QUESTION: Our office recently discussed the NAR settlement with the Department of Justice and we do not understand why NAR did not fight this federal lawsuit. We are concerned about requiring the disclosure to Buyers the amount of Buyers’ Agents’ compensation that is offered in the MLS. We believe that letting Buyers know that there are properties with low offers of co-op commission will increase the likelihood of Buyers choosing those properties. If there will be an increase in renegotiations of commissions, how should we handle that? Should we create an Addendum to the Purchase Agreement or a disclosure to handle this new rule?
ANSWER: The Department of Justice (“DOJ”) filed a federal anti-trust lawsuit against the National Association of REALTORS® (“NAR”). A tentative settlement has been reached. This Tip shall provide a brief background of the lawsuit and the status of the settlement and will then focus on the proper procedures that Buyers’ Agents should follow in dealing with low co-op commissions that are offered in the MLS.
I. Background of DOJ Lawsuit Against NAR and Status of Settlement
A. Background: The DOJ claimed that NAR was violating the anti-trust laws by concealing from the public the amount of commission offered in the MLS to the Buyers’ Agents. The DOJ’s argument was that hiding the co-op commission has enabled some Brokers to only show their clients the properties with the highest offer of commission, a practice which would not be in the best interests of consumers. The DOJ had also argued that the NAR MLS rules constituted a restraint of trade for the discount brokers.
B. Status of Settlement: NAR settled because NAR recognized that ultimately the federal government would win its case and NAR wanted to create some reasonable rules for their membership rather than letting a Judge decide those rules. Although there has been much publicity regarding the contents of the settlement, it should be kept in mind that as of the date of this Tip, that settlement is tentative and must still be fully approved by both sides of the lawsuit. The process of finalizing the settlement may take several months and the final version of that settlement may differ (either significantly or in only subtle ways) from the tentative settlement.
Assuming that the tentative settlement is comparable to the final settlement, the MLS rules will be changed so that REALTORS® must publicize the amount of commission offered to the Buyers’ Agent in the MLS. Buyers must be made aware of the amount of compensation to be paid to their Agent, and Buyers’ Agents cannot tell their clients that they are “working for free.”
The tentative settlement also deals with the long-standing NAR Ethics Rule that Agents must show their clients all properties that meet their clients’ needs and Agents should not filter out those listings with a low co-op offer of commission. Everyone should keep in mind that it is also a potential breach of the Buyers’ Agents’ fiduciary duties to only show the properties with the higher offers of commission because the Agent would arguably be putting their interests (getting a higher commission) ahead of the interests of their Buyer.
By making the offer of co-op commission transparent, Buyers will be able to control what properties they want to see and this may lead to more renegotiations of the Buyers’ Agents’ compensation.
II. Handling the Compensation Offered in the MLS
Although the proposed changes to the MLS rules may increase the number of times that Agents must renegotiate their compensation, there is no need to “reinvent the wheel.” There are already two effective tools that Agents can use if their clients want to acquire properties where there is little or no offer of co-op compensation. The most important thing to remember with both techniques is that the timing of these efforts is critical.
A. Renegotiating with Listing Agent – Follow These Steps in Order:
Step 1: Notify Buyer in an email of Agent’s desire to renegotiate the amount of commission that is offered. Buyer must approve the process in writing such as in an email. The Buyer will also need to give the Agent written instructions as to whether their offer is still to be presented if Agent cannot negotiate a higher split.
Step 2: Buyers’ Agents’ request to renegotiate the commission must be made by Buyer’s Agent to Listing Agent before presenting the Buyers’ offer (it is unethical to do so after the offer is presented). The request cannot be included in the offer or the final Purchase Agreement. Brokers and Agents are not parties to the Purchase Agreement which is why the amount of compensation does not belong in any type of purchase contract document.
Step 3: If the co-op commission is renegotiated, then Listing Agent or Seller must sign and deliver the single-party compensation agreement (CAR “CBC” form) to Buyer’s Agent. Once that is received, the offer can be presented.
“Step 3: If the co-op commission is renegotiated, then Listing Agent or Seller must sign and deliver the cooperating broker compensation agreement (CAR “CBC” form) to Buyer’s Agent.”
Note for Seller’s Agents: If the increase in compensation to be paid from the Seller’s Broker to the Buyer’s Broker results in either an increase in the total commission that Seller will be required to pay in the transaction or changes the Co-Op Agent’s split, Seller’s Agent should have the Seller sign an Amendment to the Listing Agreement specifying that, “for this transaction with this Buyer, only”, the total compensation due from Seller to Seller’s Broker will be increased by the amount to cover the increase in compensation to Buyer’s Broker or the commission split shall be ___ to the Buyer’s Broker.
B. Buyer-Representation Agreement. Properly and consistently using a Buyer-Representation Agreement with all Buyers will be beneficial in that it will minimize the need to renegotiate the low offers of co-op compensation and the risk of not getting adequately paid if the Seller’s Agent refuses to renegotiate; it will also better protect the Buyers’ Agents’ rights in a Procuring Cause commission arbitration at the Association of REALTORS®. Follow These Steps in Order with a Buyer-Representation Agreement:
Step 1: Give all prospective Buyers the two Agency Disclosure forms (AD and PRBS) and get them signed at the outset of the relationship. Create a standard protocol for sitting down with all new Buyer clients (ether in person or virtually) before showing them any property. Treat all Buyer clients the same way and consistently discuss the Buyer-Representation Agreement form with all potential Buyers (with no exceptions).
Step 2: Understand and be able to fully explain to all Buyer clients your “value proposition” which should be designed to explain why you deserve to be paid. It must be far more extensive than simply stating you have access to the properties available for sale since the internet can easily provide all of that information to Buyers. Explain that if the Seller pays some or all of the Buyers’ Agents’ commission that does not create any type of agency relationship between the Seller and the Buyer’s Agent under California law.
Step 3: Fully complete a Buyer-Representation Agreement form properly indicating the start and end date, the type of property and territorial scope (preferably referencing the counties where you will be showing properties rather than individual cities or neighborhoods). That Agreement will also detail the amount of compensation to be paid to the Buyers’ Agent and how to make adjustments if some or all of that agreed-upon amount is paid by the Seller. Check with your Broker as to which Buyer-Representation Agreement form should be used and get it signed before showing the Buyers any property. Make sure that the client gets a copy of the signed form; and that signed form (along with the Agency forms) should be promptly filed in the Broker file.
Step 4: Show your Buyers all properties that meet their needs regardless of the amount of co-op compensation.
PRACTICE TIPS:
- Do not create any new forms for dealing with the proposed new MLS rules. Once the settlement of the DOJ case is finalized, any specific disclosure documents that may be needed to let Buyers know about the co-op offer of compensation will be created by the standard industry forms committees and/or the local MLS.
- If you are going to renegotiate the amount of commission offered in the MLS, be sure that you follow the steps in the order listed above in Section II-A and do not create any type of purchase contract documents to deal with commission issues,
- Now may be the time to learn and understand how to use the Buyer-Representation Agreement form preferred by your Broker. Create a consistent protocol for meeting (virtually or in person) with all new Buyer clients and provide the forms in the order of the steps listed above in Section II-B.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
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