Effects of the NAR settlement in New York: Buyer beware – changes to buyer agency agreements

Although the National Association of Realtors (NAR) does not directly affect New York State, the New York State Association of Realtors (NYSAR) is following the lead of NAR and is complying with the terms of the NAR settlement.

The NAR settlement is a class action suit that has a current settlement value of over $418,000,000, which the U.S. District Court for the Western District of Missouri granted preliminary approval of in April of 2024 and the settlement is set to be confirmed at a hearing scheduled for November 26, 2024. Although NAR continues to deny any wrongdoing and has reiterated that commissions have always been negotiable, NAR has agreed to implement and follow new rules, which went into effect as of August 17, 2024, and NYSAR has decided to abide by same. The new rules include that: (i) buyer agents must enter into written agreements with buyers to allow for full transparency of all costs and fees, which such fees shall be negotiable; and (ii) compensation of the buyer’s agent is no longer permitted to be listed on the Multiple Listing Service (MLS) database.

The written agreement with the buyer must include: (i) the specific disclosure of the amount or rate of compensation the broker will receive and how this amount is determined; (ii) the compensation cannot be open-ended and shall be objective, examples being a flat fee, a percentage or hourly rate; (iii) terms that prohibit the agent from receiving any compensation that exceeds the amount agreed to; and (iv) an obvious statement that all fees and commissions are negotiable and not set by law. NYSAR and NAR have provided samples of the written agreement on their respective websites for agents to use or work from that encompass the requirements of the NAR settlement. A formal signing of an agreement with the buying agent became an established practice in NAR states in the 1990s, but was not required in other states, including New York. Buyers in New York will now need to understand and enter into these written agreements. If they choose to proceed without an agent, they need to understand that the listing agent represents the seller and has no fiduciary duty to the buyer.

In New York, normal practice has been that the seller pays both its sales/listing agent’s fee and the buyer’s agent’s fee, typically 5-6% of the sale price; which fees were split between the two agents. With compensation of the buyer’s agent no longer being listed on MLS, the payment of the buyer’s agent will now be shifted to the buyer. New arrangements are being considered – (i) that the buyer’s agent’s fee get built into the purchase price and then seller will give a concession at closing, (ii) that the buyer finance the buyer’s agent’s fee with their mortgage lender. But these will need to be negotiated into the contract and the house will have to appraise for a higher value. Another hurdle will be that a buyer’s lender may not permit a concession or be willing to finance the buyer’s agent’s fee. Fannie Mae and Freddie Mac have stated that they will exclude concessions from financing. Thus, payment of the buyer’s agent’s commission will come out of the buyer’s pocket – which will undoubtedly be difficult for first time home buyers.

This article was originally published in New York Real Estate Journal.