The History
Before the Multiple Listing Service and Buyer
In the past, (going back to the 1800s) real estate agents would list a property for sale and do their best to get top dollar for the Seller. The Seller and Listing Firm would agree on the Fee the Seller would pay the Broker upon the completion of a successful sale.
If a Buyer asked an agent to see homes for sale, the agent would show only their own inventory of listings. Buyers had to go from listing agent to listing agent to see what was for sale, and every agent they talked with was working for the Seller's best interests....there were no professionals advising the Buyers.
The History
First Came the Multiple Listing Service….
Real estate Brokers realized they would have a better chance of selling their listings for the best price if they could market their inventory to ALL of the Buyers in the market, not just those with whom they personally worked. Groups of firms in the same geographic area began entering into agreements to share all of their listing information with the other firms, and allowing the other firms to show their listings to prospective Buyers. This happened in some areas as early as the late 1800s, but was not common until the mid-twentieth century.
To incentivize agents from other firms to show their listings, Listing Brokers agreed to share the fee the Seller had agreed to pay them with the Firm the working with the Buyer. However - the agent working with the Buyer typically was still representing the Seller as a "subagent" of the Listing Broker and Seller. Still...no professionals were advising the Buyers in most transactions.
The History
Then Came Buyer Representation
By the 1980s, Buyers became dissatisfied (rightfully so) with the notion of working with an agent for several weeks to find a home while the agent was actually looking out for the best interests of the Sellers, and the idea of Buyer representation began to take hold in Virginia. These new "Buyer's Agents" still received compensation from the Listing Firm, but were representing the Buyer's best interests. Sometimes there would be a written agreement between the Buyer and their agent but often the agreement was verbal...and somewhat vague.
In 2012 Virginia became the first State to require a written agreement between Buyers and their agents upon "substantive discussions" about specific real estate. This agreement was required to contain the length of time the agent would be working for the Buyer, the type of property the Buyer was looking for, and the compensation the Buyer would pay the agent's firm. The compensation amount owed by the Buyer would be offset by any cooperating fee offered by the Listing Firm through the MLS.
The Lawsuit
The Accusations
In the lawsuit, the plaintiffs alleged the National Association of Realtors, some large franchises, and MLS systems across the Country required Listing Firms to share their brokerage fee with the firm representing the Buyer, thereby artificially inflating the Seller's costs in the transaction. The Sellers who joined the suit claimed they did not realize part of the fee they agreed to pay the Listing Firm could be shared with the firm representing the Buyer, and objected to being "forced" to pay the agent who was negotiating against them.
The Verdict and Award
The attorneys for the National Association of Realtors were confident in both the strength of their case and their ability to win over a Missouri jury. This level of confidence was misplaced, and the NAR attorneys were badly outmaneuvered by the attorneys for the Plaintiffs. The jury, in an astonishingly short amount of time, unanimously found for the Plaintiffs. The jury awarded damages of over $1.8 billion in a nationwide settlement. This award amount could potentially be trebled, leaving the defendants with the possibility of a total award over $5 billion. Obviously this amount in damages would be crippling for the entire industry, and the defendants began negotiating settlement agreements rather than pursuing appeals.
The Lawsuit
The Settlement
Although steadfastly maintaining no wrongdoing took place and vehemently denying accusations of collusion, the National Association of Realtors agreed to a $418 million settlement which included day-to-day practice changes for Realtors, Buyers, and Sellers. The franchises named in the lawsuit made their own settlement agreements, as did the large companies (over $2 billion in sales volume) who were excluded from the NAR Settlement by the Plaintiff's attorneys.
The agreement resolved claims related to compensation practices against the National Association of Realtors, over one million NAR members, all state and local Realtor associations, all association-owned MLSs, and all brokerages with an NAR member as principal that had a residential transaction volume in 2022 of $2 billion or below.
The settlement applies to all Sellers nationwide who sold a home through a Realtor and/or a Realtor owned Multiple Listing Service during specific period of time. In Virginia the time period for potential claims is October 31, 2019 until the date of the class notice.
The practice changes took effect on August 17, 2024
Practice Changes
Agents
Real estate agents will notice several changes in their day to day activities. To start, the cooperating fee offered by Listing Firms in the MLS will no longer be available to agents. Although it is still perfectly OK for the Listing Firm to offer a cooperating fee to the Firm representing the Buyer, that information may not be displayed in the MLS.
In addition, agents working with Buyers must now have a Buyer Agency agreement signed with the Buyer before showing any houses. In cases in which the agent is working for the Seller such as showing their own listing to a new Buyer or holding an Open House, the Buyer Agency agreement is not required. A written agreement between real estate agents and Buyers has been the law in Virginia since 2012, but the agreement was not required to be signed until the Buyer and agent engaged in "substantive discussions".
We encourage all Buyers to have the initial meeting with an agent in a professional setting prior to seeing any homes. In this initial meeting the agent and Buyer can discuss the Buyer's goals, financing issues, and agent compensation before signing an agreement to work together.
Finally, all forms used by Realtors must clearly indicate the Professional Fee is not fixed by any law, trade association, or MLS.
Practice Changes
Buyers
Buyers should now expect, in most cases, to sign a Buyer Agency agreement with an agent before being shown houses for sale. This agreement has been required in Virginia since 2012, but only upon "substantive discussion" between agent and Buyer...it is now required at the beginning of the relationship. The agreement can be for a specific home or a very short term, or could be a long-term agreement if all parties are comfortable with that. The agreement will make clear the term, type of property the Buyer is looking for, and the Professional Fee charged by the agent's firm. This fee will be offset by any compensation offered by the Listing Firm or the Seller to the Firm representing the Buyer.
If the Listing Firm is not offering cooperating compensation to the firm representing the Buyer, the Buyer can try to negotiate a concession from the Seller within the contract, which will provide the Buyer with the funds to pay their agent. If neither the Listing Firm nor the Seller will participate, the agent's fee will become part of the Buyer's closing costs.
Practice Changes
Sellers
For many decades, a cooperating fee has been a part of the Listing Agreement provided by the Virginia Association of Realtors and has been very clear about the cooperating fee being authorized by the Seller. This point has always been negotiable, enabling Sellers to authorize the Listing Firm to share as little as one dollar with the firm representing the Buyer.
Real estate firms may set their own fee (like any other business), and discuss with their agent how that fee may or may not be shared with a firm representing a Buyer. To paraphrase the Listing Agreement, Kline May Realty's policy and recommendation to Sellers is "Kline May Realty will make our best efforts to sell your house, for which we will be paid a Fee. We will share all information about your house with other firms in our MLS, and if one of those firms sells your home before we do, we will share part of the Fee we have earned with the firm representing the Buyer." We believe this approach is in the best interest of the Seller.
Due to the national lawsuit and settlement, some firms in Virginia have adopted a policy of not offering cooperating compensation, nor accepting cooperating compensation from another firm. While this policy is perfectly legal and ethical, we have concerns about potential unintended consequences. Buyers making an offer on one of these listings will need to include their agent’s fee as one of their costs at closing or will ask the Seller (negotiated within the contract) for a concession to cover some or all of the fee at closing. In this scenario the large Seller concession in the contract may cause appraisal issues if financing is involved, potentially requiring the Seller to renegotiate the sales price.
Sellers should talk with their agent about all of these issues before entering the market!