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NAR Settlement: What It Means for Appraisers

by Isaac Peck, Publisher

The real estate community has been abuzz with talk about the National Association of Realtors’ (NAR) settlement. It’s made the national news, too, becoming a lively discussion item for the American public. Even President Joe Biden has chimed in.

Some real estate experts say nothing will change as a result of the settlement. Others believe it will fundamentally shift the way homes are sold in the United States.

While real estate agents and brokers are frantically wondering if the sky is falling, with some brokers preemptively retiring or getting out of the business, the general sentiment in the appraisal community has been much more muted. Though many appraisers are members of NAR—because it controls the majority of the multiple listing services (MLSs) across the country—most question whether this monumental piece of real estate news will have any effect on them at all.

Should appraisers care about the NAR settlement, and will it have any effect on how most appraisers perform their work? Here are the details of the settlement and what appraisers need to know.

Background
The class-action lawsuit, Burnett et al. v. National Association of Realtors et al., was filed in 2019 against NAR and nearly two dozen of the largest real estate brokerages, including RE/Max, Keller Williams, Compass and almost every “big name” brokerage you can think of.

In October 2023, a jury in the Western District Court of Missouri issued a $1.8 billion verdict against NAR and the brokerages, finding that they had conspired to artificially inflate real estate agent commissions and misrepresent the way buyers’ agents were compensated.

As a matter of law, damages from an antitrust verdict are tripled, putting NAR and the brokerages on the hook for more than $5 billion in damages—a sum that likely would have bankrupted NAR and many of the brokerages. (NAR openly contemplated Chapter 11 bankruptcy after the verdict.)

However, some of the largest players in the case quickly began settling with the plaintiffs for lesser amounts. For example, RE/Max announced a $55 million settlement within 30 days of the verdict, Keller Williams settled for $70 million in February, and NAR announced a $418 million settlement in March. All settlements still need court approval to be finalized.

Settlement Fallout
In addition to agreeing to pay the princely sum of $418 million (over four years), NAR has made a series of commitments to drastically change how it and its members operate.

The NAR agreement is more than 100 pages and full of procedural changes and concessions, but some of the most notable updates to NAR’s business model include:

• Listing brokers will now be prohibited from offering buyer broker compensation through NAR’s MLSs.
• NAR’s buyer brokers must now enter into an agreement with a buyer before providing any services and specify the amount or rate the buyer broker will be compensated as well as how it’ll be calculated. This amount cannot be open-ended (Example: “buyer broker compensation will be whatever amount the seller will offer to the buyer”).
• NAR buyer brokers are prohibited from receiving compensation from any source that exceeds the amount specified in the buyer broker agreement.
• NAR members are prohibited from screening or filtering listings presented to their buyer clients based on the compensation offered by the seller or seller’s agent. (Unless the buyer specifically requests this screening.)
• NAR agreed to make other changes to ensure that sellers and buyers always receive full, complete disclosures about broker compensation.

While NAR’s settlement is a legal agreement between a trade association and certain plaintiffs, it’s likely most brokerages and MLSs will modify their practices in line with the NAR settlement to shield themselves from liability.

What Changes for Brokers?
To understand how appraisers might be affected, it’s necessary to first analyze what exactly is changing for real estate brokers. Unfortunately, there appears to be little agreement on what exactly is going to change and when.

Pundits point to the fact that RE/Max, one of the largest broker franchises with more than 140,000 real estate agents, settled its case for $55 million over seven months ago. RE/Max agreed to the same process changes as NAR, but little has changed with respect to how its agents operate in the market—at least so far.

The most impactful change might be that listing brokers are now prohibited from making an offer of compensation to the buyer’s broker via the MLS. Without any compensation being offered via the MLS, buyer brokers will no longer know what compensation they’ll receive from guiding their buyers to particular homes. Instead, they’ll need to call or communicate with the listing broker to determine what commission, if any, is being offered.

