Colorado Opts for Alternative Path on NAR Settlement Terms

The real estate industry is undergoing significant changes in the wake of the recent commissions lawsuits and the National Association of Realtors (NAR) settlement. A key aspect of these changes is the dismantling of the cooperative compensation structure, where the seller pays the full commission for the transaction to the listing agent, who then splits it with the buyer agent.

The Impact of the NAR Settlement

Lawsuit plaintiffs argued that this structure artificially inflates commissions and leads to steering, an anti-competitive practice. The rationale is that sellers felt pressure to offer higher commission amounts out of fear that buyer agents would not show their listings or would put up other headwinds due to the lessened commission potential. There is validity to this. 

The New Structure Under the NAR Settlement

The spirit of the change is that instead of the previous structure, where the commission is set up on the listing side and then shared with the buyer's agent, the new structure requires each side to work out their own success fee arrangement (commission or flat fee). The seller covers their portion of the success fee with the listing agent, while the buyer agent negotiates their success fee directly with the buyer. Both parties then meet at the transaction and can negotiate if the listing side will cover the buyer agent fee either in full or partially, through a concession or other compensation arrangement, or if the buyer will cover the full amount themselves.

In Defense of Cooperative Compensation

However, in defense of cooperative compensation (since no one has seemingly made a compelling argument), it's crucial to recognize that without it, buyers will face significant challenges and potentially negative outcomes, which can also have repercussions for the seller side. Proper representation is essential for buyers navigating the complex real estate transaction process, and without the ease of access provided by cooperative compensation, buyers may find themselves taking shortcuts or trying to go it alone.

The Importance of Proper Representation

In the absence of proper representation, buyers may unknowingly stumble into pitfalls, make suboptimal decisions, or overlook crucial factors that could dramatically impact the outcome of their purchase. These missteps and their fallout can lead to buyers taking litigious or other actions to seek remedies from the seller side. The intricacies of the real estate transaction process are numerous, and navigating them without expert guidance leaves buyers, and by extension sellers who may get caught up in lawsuits and other legal entanglements, vulnerable to a host of potential missteps that could have far-reaching consequences. There's a good chance we'll see a lot more lawsuits as a result.

Historical Context: The 1980s and 1990s

This scenario played out in the 1980s and 1990s, leading to calls for, you guessed it, the cooperative compensation structure that greatly enhances accessibility for buyers to obtain proper representation in such a high-stakes transaction – one that ultimately becomes one of the most important and biggest financial decisions they'll make in their lifetimes. Only time will tell if history will repeat itself in the wake of these recent changes.

States' Response to the NAR Settlement

As states grapple with the new reality brought about by the NAR settlement, the majority are diligently working to align their contracts and agreements to meet not only the technical requirements but also the spirit of the mandated changes. Some found out the hard way that regulators are keeping a close eye - for example, the California Association of Realtors (CAR) recently found itself in the crosshairs of the Department of Justice (DOJ), receiving pushback on their proposed documents.

The Role of the Department of Justice (DOJ)

The DOJ has been acting as a formidable presence, not unlike a watchful guardian, ensuring that the tone and spirit of the agreement are upheld. While not always directly intervening, the DOJ has made its presence felt by weighing in on court cases and, in the case of CAR, directly engaging with state-level organizations. This powerful entity looms in the background, vigilantly monitoring the situation and ready to step in if necessary.

Colorado's Forging Its Own Path

Colorado, however, is taking a markedly different approach from other states. The Colorado Real Estate Commission, which is responsible for drafting and approving the state's real estate contracts, has chosen to structure their agreements in a way that closely resembles the cooperative compensation model. This decision appears to ignore both the spirit and technical aspects of the recent changes mandated by the NAR settlement.

Colorado argues that because the state regulators, rather than a Realtor association like in California, are responsible for creating the agreements, Colorado law is not bound by the NAR settlement terms. As a result, the state's listing agreements allow for the listing agent to take their fees in a manner that essentially mimics the cooperative compensation structure, going against the intended changes.

Analysis of Colorado's Listing Agreement

Let's take a closer look at Colorado's listing agreement to see exactly how they have structured their agreement. This is the redline form, showing changes from the previous version, slated to go live August 17th:

• 7.1.1. This is what the listing agent is asking for commission, in percentage or flat fee.

• 7.1.1.1. This is what the listing agent can offer to the buyer agent.

• 7.1.1.2. If the seller ends up compensating the buyer agent's success fee in part or in full via the purchase agreement, that amount cancels out the amount owed to the other side in 7.1.1.1.

  (However, if there is no buyer agent on the other side or the buyer agent's commission is less than what is offered in 7.1.1.1., the listing agent keeps the difference. This arrangement is essentially a holdover of cooperative compensation and would likely be considered controversial by interested parties and the DOJ). 

As you can see, this structure closely mimics the cooperative compensation model by allowing for a full commission amount in 7.1.1, with 7.1.1.1 specifying the split with the other agent. While agent-to-agent compensation hasn't been explicitly outlawed, structuring it directly into contracts is contentious. The DOJ has been vocal about agent-to-agent compensation, citing concerns about steering and artificially inflated commission rates. This approach contrasts sharply with most new contracts nationwide, which typically only include fields for seller-to-listing-agent success fees and potential seller-to-buyer concessions. Most states are actively moving away from contractually structured agent-to-agent compensation, recognizing it as a DOJ hot-button issue. They're also increasingly recommending against agent-to-agent compensation as a practice, aligning with the spirit of recent regulatory changes and settlement terms.

Conclusion

As the real estate industry navigates these uncharted waters, it is crucial for agents, buyers, and sellers to stay informed about the changes and their implications. This situation is bound to get interesting. If there weren't careers, livelihoods, and buyer and seller outcomes hanging in the balance, one might say to grab some popcorn and watch how this unfolds.