By Summer Goralik, Real Estate Compliance Consultant, and co-authored by and in collaboration with, Wayne S. Bell, the former CA Real Estate Commissioner
Amidst the multitude of lawsuits confronting Realtors and the real estate industry, and in light of the recent proposed settlement proffered by the National Association of Realtors (NAR), licensed sales agents and brokers find themselves facing uncertainty and tasked with the challenge to learn, address, and adapt to oncoming changes, only some of which are known.
It is against this backdrop that this piece has been crafted, with the aim of offering practical advice and guidance to licensees navigating the evolving terrain of real estate practice. The first piece of advice for real estate professionals is to remain calm and open-minded, while staying focused and proactive going forward. More on this will be discussed below, along with a number of other suggestions and tips.
Background
The settlement tendered by NAR to resolve the class-action lawsuit known as Sitzer-Burnett (as well as other cases pending against NAR), still needs court approval, which will likely not occur until at least July 1st of this year. Notwithstanding the inchoate and unfinished nature of the settlement, there are some clear and identifiable changes offered in the settlement with respect to cooperative compensation, buyer’s agents, and the like. But in addition to the identified and known issues, there is much speculation, conjecture, and misinformation about what impacts the settlement will have on the real estate industry, real estate licensees, and the housing market. For instance, some have predicted - without any support or substantiation - the imminent demise of the use of real estate agents, and a dramatic fall in housing prices.
To be certain, the landscape of the real estate industry definitely felt like it was on the brink of change as a result of the groundbreaking jury decision (which included an award of $1.78 billion in damages) in the Sitzer/Burnett lawsuit in Missouri last year. That case - the foundational one in which NAR has set forth its settlement - was brought on behalf of home sellers, and triggered a cascade of copycat lawsuits.
The current proposed settlement by NAR for the payment of $418 million over the course of four years, when approved, will resolve the claims of plaintiff home sellers against NAR - and nearly every Realtor member, some State and local Realtor associations, all association owned multiple listing services, and some smaller Realtor-member brokerages - in the Sitzer-Burnett case and many related lawsuits brought against NAR. In addition, NAR has agreed in the settlement to eliminate and/or modify long-standing rules on multiple listings services, the sharing of commission information, and mandatory cooperation between seller and buyer brokers. Specifically, these changes, which will potentially take effect as early as July, include the mandatory utilization of buyer representation agreements by Multiple Listing Service (MLS) participants when working with buyers, as well as the elimination of offers of compensation on or through the MLS.
It is important to note that there are other active and disparate cases pertaining to the real estate industry, industry practices, and commissions that will not be settled when the NAR resolution is consummated. These include cases against brokerages whose residential transaction volume exceeded $2 billion in 2022. Moreover, the U.S. Department of Justice is also looking at real estate practices they think are or might be anti-competitive. Thus, further, and additional (and possibly wide-ranging) changes may be coming.
Depending on one's perspective or place at the table - as a regulator, consumer, or licensee - varied arguments emerge in support of or in opposition to new MLS rules, and the changing commission and compensation structures. And, these diverse viewpoints may fuel concern and speculation about future potential outcomes vis-a-vis real estate licensed activities in connection with home sales and purchases.
Moreover, the discussion of new rules and changes undoubtedly leaves some licensees feeling anxious or uncertain about the future of home selling and buying. Compounded by the fact that the proposed settlement awaits court approval, some real estate professionals find themselves grappling with unanswered questions and an uncertain path forward.
On the other hand, there are real estate brokers and agents who are committed to embracing change and to making the necessary modifications to their policies, procedures and practices right now. For example, there are licensees who - and brokerage firms which - have already begun using buyer representation agreements. These agents and brokers are using the current climate as an opportunity to be proactive, as well as to be more transparent, professional and compliant, and to advance their real estate businesses.
Putting uncertainty aside for a moment, it is crucial to recognize that the fundamentals of real estate commissions and the payment of compensation remain straightforward, at least within the context of California law. In California, commissions and fees in real estate transactions have always been negotiable by law, and licensees are required to disclose the commission amount they stand to earn and receive in connection with licensed real estate activity, irrespective of its source, to their principals. Thus, the impending changes which will be brought about by the resolution of the NAR commission litigation will not impact the rules governed by California State laws and regulations.
Instead, what will likely evolve from the home sellers’ litigation is the way that sales agents and brokers engage in and comply with their professional duties. In other words, real estate practice, professional conduct, and customary interactions between agents and consumers will need to be re-evaluated and potentially corrected or revamped to adhere to upcoming rule changes agreed to and enforced by NAR, local and State associations, and the MLS. Considerations such as conversations about commissions, new forms and agreements, commission and compensation structures, improved disclosure practices, and negotiation dynamics may all need to undergo fundamental shifts in the near future.
With the recognition that there are myriad questions and concerns in the home selling and buying industry right now, many of which we cannot answer or address because there is no complete certainty or finality, the remainder of this brief piece offers some gentle advice and shares some simple tips for licensees to consider as they wade through seemingly imminent or coming changes to the practice of real estate that will most likely emanate from the resolution of the commission litigation.
Advice and Tips
For brokers and sales agents:
As stated in the very beginning of this piece, stay calm and focused. Fear will get you nowhere.
Be proactive. Read releases from NAR and counsel in the Realtor/broker lawsuits about the settlement(s), including the specific matters agreed to by NAR, and become knowledgeable and informed about what is going on relative to changes to the commission structures and methods of home selling and buying practices, and be able to convey that information effectively to your principals.
