Change is coming to how homes are bought and sold.
The U.S. real estate industry was shocked last week when the jury in a class action lawsuit against the National Association of Realtors and two major brokerage firms, Keller Williams and HomeServices of America, decided they conspired to keep real estate commissions higher than needed. After a two-week trial that ended Oct. 31, jurors awarded the plaintiffs $1.78 billion in damages.
Now, everyone from brokerages to independent agents is trying to figure out what the future will look like once the dust has settled. The decision, says Steve deGuzman, CEO of rehavaPress, a software development company for real estate brokerages, could bring benefits “not only to consumers but to the industry all around.”
The lawsuit, known as Sitzer/Burnett, centered around the NAR’s participation rule and the practice of agent commission sharing. Under the rule, in order to advertise a property on a listing site, the seller’s agent must offer compensation to buyer agents. The aim is to attract more people interested in purchasing a home.
When it sells, the listing agent’s commission, which typically averages between 5% and 6% of the sales price and is paid from the proceeds, is split with the buyer’s agent. But the plaintiffs in the lawsuit alleged — and the jury agreed — that this practice unnecessarily increased the real estate transaction cost for sellers.
What happens next?
The next step in the process is for the judge hearing the case, Stephen Bough, to determine the final damages, which could exceed the amount the jury awarded, says Paul Golden, partner at the Coffey Modica law firm.
Golden says Bough could decide to “issue treble damages — that is, three times the damages” awarded by the jury, which would increase the judgment amount to over $5 billion. He could also grant the plaintiff's court costs, including attorney’s fees and prejudgment interest.
More broadly, Bough could make changes to the commission sharing rule, ban it altogether on a national level or decide to modify the system. If the judge opts to outlaw commission sharing altogether, home sellers and listing agents would no longer be able to determine how much to offer a buyer’s agent or include the information on a listing site — a change that would drastically alter the industry.
Who qualifies for NAR damages?
Sitzer/Burnett is a class action lawsuit in Missouri representing over 500,000 home sellers in that state. Only members of the class are eligible to receive damages as a result of the lawsuit.
But anyone expecting to get a nice chunk of change has a long time to wait. NAR, Keller Williams and HomeServices of America have all signaled their intent to appeal the verdict. (Re/MAX and Anywhere Real Estate, two other defendants in the case, reached settlements with the plaintiffs before the trial and are not included in this decision.)
“These lawsuits are probably going to take years to work through the court system,” says Laura Ellis, chief strategy officer at brokerage Baird & Warner.
It could take up to two years after all the appeals have run out for the plaintiffs to receive any compensation if the damages are confirmed. The amount paid out will depend on how much the final award is after attorney fees and court costs are subtracted.
But Missouri residents aren’t the only ones in line for a payout. There’s another class action lawsuit against NAR, known as Moerhl, set to go to trial sometime next year. Potential damages in that case, which is also targeting commission sharing, could go as high as $40 billion.
A third lawsuit, known as Gibson, with similar claims against NAR was filed within hours of the Sitzer/Burnett decision, naming other major brokerages, including Redfin, Douglas Elliman and Compass, as co-defendants. The class action lawsuit covers home sellers nationwide and could seek damages of up to $200 billion.
What does the NAR lawsuit ruling mean for buyers?
While the monetary outcome of the jury’s decision is unclear, the future of agent commissions is downright murky — and it all depends on what the judge decides.
If Bough strikes down the commission sharing rules, entirely or partially, it opens up a world of possibilities. Buyer agents would no longer be able to advertise their services as free (though they have never been free because the seller has always paid them). Instead, they’d have to be upfront about their fees, regardless of who pays them.
Buyers will still have the option of omitting the services of a realtor and working directly with a listing agent. But for those who want the expertise of an agent to guide them through the negotiation process, the upfront costs of buying a home could increase.
Ellis says some brokerages, including hers, could require clients to sign a buyer’s agreement specifying the services the agent will provide, their commission and the buyer’s responsibility to pay the fee if the seller doesn’t cover it. If the buyer has to pay their agent, it could add thousands of dollars to the cost of a home purchase — on top of the down payment and closing costs.
In the end, “the market is ultimately going to determine the value of that buyer agent’s services,” says Ellis.
What does the NAR decision mean for sellers?
Home sellers are likely to see a more immediate benefit. If commission sharing is no longer allowed, a seller would negotiate a fee with their agent, and a buyer would do the same with their representative. For sellers, this could be a positive: They would no longer have to pay another agent out of their home sale profits.
Indeed, some brokers are already taking steps to eliminate commission sharing from their listings, says deGuzman of rehavaPress, adding, “that’s going to immediately save the seller anywhere from 3% or more.”
A business model based on fixed-fee compensation, where the seller or buyer pays a flat fee for their respective representative’s services, could also emerge and help keep home selling and buying costs down for both parties.
There’s a lot about the Sitzer/Burnett decision that has yet to be determined. The full effects of not only this lawsuit but also others still working their way through the courts will certainly have an impact on the housing market, but the scope isn’t clear.
In the meantime, deGuzman says, “it’s going to be chaos for about a year.”
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