This, combined with the fact that buyers’ brokers (at least those who are members of NAR) will be required to enter into a written compensation agreement with the buyer that specifies the amount or rate they’ll be compensated and how it’ll be calculated, creates a problem for buyers as well as their brokers.

With the increased uncertainty about whether the seller or listing agent will be paying the buyer’s broker, buyers’ agents will want their Buyer Representation Agreement to include a clause stipulating that the buyer will pay their commission if necessary. Consider that the median U.S. home price is more than $420,000, and a 3 percent commission on such a house would be $12,600. Many buyers simply won’t be able to afford this. In certain low-income communities, brokers argue that most buyers struggle to come up with a 1 or 2 percent down payment, which makes the prospect of paying their own broker over $10,000 at closing a non-starter.

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Location, Location
Just like everything else in real estate, the impact of these changes will vary by location. In some smaller localities, where all real estate brokers “hold the line” and take only listings in which sellers agree to include an offer of compensation to buyers’ brokers, very little will change in the market.

However, in larger, dynamic markets where some sellers balk at the 5 or 6 percent commission that listing agents typically request (and then split with the buyer’s broker), uncertainty in the marketplace will increase substantially. Some sellers might include compensation for the buyer’s broker, while some will not. Buyers who don’t want to pay their broker’s commission themselves will know that if they do sign a buyer’s broker agreement, they might be unable to purchase their dream home because they can’t come up with the extra $10,000 to $20,000 in cash to pay their own broker.

Alternatively, these buyers might develop specific strategies for how they will deal with sellers that don’t offer to pay their buyer broker’s commission. If they don’t have the desire or the ability to pay their broker themselves, a buyer might make their purchase offer contingent on the seller paying the buyer broker’s commission, or they might request a $10,000 or $15,000 concession to help cover closing costs (and pay their broker). And, of course, a buyer might increase their offer price to help either of these options be more palatable to the seller.

Local market reaction to this shift may vary substantially. Real estate brokers in some markets may continue business as usual. In other markets, the rise of flat-fee or à la carte buyer broker services may become popular. Elsewhere, sellers may overwhelmingly balk at paying the buyer broker’s commission. New customs and norms might develop.

Why Should Appraisers Care?
While this landmark legal case has the potential to really change how real estate agents and brokers do business, one question largely unaddressed by the hundreds of journalists covering this issue is how all this will affect appraisers.

Many appraisers and key stakeholders in the valuation space have begun discussing this question—most recently at the 2024 Association of Appraiser Regulatory Officials (AARO) Spring Conference in Nashville.

Danny Wiley, senior director of single-family valuation at Freddie Mac and Lyle Radke, senior director of collateral policy at Fannie Mae, gave a joint presentation at AARO in which the audience questioned how appraisers (and their regulators!) should view the issue.

The consensus from Wiley and Radke is that nobody really knows how the market(s) are going to respond, but the government sponsored entities (GSEs) will monitor the situation closely.

The central question arising for appraisers is: At what point, if any, does an appraiser need to adjust for seller-paid commissions?

One point highlighted in the discussions at AARO is that, to date, appraisers have generally ignored the real estate brokers’ commissions that sellers have paid because these commissions have been silently baked into appraisers’ opinions of value for decades.

Appraisers need look only at how the Uniform Residential Appraisal Report (Form 1004) defines market value, specifically the section on adjustment for concessions: “Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions.”

In other words, if there are costs that are normally paid by sellers in “virtually all sales transactions,” the appraiser doesn’t need to account for them and no adjustment is necessary.

However, if a market shifts to the point that sellers stop paying for the buyer broker’s commission in “virtually all sales transactions,” then an appraiser in that market may need to start paying attention, make note of those costs and adjust to the comparables accordingly.

Again, it will depend on how the local market responds. Will 5 or 10 percent of sellers refuse to pay the buyer broker’s commission? Will there be some markets in which 20, 30 or 40 percent of sellers ultimately decline to offer a buyer broker commission over the next three to five years?

