Real Estate Commission Cuts Could Lead to Less Buyer Representation in Wake of Lawsuit

The Sitzer | Burnett Lawsuit and What it Means for Real Estate

In October 2023, a landmark class action antitrust lawsuit against the real estate industry known as Sitzer | Burnett concluded with a unanimous jury verdict against the National Association of Realtors (NAR) and major real estate brands.

The plaintiffs, a class of home sellers, successfully argued that NAR rules and franchisor practices kept commissions unfairly inflated. The jury agreed, awarding over $1.7 billion in damages.

This explosive verdict promises to fundamentally reshape the way real estate agents are compensated. However, the changes sparked by the ruling may have unintended consequences for home buyers, sellers, agents, and the housing market overall.

Here is a more in-depth recap of Sitzer | Burnett and analysis of its complex implications.

The Lawsuit's Origins

In 2018, prospective home sellers in Missouri filed the class action suit against NAR, brokerage franchisors, and MLSs. They alleged these entities engaged in anticompetitive conduct through the long-standing cooperative compensation system.

Under this system, the listing broker splits the total commission with the buyer's broker. This is facilitated through their MLS membership and follows NAR's Clear Cooperation Policy. Plaintiffs argued this practice inflated commission rates and forced sellers to pay for "services" from the buyer's broker without their consent.

The lawsuit sought damages equal to the portion of commissions paid to compensate buyer's brokers. With commissions typically splitting 5-6% total, the damages accumulated in the billions across the hundreds of thousands of affected home sellers.

Major Brokerages Involved

The original complaint named 16 corporate defendants, including large real estate franchisors and MLSs. These included:

- RE/MAX

- Keller Williams

- Coldwell Banker

- Century 21

- ERA Real Estate

- Anywhere (formerly Realogy, parent of Coldwell Banker, Coldwell Banker, and Better Homes & Gardens brands among others)

Also named were HomeServices of America and two of their subsidiaries BHH Affiliates and HSF Affiliates. The National Association of Realtors was another key defendant.

Before trial, several defendants settled, including RE/MAX, Coldwell Banker, Century 21, ERA, and Anywhere. They paid a combined $119 million to avoid trial. However, Keller Williams, HomeServices, and NAR did not settle and the case proceeded against them.

Plaintiff Arguments and Evidence

When trial began in October 2023, the plaintiff home sellers presented several arguments to establish wrongdoing by NAR and the brokerage defendants:

• NAR's Clear Cooperation Policy made cooperative compensation effectively mandatory for Realtors.

• Franchisors like Keller Williams trained agents to stick to standardized commission splits and resist discounting.

• Objection handling scripts reinforced presenting commissions as fixed, not negotiable.

• Buyer brokers provided no tangible services to sellers, yet sellers paid their commissions.

• Economic analysis showed commissions didn't correlate to factors like home prices or agent effort.

Plaintiffs cited internal training materials, video depositions of executives, and testimony from class members dissatisfied paying the buyer's agent commissions.

Defense Arguments in Court

Conversely, the defendants claimed no conspiracy existed and justified long-standing industry practices:

• Cooperative compensation created value for sellers by incentivizing buyer brokers. This helped transactions close.

• Commission rates were in no way mandatory or fixed, but rather independently negotiated at the brokerage level.

• Training focused on hypothetical scenarios and dialogues, not on requiring standardized splits.

• Their trade association, NAR, had no role in setting commission rates or brokerage policies.

• Commission norms evolved from market competition, not collusion or price-fixing.

• After closing arguments synthesizing these positions, the case went to the jury for deliberations.

The Jury Sided With Home Sellers

On October 31, 2023 the jury returned a unanimous verdict fully in favor of the class plaintiff home sellers.

They found the defendants violated antitrust laws through an illegal conspiracy to keep real estate commissions inflated. The jurors cited NAR's compensation rules, trainings by franchisors, and steering practices as evidence of wrongdoing.

In a resounding victory for the plaintiffs, the jury awarded damages totaling $1.785 billion. With hundreds of thousands of class members, the payout averaged a few thousand dollars each.

The Verdict's Implied Changes

This monumental verdict implied that major changes are necessary in how real estate agents are compensated. While appealing the decision, the industry must adapt to avoid further liability.

Here are the broad shifts implied by the jury's findings:

For Buyers

- Will likely pay their broker directly instead of the seller footing the bill.

For Sellers

- Can expect lower total commissions with freedom to reduce the buyer's broker split.

For the Market

- Lower commissions could yield lower prices for buyers and higher proceeds to sellers. This improves affordability.

But critics caution the above changes come with considerable downsides...

Unintended Consequences for Home Buyers

The verdict presumes buyers will pay their broker's commission directly instead of this cost getting bundled into the home price. However, this raises concerns that buyer representation could sharply decline:

• First-time and budget-conscious buyers struggle to pay thousands more in upfront commissions.

• Agents exit the business as buyer representation becomes less profitable at lower commission splits. Less agents means less choice for buyers.

• Buyers may forgo using an agent to avoid the added cost, leaving them without an advocate negotiating against the seller's agent.

This mirrors someone representing themselves in court rather than hiring a lawyer - they are at an inherent disadvantage. The verdict could make unrepresented buyers a new norm, leaving them vulnerable to pay more for home purchases.

Potential Decline in Number of Agents

According to the National Association of Realtors (NAR), there are currently 1,578,053 licensed real estate agents in the United States. This is a slight increase from 2022, but it is still below the pre-pandemic peak of 1.6 million agents in 2019.

The NAR also predicts that the number of real estate agents could decline significantly in the coming years if commissions drop significantly. This is because many real estate agents rely on commissions as their primary source of income. If commissions drop, many agents may be forced to leave the business or switch roles.

• Lower pay makes it difficult for newer agents to survive as they build a business. The career becomes less appealing.

• Experience buyer agents may shift to listing agent roles if that side of the commission stays more consistent.

• Part time agents may determine the reduced pay is not worthwhile compared to hours worked.

Fewer agents reduces consumer choice. And agents who stay in business may need to conduct higher volume to make up lower commission rates. This churn could result in lower quality agents.

Increased consolidation in the real estate industry: The Sitzer | Burnett verdict could also lead to increased consolidation in the real estate industry. Larger brokerages with more resources may be better able to withstand the lower commissions that are likely to result from the verdict. This could lead to a situation where a few large brokerages dominate the market, which could reduce competition and drive up prices for consumers.

Impact on the quality of real estate services: If commissions are significantly reduced, it is possible that the quality of real estate services could decline. Agents may be less motivated to provide high-quality services if they are not being compensated fairly.

Prudence on the Changes Ahead

The Sitzer | Burnett verdict exposed anticompetitive issues with current industry approaches to cooperation and compensation. However, radically disrupting the status quo could negatively impact representation and services.

As appeals unfold, careful thought is required around reforms that balance affordability and consumer choice. New commission models may emerge that allow price competition yet sustain professional support.

Overall, the industry should reflect on what policies and structures best serve the market in a fair, pro-consumer way. This landmark verdict sparks overdue evolution in real estate practices, but unintended consequences should be weighed as the industry transforms.