A jury verdict issued Tuesday could upend how commissions are paid by home sellers and buyers.
A jury has ordered a group of real estate companies and the National Association of Realtors to pay damages totaling $1.78 billion in a lawsuit that could reshape the nation’s residential real estate industry.
But many critical questions remain in the immediate aftermath of the verdict, and it may take time before the dust settles in the game-changing litigation due to the appeals process, related court battles and buyer habits.
The verdict in Sitzer/Burnett v. The National Association of Realtors stems from one of two class-action lawsuits that targets how the NAR and real estate brokerages approach commissions. The plaintiffs claimed in the lawsuit the NAR’s “participation rule” and “cooperative compensation” practices unfairly force home sellers to pay inflated commissions to buyer agents.
The Sitzer/Burnett jury agreed, finding the real estate titans liable for $1.78 billion in damages in the suit, which focused on homesellers in Missouri, Illinois and Kansas.
Multiple defendants, including the National Association of Realtors and HomeServices of America, have already announced plans to appeal. The NAR also said it plans to ask for a reduction in damages. A spokesperson for Keller Williams said the company is considering all options, including an appeal.
Outside of those appeals, which could take substantial time to wind through the court system, one of the biggest short-term questions surrounds a judge’s order in the case that has yet to be issued.
That order could include non-monetary remedies, such as an injunction that calls for changes in business practices — including potential tweaks to commissions. Recent settlements in the case and related cases included changes in business practices.
A potential injunction targeting commissions could radically change the industry, according to a recent analysis by investment firm Keefe Bruyette & Woods that was published weeks ahead of the verdict.
“For nearly a century, the U.S. residential brokerage industry has been the target of intense scrutiny, with critics arguing that the policies of the industry’s primary governing body, the NAR, restrict competition and inflate commissions,” the Keefe Bruyette & Woods report said. “Each of the industry’s past legal contests has resulted in significant structural changes. We do not expect this latest chapter to be any different.”
Additionally, the Sitzer/Burnett case is not the only lawsuit with the potential to shake up the homebuying industry. A separate high-stakes case — Moehrl v. The National Association of Realtors — is expected to go to trial in 2024.
Real estate giants RE/MAX Holdings Inc. and Anywhere Inc., which owns Coldwell Banker, recently agreed to settlements in the lawsuits. Anywhere Inc. and RE/MAX both issued statements noting the verdict doesn’t affect their prior settlements, which are awaiting court approval.
How defendants responded to the Sitzer/Burnett verdict
Darryl Frost, a spokesperson for Keller Williams, said the company disagreed with the verdict but respected the jurors who rendered a decision on the case based on the issues before them.
“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,” Frost said. “This is not the end. 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.”Darryl Frost, a spokesperson for Keller Williams
Home Services of America issued the following statement:
“We are disappointed with the court’s ruling and intend to appeal. Today’s decision means that buyers will face even more obstacles in an already challenging real estate market and sellers will have a harder time realizing the value of their homes. It could also force homebuyers to forgo professional help during what is likely the most complex and consequential financial transaction they’ll make in their lifetime. HomeServices of America believes that home buyers and sellers deserve fairness and transparency. Buying or selling a home is a complicated process, and it’s essential to have a knowledgeable, experienced advocate to support buyers and sellers throughout their journey and protect their interests. Cooperative compensation helps ensure millions of people realize the American dream of homeownership with the help of real estate professionals.”HomeServices of America
Mantill Williams, vice president of of communications for the NAR, said in a statement the verdict was not the final word on the matter. The NAR intends to ask that the jury verdict be reduced.
“NAR rules prioritize consumers, support market-driven pricing and promote business competition,” Williams said. “This matter is not close to being final, as we will appeal the jury’s verdict. In the interim, we will ask the court to reduce the damages awarded by the jury. We stand by the fact that NAR’s guidance for local [Multiple Listing Services] broker marketplaces ensures consumers get comprehensive, equitable, transparent and reliable home information, and that brokerages of any size, service or pricing model get a fair shot at competing.”
Williams said it will likely be several years before this case is finally resolved.
Background on Moehrl v. The National Association of Realtors
At the heart of the Moehrl lawsuit, filed in 2019 by a group of people who have sold their homes since 2015, are claims that sellers paid more than they should have in commissions.
The allegation is based in a complex web of rules and policies that require those selling a home to pay the buyer-broker through a commission paid for by the seller. Plaintiffs contend the setup keeps commissions higher than necessary because of the risk of losing potential buyers.
The New York Times reported the NAR recently circulated an internal memo that said while brokers are required to offer a buyer-broker commission, that commission could be set at $0.
Plaintiffs in that case asked for damages estimated at $13.7 billion for anyone who paid a commission to the defendants between March 6, 2015, and Dec. 31, 2020. They also were demanding a significant overhaul of industry practices they argue would lower commissions for buyer and seller agents.
In a statement to The Business Journals provided over the summer, the NAR said the practice of the listing broker paying the buyer-broker’s compensation saves sellers time and money by having so many buyer-brokers participating in that local marketplace, which creates a larger pool of buyers for sellers.
How the lawsuits could affect the homebuying industry
In its analysis, Keefe Bruyette & Woods predicted the litigation will reshape the industry’s commission structure.
The report noted the lawsuit could potentially upend the longstanding practice of listing agents and sellers setting and paying buyer-agent commissions.
The analysis stressed the biggest change could be the typical 5% to 6% commission rates most sellers pay when selling their homes.
If a court ruling or settlement resulted in lower commissions, Keefe Bruyette & Woods projects it would also eventually translate to significantly fewer real estate agents, since that number has grown over recent decades, even as home sales haven’t kept pace.
According to Keefe Bruyette & Woods, the most “impactful” scenario would occur if commissions become “unbundled” and home sellers and buyers would each separately negotiate a commission for their services. The report predicts such a change could lead to a reduction in commission rates, weaken industry trade organizations and spur the development of new technology around the housing market.
Real estate industry already seeing some changes
There already have been several notable changes in the industry since the lawsuits were initially filed. In July, Bright MLS, which covers the Washington, D.C., metro area, said buyer-broker commissions are no longer mandatory. MLS Property Information Network Inc., a listing service in Massachusetts, also stated such commissions were optional.
More recently, the NAR said its commission rule was now “optional” in that it could offer “zero-dollar” commissions for buyer agents.
As part of its settlement, Anywhere Real Estate agreed not to require its company-owned brokerages, franchisees or affiliated agents to belong to the NAR, or follow the NAR Code of Ethics or its Multiple Listing Service Handbook. RE/MAX agreed to the same.
While Keefe Bruyette & Woods’ analysis concluded disruption to the industry is likely in the wake of the lawsuits, it also stressed agent entrenchment could mean sellers might not seek out alternatives.
Source: By Andy Medici Senior Reporter, The Playbook, The Business Journals Bizjournals.com