There are a number of scenarios for how a residential transaction might play out:

• Seller offers to pay commission for buyer broker.
• Seller offers no commission and buyer pays their own broker.
• Seller offers no commission and buyer submits an offer contingent on seller paying the buyer broker’s commission.
• Seller offers no commission and buyer submits an offer contingent on a cash concession toward closing costs (think $10,000 or $15,000).

There are myriad other scenarios that buyers and sellers might creatively invent for how to make a transaction work. For starters, a buyer desperate to make a deal work might increase their offer price but then ask for the same amount to be paid as commission to their broker, or returned to them as a concession at closing.

Investigative Appraising
In markets that have no uniformity with respect to how sellers compensate buyer brokers, appraisers will need to do some investigating to determine if an adjustment is warranted.

Ryan Lundquist, a Sacramento, California, appraiser and author of the popular sacramentoappraisalblog.com, acknowledges that because commissions have been baked into the market for so long, it’s not really something appraisers have had to consider. “With a buyer’s agent commission now potentially being handled like a concession, this is something new that we need to analyze. The gist is we’re going to have to see if there is any price difference between homes with and without the buyer’s agent commission covered,” says Lundquist. “This isn’t just something appraisers will have to ask either. Real estate agents are going to dig into this, and savvy buyers, too. If you were a buyer looking at comps, wouldn’t you ask, ‘Did the seller pay for the buyer’s commission on this one?’ That seems like a relevant question when considering what to offer.”

Craig Capilla, a partner at Franklin, Greenswag, Channon & Capilla LLC and an attorney on the frontlines of defending appraisers, says the impetus will fall on appraisers to take additional steps in data verification. “Especially since the commission paid or offered to the buyer broker is not going to be in the MLS, appraisers who are operating in markets where compensation is not universal will need to work harder to get an accurate view of what’s what,” says Capilla. “Appraisers will need to pick up the phone, call the agent and try to get answers around how compensation was structured on each comparable used in the appraisal.”

For sellers and listing agents offering commission to the buyer broker, Capilla says it might be easier to suss out than appraisers think. “The expected settlement terms would mean the only place the listing agent can’t put the commission is the MLS, so check their social media and websites. If they’re offering buyer side commission, they’re probably going to shout that information from the rooftops. Appraisers can screenshot that information or take notes on any phone conversations they have and save it to their workfile,” suggests Capilla.

Of course, taking this approach is ultimately going to be more work for appraisers. “If the local market isn’t handling commission in a uniform way, the appraiser will have an obligation to try to obtain more information and make heads or tails of it,” notes Capilla. “That’s going to require extra effort on the appraiser’s part.”

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Concessions Already a Problem
Setting aside this new commissions issue, some appraisers are already in hot water for failing to adjust for concessions. In its December 2023 Appraiser Newsletter, Fannie Mae explains that it recently analyzed appraisal data from Q4 2021 to Q3 2023. In that sample, appraisers reported seller concessions for 7.6 million comparables, but didn’t make adjustments on 58 percent of the comparables. Addressing this failure, Fannie writes: “Of course, this tends to inflate the appraisal results and undermines the credibility of the appraiser.”

Fannie Mae reminds appraisers that “market theory suggests that sellers would typically aim to recover the expense of the seller concession by increasing the price, so something close to a dollar-for-dollar adjustment would be the predicted outcome of the appraiser’s analysis in most cases.”

This has been a popular discussion item for GSE representatives, including Radke, at numerous appraiser conferences over the last 12 months. An example Radke offers in his presentation is the following: “If I am in my car driving down the road and a man is standing on the street corner with a sign that says, ‘Please give me $10,000,’ no one is going to do that. No one is going to give away $10,000 for nothing. Yet, we see these kinds of concessions be completely ignored by appraisers all the time. They will say, ‘Oh this is typical for my market, so I don’t have to adjust for it.'”

At the AARO conference, Radke and Wiley suggested that many appraisers simply don’t want to spend the time to calculate the adjustment for concessions. However, the GSEs are signaling that this will be a key focus for them going forward, implying that appraisers who refuse to adapt to their standards will likely be on the receiving end of warning letters, board complaints and loan buyback demands.

