A recent federal jury verdict in Missouri has gotten the attention of real estate industry professionals around the country. The jury in Sitzer v. National Association of Realtors et. al (Case No. 4:19-cv-00332-SRB) ordered the National Association of Realtors (“NAR”) and a number of the nation’s largest real estate franchises to pay $1.78 billion in damages to the sellers of over 260,000 homes in Missouri, Kansas and Illinois.
This class action antitrust case was based on a simple premise: The plaintiffs argued that NAR’s Cooperative Compensation Rule requiring listing brokers to offer compensation to buyer’s brokers constituted a conspiracy. Let’s first look at NAR, what it does and how the compensation structure works.
What Is NAR?
NAR is the country’s largest trade organization, with more than 1.5 million members. Most people are familiar with NAR’s trademarked term, REALTOR®, but not all real estate agents and brokers are REALTORS®. In fact, the Association of Real Estate License Law Officials (ARELLO) estimates that there are more than 3 million active real estate licensees. Real estate licensees who wish to become REALTORS® can join NAR, and must abide by the code of ethics and rules.
One such rule is the Cooperative Compensation Rule. Simply stated, the rule requires listing brokers to offer compensation to buyer’s brokers to have their listings appear on a multiple listing service. In the Sitzer case, the plaintiffs argued that this requirement artificially inflated commissions, leaving both buyers and sellers in an unhappy position. The argument, which the jury agreed with, is that sellers incur increased transaction costs without the ability to negotiate commissions with NAR members. Before the Sitzer trial started, NAR told its listing brokers that offering a $0 buyer’s broker commission was an acceptable interpretation of this rule. Based on its decision, the jury did not put much stock in this argument.
Broker Operations
Traditionally, buyer’s brokers have been compensated by the seller, not their own clients. For NAR members, this was a simple and efficient way of doing business and maximizing commissions. But in recent years, numerous brokers have adopted listings with lower commissions, such as Redfin. Other brokers have adopted flat fee or discounted models based on their client market segment.
These decisions are made at the office level, and with many nationally recognized offices requiring membership in NAR, such arrangements were not typically possible. Independent brokers, or those working in more flexible environments, have taken to adjusting commissions as needed to bring more buyers and sellers together. For those who make their living as REALTORS®, discounting their services is not usually an option.
Impact of The Ruling
There has been much discussion over the years about the value of brokers (or REALTORS®) in residential property transactions. Much like tipping restaurant servers, the value of the service doesn’t directly correlate to the price of the transaction. A server at a high-end restaurant may do just as much work for a table with a $100 bill as they do for a table with a $200 bill, but their compensation increases with the larger bill. Some home sales require dozens of showings, dead and reborn deals, significant negotiation and concessions. The listing broker who does this for a $300,000 listing may spend significantly more time than they would on the “easy” $1 million listing that had a very busy open house and multiple offers from Day 1. The commission on the latter deal would be significantly higher, but is that better for the seller? For the market as a whole? That sentiment was the driving force for this class action lawsuit and will likely continue.
The impact of the Sitzer verdict will ultimately spill over to various markets across the country. In addition to flat fee or alternative fee arrangements, buyer’s brokers will undoubtedly be more diligent in signing commission agreements with their clients that require buyers to pay the commission. From NAR’s perspective, shifting the burden of commission sharing to the buyer instead of the listing broker doesn’t materially impact the transaction. For home sellers, paying a commission to only one broker would certainly represent a 1-3% savings. Arguably, however, buyers may end up offering lower prices because their budget will now need to include an additional 1-3% to compensate their broker. For buyers and sellers who are involved in a limited number of transactions compared to their brokers, these differences could be significant. Buyers and sellers in the home market will likely be more prepared and asking these questions as they interview potential brokers. It will be interesting to watch how the industry will react to this shifting dynamic.
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