A new mandatory agreement buyers must sign when working with a real estate broker provides transparency, but not much more.

Several months after a $1.8 billion antitrust verdict against the National Association of Realtors (NAR) last October, the NAR and the Illinois Realtors began requiring residential home buyers to sign formal agreements with their broker agents.

According to the settlement, the new agreement requirement was to be in place by August 17 for any buyer and broker using Multiple Listing Services (MLSs).

The agreement is meant to ensure more transparency as to whom the buyer is paying. In addition, listing brokers and sellers shall not make any offer of compensation to the buyer’s broker and the buyer broker is also prohibited from receiving more than was initially agreed to from the buyer. (There does not seem to be any requirement for buyers, sellers, and agents working outside of the NAR-regulated MLSs, which is where the vast majority of U.S. residential homes are listed).

A way forward?

The full repercussions of the October 2023 settlement on residential real estate transactions may take time to play out—the case from the U.S District Court for the Western District of Missouri is not the only one of its kind making its way through courts, and last month, the Department of Justice was given a green light by the U.S. Court of Appeals for the District of Columbia Circuit to continue investigating the NAR over possible antitrust practices. But the mandatory agreement is meant to address consternation among sellers who resent passing a percentage of the sale to the buyers’ agent. Buyers and sellers sometimes are also concerned their brokers are not always representing their best interests.

Illinois real estate attorneys are paying close attention to antitrust suits against the NAR, large real estate firms, and associated entities. But there is uncertainty as to how subsequent settlements and agreements will result in a different experience for buyers and sellers. After all, the Illinois Realtors has long supported mandatory buyer-broker agreements and launched a public relations campaign, The Way Forward, to promote the August 17 changes.

“I have been very clear in my discussions publicly that this was a solution in search of a problem. I firmly believe that residential real estate commissions are not going to be avoided or eliminated as a result of this settlement,” says Kevin Camden, a real estate attorney in Downers Grove and a member of the ISBA’s Real Estate Law Section Council. However, Camden says the mandatory agreements will bring clarity to real estate transactions. “I think this is a great tool for the agents to demonstrate what value they bring to the transaction, outlining their role and skills. Such agreements also protect both buyers and agents.” 

For attorneys, mandatory agreements forged at the outset also provide more opportunities for them to advise clients before a sale.  

“I think attorneys will be in a better position than we are presently to review the agreements before the client signs, which in my experience up to this point has not been the case,” Camden says. “It will also give the attorneys an opportunity to show our value in the transaction because we can talk about riders to the contract regarding commissions, the content and value of the attorney-review letter to incorporate the seller agreeing to pay a cooperating commission, and generally demonstrate the attorney is protecting the purchaser.” 

Buyers and sellers can both proceed without such an agreement in the sell-by-owner market, of course. The legal fee may still be considerably lower than what a client would pay a broker. But Camden suspects mandatory agreements will discourage for-sale-by-owner deals.

“I think nonrepresented buyers are going to be shut out of the market because listing agents will prefer to work with a buyer agent; the listing agent is not going to do the buyer agent work on their behalf, for no additional commission,” he says. “Much like attorneys would rather work with opposing counsel than a self-represented party, I think the same will eventually come to pass with residential agents.

“Finally, and perhaps ironically, I think this is going to drive what was otherwise public—for example, the MLS listing the commission split, which is now prohibited—underground. I envision buyer agents calling seller’s brokerages and asking about a commission split because it is not public with the listing, completely thwarting the rationale of ‘helping the consumer.’ I believe strongly this is going to negatively affect those who need the most help in the real estate purchase—those at the lower end of the economic spectrum—because they can least afford to pay a buyer commission and that strata of the spectrum will be shut-out of the home buying process.”

The more things change

In her April 2024 Real Property article, “Burnett v. The National Ass’n of Realtors,” Erica Crohn Minchella of Skokie-based Minchella & Associates Ltd, asks a number of rhetorical questions as to how the NAR settlement and others like it will affect residential real estate transactions. But, like Camden, she concludes with a note of skepticism, predicting “not much will change.”

After the NAR began enforcing mandatory agreements, Minchella, who also serves on the Real Estate Section Law Council, says, challenges and points of confusion remain.

“The fight over compensation for the work brokers do is not over merely because of the settlement,” Minchella says. “There are still challenges swirling around broker commissions. The threat, as I have heard it, addresses commissions that are paid directly from a listing agent to a selling agent, notwithstanding that there was disclosure to both the seller and the buyer. The recommendation is that all compensation—and that is the term that should be used, not ‘commission’—should be paid out of the proceeds of sale and not from a listing agent’s brokerage. Clearly describing compensation and how those funds will be paid will create fewer targets for litigation.”

Minchella notes that the Federal Housing Authority, Fannie Mae, and Freddie Mac have addressed concerns about how the buyer will be able to finance the cost of the selling agent’s compensation by allowing those fees to not be subject to financing concession limits. 

“So, if seller concessions for repairs might be 3 percent of the purchase price, that does not include the amount that might be necessary to pay the selling agent. So, concession for costs of closing do not include the cost of paying the broker.”

In other words, perhaps not so much has changed after all, except for perhaps a little more transparency and more opportunities for attorneys to continue walking real estate clients through the fine print.

“In essence, the seller is still paying for the buyer’s broker by granting a concession to cover that cost,” Minchella says. “The difference is that it is open and obvious to all the parties that the compensation is coming from the seller’s concession—that is, the seller’s proceeds. In essence, disclosure is the distinction without a difference.”

Pete Sherman is managing editor of the Illinois Bar Journal.
psherman@isba.org