Develop new scripts and talking points for discussions with potential and/or actual clients, and do role play exercises, as practice makes perfect.
Make certain that you fully discuss the choices that potential and/or actual clients have with regard to representation, and clearly convey that real estate commissions are negotiable by law.
Carefully go over any documents that you ask your clients to sign, and always disclose the amount of your compensation and all of the services you intend to perform in exchange for that compensation. This is where a script, and a document listing your services and all compensation, will be important.
Know and communicate your value proposition. If you believe your value commands a higher commission or fee for the work that you do, communicate and illustrate that value with your clients and prospective clients, and fully set forth in writing the services you will perform. If you are a listing agent, and want or plan to cooperatively offer compensation to a buyer's agent in connection with a particular home sales transaction, explain what that option means and how that will work, as well as the value or benefit to the client in doing the same. Anticipate consumer questions and have canned answers which are thoughtful, transparent and accurate.
Master the buyer representation agreement and all of the applicable matters that need to be included. If working or specializing as a buyer's agent in the industry, now is the time to improve your skills and be fully informed about all of the relevant issues. These specialities will necessitate training and education. Fortunately, there are schools offering classes in these areas.
Practice and tighten up your negotiation skills.
Stay up to date on the developing topics and issues, new forms, and the like.
Develop a professional buyer presentation (similar to a listing presentation).
Read reliable publications and writings from trusted and reputable sources on practice suggestions and stay current on any updates they publish. Think about and undertake continuous learning. Build relationships with real estate colleagues. Create a network of advisors you can call upon for advice and counsel. Ask them questions, and ask them for help when you need it.
In addition to disclosing all relevant facts about your compensation, remember to be professional and fully transparent (and to communicate with your clients) as you perform your services.
Always comply with and prioritize your fiduciary duty to put your client's interests before your own, including your financial self-interest.
Also remember that your home buying or home selling client is genuinely concerned about commission fees relative to the value of the work/services you provide.
After you learn the required and necessary compliance fundamental, you will likely gain greater comfort with any changes that might come next. And importantly, do not be afraid to embrace changes.
And this special advice for responsible brokers:
Commit to the professional development of your sales agents. Provide effective and valuable trainings and education to your agents, especially in the area of changing commission/compensation structures, negotiation skills and buyer representation agreements.
Invite experts and seasoned, successful practitioners to speak to your sales agents on a regular basis.
Be available to answer questions and provide guidance to your sales force.
Create or update scripts and other aids to assist licensees with new conversations and interactions with their clients about real estate commissions, compensation and fees.
Update, and enforce, policies and procedures, and always be certain that there is appropriate supervision of your sales agents. Policies and procedures not only help guide agents to do the right thing, but it affords responsible brokers the ability to create appropriate systems and checks around those policies and procedures to ensure professional and compliant conduct.
Create mentoring programs where less experienced sales agents shadow and learn from more experienced and seasoned ones.
Seek outside help or legal counsel to address any gaps in your knowledge or understanding so that accurate information is always relied upon, applied to your business practices, and conveyed to your sales agents.
In closing, as the fabric of the real estate industry evolves, we hope this piece provides a helpful resource for licensed real estate professionals seeking guidance during this period of change. More importantly, by adopting proactive measures, taking advantage of ongoing education and training, and updating business strategies, real estate licensees can enhance their professionalism and ensure compliance with new and forthcoming changes and rules.
Authors’ Note: It should be stated that the potential changes proffered by NAR vis-à-vis the proposed settlement discussed herein apply to members of NAR, as well as local and State Realtor associations, and MLS participants. Additionally, while the authors have endeavored to provide information about the relevant lawsuits and related actions that is accurate and complete, the authors assume no responsibility for errors, inaccuracies, or omissions. Finally, this piece is not intended as legal advice, and should not be relied upon as legal advice. Any and all legal questions or concerns should be directed to a licensed attorney.
About the Authors
Summer Goralik is a Real Estate Compliance Consultant and licensed Real Estate Broker (#02022805). Summer offers real estate brokers a variety of consulting services including assistance with California Department of Real Estate investigations and audit preparation, mock audits, brokerage compliance guidance, advertising review, and training. She helps licensees evaluate their regulatory compliance and correct any non-compliant activities. Summer has an extensive background in real estate which includes private sector, regulatory and law enforcement experience. Prior to opening her consulting business in 2016, she worked for the Orange County District Attorney's Office as a Civilian Economic Crimes Investigator in their Real Estate Fraud Unit. Before that, Summer was employed as a Special Investigator for the DRE for six years. Among many achievements, she wrote several articles for the DRE, four of which were co-authored with former Real Estate Commissioner Wayne Bell. Prior to her career in government and law enforcement, Summer also worked in the escrow industry for nearly five years. For more information about Summer's background and services, please visit her website.
Wayne S. Bell is currently the Executive Vice President and Chief Corporate Counsel at Renewed Arts and Housing Foundation Inc., as well as a consultant regarding real estate licensing and regulation. Formerly, he was the Real Estate Commissioner for the State of
California, the Chief Officer of the CA Department of Real Estate, and also, and among other State positions, the Chief Counsel of that department. Along with experience in government, public policy, analysis, and the provision of advice regarding legislation and regulations, real
estate, dispute resolution and problem solving, collaborative decision-making, and the law (rated AV Preeminent as an attorney by Martindale-Hubbell), Mr. Bell's background has entailed research and writing on a broad range of legal and non-legal topics, fraud prevention, public speaking, and work with the private sector and businesses - including strategic, regulatory, expert, and legal consulting, as well as with non-profits created for the benefit of the public.