At the moment, however, the GSEs (along with the Federal Housing Authority) have indicated they will not treat the seller’s payment of the buyer broker’s commission as a concession or an interested party contribution (IPC). While seller concessions have typically been limited to between 2 and 9 percent of the property value, the GSEs directly addressed the uncertainty around this issue created by the NAR settlement in writing, noting that because “buyer agent fees have historically been fees customarily paid by the property seller or property seller’s real estate agent,” they will be excluded from the financing concession limits.

However, Fannie leaves the door open to reassess the situation later, writing: “It is Fannie Mae’s standard practice to continuously evaluate its requirements to determine whether updates are appropriate based on changes to the market and industry. Fannie Mae will continue to monitor and assess the impact of the proposed NAR settlement and other real estate agent commission lawsuits to determine if any updates to its requirements are necessary.”

Another thing to note is that the GSEs will ultimately be able to track how uniformly commissions are paid by the seller in a given market because they have access to the final closing statements of each transaction.

Consulting Opportunities?
In addition to changing how appraisers might need to monitor, analyze and report on the real estate market, there may also be opportunities for appraisers interested in building up their private appraisal and consulting business.

Kern Slucter, MAI, SRA, author of Real Estate à la Carte (second edition) and CEO of the International Association of Real Estate Consultants, believes this is a tremendous opportunity for appraisers to step into the role of real estate consultants and grow their businesses with private work. Slucter, who’s licensed as an appraiser and real estate broker in Michigan, says that depending on an appraiser’s home state regulations, they may or may not need to get licensed as a real estate agent or broker to truly take advantage of the consulting opportunities that will arise from this change.

“In my home state of Michigan, the regulator will give appraisers credit for the three years of experience that’s required to get the broker’s license. So, all you need is an additional 60 hours of education and to pass an exam to get your broker’s license,” reports Slucter.

Appraisers are uniquely positioned to consult with buyers who don’t want to work with a traditional buyer’s broker. “Some percentage of buyers is going to reject the traditional broker model and hire consultants instead. It’s cheaper for them because they’ll be able to negotiate a lower sales price in many cases. In today’s market, buyers can do a lot of the legwork themselves and then hire a real estate professional by the hour to do what they can’t,” argues Slucter. “Appraisers know about homes, they know about the buying and selling process, and because of their education and experience, they are often far more qualified compared to traditional brokers. Appraisers are truly in the best position to serve as consultants to these buyers.”

Moving Forward
While appraisers are in a “wait and see” dynamic right now, Capilla advises keeping a close eye on your local market over the next 12 months. “Now more than ever, data verification is king,” he says. “Appraisers sometimes expose themselves to liability by simply citing the MLS or public record where they found the data, and they never bother to verify that data or look further into it. So, if we see markets begin to shift on how commissions are paid, there’s definitely a potential risk for appraisers who aren’t doing data verification that they really should’ve been doing all along.”

Capilla also recommends appraisers verify the sales data and data sources they rely on. “In terms of verifying sales data, it’s not just about the transaction in question but also the closed sales and comparables that you’re using in your report,” he advises. “Do you have a sense of whether or not what you’ve obtained from MLS is accurate? Especially as we move into August and NAR starts implementing changes in the MLS and the markets start responding, appraisers need to face these changes with both eyes open and an ear to the ground. A significant concern here is that historical data might be removed from viewable information in various MLS systems so appraisers should be sure to keep a good record of their data verification sources to support their conclusions.”

Will these new changes also create meaningful opportunities for appraisers to diversify more into private appraisal and consulting work? Only time will tell.

Stay safe out there!

About the Author
Isaac Peck is the Publisher of Working RE magazine and the President of OREP Insurance, a leading provider of Appraiser E&O insurance that includes additional Discrimination Claim Coverage for appraisers (many programs exclude this important coverage). OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

OREP Insurance Services, LLC. Calif. License #0K99465