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 NAR Settlement: Where Do Inspectors Go From Here?

 by Isaac Peck, Publisher 

The news about the National Association of Realtors’ (NAR) settlement has spread like wildfire. Everyone’s talking about it—even President Joe Biden—who (erroneously) stated that consumers could, for the first time, negotiate lower real estate broker commission rates as a result.

Many real estate experts say the settlement will fundamentally shift the way homes are sold in the United States. 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.

While this landmark legal case has far-reaching implications for real estate agents and brokers, one question largely unaddressed by the hundreds of journalists covering this issue is how the fallout will affect home inspectors.

Here are the details of the settlement and what it means for home inspectors.

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:

• NAR will no longer require listing agents to offer compensation to buyers’ brokers, and listing brokers will now be prohibited from offering buyer broker compensation through multiple listing services (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 has agreed to make other changes to ensure that sellers and buyers always receive full, complete disclosures about broker compensation. 

NAR’s settlement doesn’t include a release of liability for brokerages who averaged more than $2 billion in annual transaction volume, which means the other large brokerages that haven’t yet settled with the plaintiffs are still on the hook for their own damages. It also doesn’t include potential liability relief for MLSs that aren’t wholly owned by NAR.

What Changes for Brokers?
To understand how home inspectors will be affected, it’s necessary to first analyze what exactly is changing for real estate brokers. There’s a strong sentiment among real estate professionals as well as the general public that the NAR settlement is going to reshape the real estate market. However, 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. This is significant because many brokers routinely filter the houses they present to their buyer clients based on the commission being offered. Without any compensation being offered via the MLS, buyer brokers will no longer have certainty around 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. The prospect of paying their own broker’s commission may be enough to scare many buyers away, especially if they’re short on cash.

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.

Of course, the most significant aspect of this situation isn’t codified in any settlement. After all, if listing brokers can continue to convince sellers to pay a 5 or 6 percent commission in their listing agreements, the entire real estate market will continue to hum along as it has been. But the fact is these very public lawsuits against NAR and the largest brokerages have sparked a nationwide conversation about broker commissions, and some percentage of sellers are likely to begin balking at the concept of including an extra 2 or 3 percent for the buyer’s broker.

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 will 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.

Will the buyer be able to increase their offer price on condition that the seller or listing agent pay a commission to the buyer’s broker? Potentially.

Here are five scenarios looking at how the market might change for real estate brokers and consumers:

• More Dual-Agency Transactions: With buyers concerned about being on the hook to pay their broker themselves, more may turn to the listing agent directly. Buyers could be less likely to sign a buyer broker agreement that locks up their options for three to six months (or longer) and instead choose to attend open houses, speak with different listing agents and potentially work directly with the listing agent to write the offer.

  It’s important to note that dual-agency transactions are currently illegal in eight states because many believe agents can’t represent the best interests of both sides of a transaction at the same time. These states include Alaska, Colorado, Florida, Kansas, Maryland, Texas, Vermont and Wyoming. However, even in these states, many brokers try to skirt the rules by having one sales agent represent the seller and another broker from the same office represent the buyer.

• Alternative Buyer Services: There has been considerable discussion about the prospect of buyers using real estate attorneys to prepare their purchase documentation. In such a scenario, a buyer may go “unrepresented” in the traditional sense and simply hire an attorney to prepare a purchase agreement, help answer questions about disclosures, and so on.
• Rise of Tech Solutions: Large technology firms in the real estate space are actively working to “fill the gap” that might be created among buyers who want to purchase a property without engaging a buyer’s broker. These solutions will likely include forms that enable buyers to write their own purchase agreements and repair requests as well as educate on the purchase process, etc.
• Flat-Fee and À La Carte Models: Tech firms, lawyers, paralegals and real estate brokers will likely begin offering more flat-fee or à la carte services to buyers. Leigh Brown, the 2023 president of the North Carolina Association of Realtors, suggested in a recent video posted to her YouTube channel that real estate brokers might consider charging by the hour just like attorneys!

  Some new business models will likely allow buyers to pick and choose services à la carte. Imagine a world in which a showing costs $150, preparing a purchase agreement costs $600, a repair request costs $400, and so on. Tech firms, lawyers and certain brokerages may seek to serve this category and make up for the lower pricing with higher volume.

• Offer and Loan Workarounds: There has been lively discussion about how buyers might secure compensation for their broker by adjusting how they write their purchase offers. For example, when dealing with a seller who doesn’t offer any compensation to the buyer’s broker, the buyer could increase the purchase price offered by $10,000 to $20,000 (or not) and then include a demand for a seller concession or a demand that the listing agent pay the buyer’s broker as a contingency of the offer.

  This would allow the buyer to work their broker’s compensation into the loan and pay it off over time. These potential solutions are still being explored and face a number of challenges. For instance, how will a real estate appraiser evaluate such concessions? Rolling the buyer broker’s commission into the loan would work only if the appraisal comes in at the (potentially inflated) purchase contract price. For example, if a home is listed at $420,000 and the buyer offers $430,000 to include a $10,000 concession for their broker, they’d still need to come up with the $10,000 difference in cash to close if the home appraises for only $420,000. 

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 What Changes for Inspectors?
The degree that home inspectors’ business models are affected depends largely on how sellers and buyers respond to this new reality. Significant changes in the real estate market aren’t likely to happen overnight and will vary by location.

