A federal jury has decided that several brokerage firms colluded with the National Association of Realtors (NAR) to enforce inflated commission rates. According to the plaintiffs, the conspiracy was evident through a written rule that requires sellers’ agents to offer a set rate of compensation to the buyer’s agent when listing a property on an MLS.
The ruling came last Tuesday after just a few hours of deliberation. Sellers of hundreds of thousands of homes in Kansas, Illinois, and Missouri, the plaintiffs in the Sitzer/Burnett lawsuit, were awarded $1.785 billion in damages. That amount may be trebled to greater than $5 billion. And the copycat lawsuits have already begun.
The verdict alone could have a ripple effect on the real estate industry. It could lead to lower commissions through negotiations between sellers and agents or even leave buyers to foot the bill for their own agents.
Brokerages are likely to prioritize pro-competitive policies to avoid future litigation, and that could mean clear opportunities for discussions about commission rates. According to the NAR, commissions are always negotiable under its rules—but in practice, most real estate agents won’t budge on their rates, according to a report from the Consumer Federation of America.
What the Defendants Have to Say
In a written update on its website, the NAR indicated plans to appeal the verdict. Keller Williams and HomeServices of America are also reportedly considering appeals. RE/MAX and Anywhere (the parent company of Sotheby’s, Coldwell Banker, and Century 21) previously agreed to settlements in the Sitzer/Burnett case and similar Moehrl lawsuit.
Regardless of the outcome of those appeals, it will take time for a judge to issue an order. That injunction could also include a requirement to change NAR rules or brokerage practices.
“We disagree with the verdict but respect the jurors who decided the case based on the issues in front of them,” said Darryl Frost, spokesperson for Keller Williams, in a statement provided to BiggerPockets. “We are disappointed that before the jury decided this case, the court did not allow them to hear crucial evidence that cooperative compensation is permitted under Missouri law.”
For example, Missouri law states that a seller may authorize a broker to share the seller’s compensation with another broker.
“This is not the end,” continued Frost. “Keller Williams followed the law regarding cooperative compensation and stands by the evidence presented on the 100-year-old practice of sellers’ agents offering commissions to other agents who help market and sell homes. Looking forward, we will consider all options as we assess the verdict and trial record, including avenues of appeal.”
That 100-year-old practice was commonplace before the NAR mandate was made, in large part because cooperative compensation may be the best tool sellers’ agents have to attract buyers. It’s practical for sellers’ agents to offer compensation to buyers’ agents in exchange for their marketing efforts, which brings more offers to the listing. That could be why the practice still continues in areas where cooperative compensation isn’t required. For example, Northwest MLS eliminated the requirement while also allowing brokers to publicly list compensation offers, with no noticeable market changes.
BiggerPockets also contacted the NAR and HomeServices of America for comment, but as of this publication, they have not responded.
The Journey to a Ruling
After deliberation, the jury answered yes to four questions. They agreed that there was a conspiracy between the brokerages and the NAR, that the conspiracy increased or stabilized commission rates, that the defendants willingly joined the conspiracy with knowledge of its goals, and that the plaintiffs overpaid for real estate services as a result of the conspiracy.
At issue in the case was NAR’s cooperative compensation rule, which requires sellers’ agents to offer compensation to buyers’ agents when listing a home on a local MLS. The blanket offer is made without knowledge of the time or effort the buyer’s agent will bring to the deal.
The plaintiffs argue that homebuyers aren’t privy to the offer of compensation, so buyers’ agents can steer homebuyers toward the homes with the highest payout. To ensure that buyers’ agents show the home to their clients, sellers’ agents are therefore incentivized to offer a competitive rate. That keeps commission rates artificially high.
One witness for the plaintiffs compared the current commission system in the U.S. to other countries, where commission rates are significantly lower, arguing that the NAR and the brokerages were responsible for keeping U.S. rates elevated. Commission rates remain stuck, even as internet resources have shifted much of the work of finding a home to the homebuyer, and home prices have skyrocketed. However, that same witness denied evidence of a conspiracy.
But Michael Ketchmark, the plaintiffs’ lead attorney, argued the written rule itself constituted a conspiracy. The defendant brokerage firms required their agents to join the NAR and follow their rules. They were, therefore, colluding with the NAR to enforce high commission rates, a form of price fixing, the plaintiffs argued.
In his closing remarks, Ketchmark positioned the case as a fight between consumers and corporations, saying: “Our system doesn’t have to forget people. You can hold corporations accountable.”
A World Without Cooperative Compensation
Economist Lawrence Wu testified that homebuyers in Australia typically don’t rely on buyers’ agents—their services are instead handled by lawyers and CPAs. That might be preferable, given the surfeit of inexperienced agents in the U.S., but someone must pay for those services. In the absence of cooperative compensation, whether a buyer pays for legal services or real estate services, their upfront costs may be greater.
It’s also possible that the sellers’ agent would still charge 6% for doing the buyer’s agent’s share of the work. So was the testimony of Jen Davis, vice president of MAPS Coaching at Keller Williams. That outcome could mean real estate transactions get more expensive for everyone involved.
That scenario would be particularly tough on real estate investors, who often rely on the guidance of qualified agents to navigate markets they may be unfamiliar with.
On the other hand, it’s also possible that changes to the industry could lead to more negotiation between consumers and real estate agents in general.
Sellers might ask for reduced rates in exchange for reduced marketing efforts in a hot market. Buyers might pay a flat fee for limited real estate services, and the mortgage industry might evolve to allow those services to be financed. The reduced commission burden on the seller may be reflected in lower home prices. If all of those outcomes came to pass, everyone would win.
The NAR has been central to real estate transactions for so long that it’s difficult to guess what the industry would look like without the association’s influence, and other countries don’t necessarily provide an apples-to-apples comparison.
The NAR’s Reputation
Whether or not you believe a conspiracy was taking place between the NAR and the named brokerage firms, the NAR faces several reputational threats that may be a catalyst for change within the trade association and the industry. Between the antitrust lawsuits, Redfin’s breakup with the NAR, the accusations of sexual harassment, and the subsequent resignation of president Kenny Parcell and another high-profile resignation of its CEO, Bob Goldberg, just this week, the NAR has good reason to update its policies.
To gain the trust of its members and consumers’ respect for the Realtor membership mark, the NAR will need to reinvent itself as a pro-consumer organization and take clear action to prevent intimidation and harassment of its employees. Those policy changes could impact the way homes are bought and sold. Likewise, if the NAR fails to maintain its powerful influence, that could open the door for swift changes to the industry.
The NAR has always maintained that its policies are consumer-friendly. “NAR doesn’t tell people what to charge or to receive a commission,” the association wrote in an update on the trial. “NAR rules are very intentionally pro-consumer and pro-business competitive, and buyer brokers exist because consumer protection agencies thought they were important.”
Still, the trade organization has fallen short of requiring local MLSs to publish commission rates publicly or mandating the removal of cooperative compensation requirements. That could change. And the climate of real estate transactions could shift due to the Sitzer/Burnett jury verdict—where home sellers were once afraid to discuss commission rates with their agents, they may more courageously negotiate pricing in the future.
The Bottom Line
Whether the outcome of the lawsuit leads to lower average sell-side agent commissions remains to be seen. How it will affect buyers and buyer agents is also up in the air. And whether the effect of shaking up the industry will have a net positive or negative effect on consumers depends on who you ask.
Still, the case is far from over, with appeals expected and the details of the judge’s order uncertain. We’ll provide updates as the situation unfolds.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.