Harmony Brown, Chief Executive Officer of GreenWorks Inspections & Engineering, one of the largest home inspection firms in the United States, reminds inspectors that change always brings opportunity. “iBuyers are going to gain some traction. Low cost, low commission tech companies are going to take some market share, and some buyers might start using attorneys to write up their offers. Our industry’s innovators are going to become part of that shift. Anytime there’s a shift in any industry, there’s opportunity. Buyers are going to need home inspectors more than ever. This is an opportunity for home inspectors to speak up, build their brands, and be more boldly known as the authority on the home,” says Brown.

Ian Robertson, owner of three home inspection companies, co-founder of Inspector Toolbelt Home Inspection software and host of Inspector Toolbelt Talk, has had numerous guests on his podcast to discuss this topic. Robertson is quick to acknowledge that he doesn’t have a crystal ball, but from what he’s seen in his own market, real estate brokers are expecting the worst.

“There are going to be a lot fewer real estate agents once all of this settles down,” notes Robertson. “We are already seeing agents get out of the business even though not much has changed yet. A friend of mine who owns a large brokerage is retiring. He told me he’s too old for this kind of change in the market. His team alone does a few hundred transactions a year minimum. If they were referring all that business to a few home inspection firms, that’s a lot of work lost for those home inspectors.”

The result will be a disruption in the market. While many brokers and agents will get out of the business (which isn’t terribly unusual), that volume will switch to other brokers, and/or some buyers will go it alone or through dual-agency.

Given the challenges that buyers face and how dual-agency, flat-fee models and technology stand to alter the buyer experience, Robertson believes it’s fair to draw a simple conclusion: Some percentage of buyers/consumers will stop relying on a home inspector referral from their broker and choose to hire the home inspector themselves.

This would result in an increase in a home inspector’s direct-to-consumer business. “Whether we see an increase of 5 or 30 percent of consumers deciding to select their own home inspector, it’s reasonable to expect some type of increase in consumers researching, evaluating and hiring their own home inspectors,” Robertson says. “This is a shift away from the inspector’s traditional agent referral marketing model. We don’t quite know how big of a shift it will be, but it will be something. Even if it’s only 5 or 10 percent, that’s still substantial in most markets.”

Opportunity for Inspectors
The opportunity for home inspectors then is to adjust their marketing to capture this shift. “With less agents in general, there will be less agents to market to. A certain percentage of buyers are going to be working directly with the listing agent (dual-agency), or they might have a different relationship with their buyer agent, or they might be using flat-fee or à la carte services,” opines Robertson. “Some of the agents that are getting out of the business are the ones that wanted things to be easy and pressured their clients to use cheap, low-quality inspections, whereas buyers working without an agent may have an even stronger desire for a high-quality home inspection—to have someone look out for their interests.”

Robertson says his own firm started preparing for a more direct-to-consumer marketing approach last year. “When we started talking about the NAR case last year, we knew there was a chance something big would happen. We already had a strong online presence, but we started ramping up our direct-to-consumer marketing. Marketing to real estate brokers can happen quickly. If you build a relationship today, in a very short period of time that broker might start referring a lot of business to you.

Direct-to-consumer doesn’t happen quickly. Building a social media presence, search engine optimization (SEO), building up your Google reviews—that can take six months, a year or longer. If you’re starting today, you’re already behind a lot of your competition. If you started a year ago when we first mentioned it on the Inspector Toolbelt podcast, then you’re probably ahead of the majority.”

Most home inspection firms have built their businesses around agent referrals. Robertson points out that many home inspectors run successful single-man operations doing 400-plus inspections with very little or no online presence. “I got a call a few weeks ago from a solo-operator inspector who has been doing 500 inspections a year and has a great group of agents that refer him. He doesn’t have much of a website and has very little in terms of marketing. The reason he was calling me is because some of his agent-referral partners had left the industry and his work had started to decline,” reports Robertson.

As the market shifts, home inspectors will have to learn new skill sets. “If the market shifts towards a more direct-to-consumer model, then branding becomes much more important. SEO, Google Reviews, Google Ads and Google Local Services Ads will play a bigger role. Home inspectors who are not spending time or money on their online presence are just going to fall to the wayside. Building an amazing website, having a strong brand in your community, having strong conversion rates, great scripts for your team when they answer the phone, and a great social media presence—is all going to matter more,” advises Robertson.

The importance of social media is also going to increase. “A home inspector’s social media presence is going to matter a lot,” notes Robertson. “If you’re a 25-year-old buyer and you need to find a home inspector, are you going to randomly hire one, or are you going to go with the guy you’ve been following on TikTok? The people we follow on social media or TV—that’s called a parasocial relationship. For example, we don’t know the person we see on TV personally, but we like them. They give us a warm-fuzzy feeling. They don’t know us, but we feel like we know them. Home inspectors who are running podcasts, posting videos to social media and building their personal brand are going to be the ones that people hire because people trust them.”

Just how much the buyer broker model will erode over the next five or 10 years is difficult to predict, but Robertson suggests that building relationships and a marketing framework around other parties in the transaction should prove fruitful. “Many people touch homebuyers at different parts of the transaction— mortgage loan officers, insurance agents, attorneys and more,” he says. “As home inspectors, we can make sure they have our business cards. We can take them out to lunch and work to make them part of our marketing campaign.”

About the Author
Isaac Peck is the Publisher of Working RE magazine and the Senior Broker and President of OREP.org, a leading provider of E&O insurance for savvy professionals in 49 states and DC. Over 13,000 professionals trust OREP for their E&O. Isaac received his master’s degree in accounting at San Diego State University. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

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