The National Association of REALTORS Settlement

I assume you have read headlines about the National Association of REALTORS® (NAR) agreement to end litigation in the Sitzer-Burnett lawsuit because it's been all over the news. If by chance you haven’t heard, let me give you some background what the lawsuit was about.

The Sitzer-Burnett is a class-action suit that was filed in Sept. of 2021 in federal court by a group of home sellers in the state of Missouri against the National Association of REALTORS (NAR), along with several other defendants including Anywhere, Berkshire Hathaway HomeServices, Keller Williams, and RE/MAX.

The plaintiff's case stated real estate commission rates are too high, buyers’ representatives are paid too much, and NAR’s Code of Ethics and MLS Handbook, along with the corporate defendants’ practices of forced compensation have led to inflated commission rates for the sellers. The jury in this case agreed with the plaintiffs. As soon as the verdict came in, the lead attorney for the plaintiffs filed a nationwide lawsuit against the National Association of Realtors, Compass, eXp, Redfin, Howard Hanna Real Estate, United Real Estate, Douglas Elliman, and Weichert Realtors. Instead of appealing the Sitzer-Burnett case and litigating all of the others, the NAR decided to consolidate the cases and proposed a settlement, and as I understand it, it is now up to the court to accept the settlements.

The issue at the heart of the lawsuits is why home sellers are paying commissions of brokers representing home buyers.

This issue is like an onion, as it has many layers, and the industry has done a poor job of informing our clients what the truth is and many agents in the industry do not understand it themselves well enough to articulate it. I understand it completely because I have been selling real estate through the changes.

The compensation, whether it is a flat fee or a commission, is outlined in the contract between the client and the primary broker of the real estate company. Most home sellers or buyers never talk to the primary broker unless something goes wrong. Agents are employed by the brokers, and in most cases may not deviate from the broker's decisions regarding compensation.

Brokers inform real estate agents what they need to charge, and that fee is split between the broker and the agent. All compensation is negotiable and has always been, nothing in this settlement changes that.

The way it works now is that the real estate compensation is paid to the listing broker, and the listing broker pays the cooperating (buyer's) broker.

The reason this practice is in effect now is because that was the way it was long before buyers' agency was a law. When I was first licensed in 1994, cooperating agents (agents who work with buyers) acted as subagents of the listing agent. After the Federal Trade Commission released a study showing that most buyers thought they were being represented, Ohio passed a law that required agents to disclose whom they represented. Thus, the buyers’ agency was born. Compensation did not change after the buyers’ agency because the mortgage laws were never updated and that is how we ended up with this antiquated compensation model.

That brings us up to today. Today there is no easy way for a buyer to pay their agent fees outside of the way it has always been because mortgage rules cap the amount of fees that can get added to a loan, and with VA loans buyers are forbidden to pay any cost. Lawmakers did this to ensure fees do not deplete borrower equity.

So, what has changed as a result of the settlement and how will it affect the way real estate is sold? Good question. No one knows all of the details yet, but here is what we do know; As of mid-July 2024, compensation will be de-coupled from the listing contract and no buyer's agent compensation will be listed on the Multiple Listing Service. This means that sellers will pay their broker and buyers will be responsible for paying their broker.

The internet is full of people making predictions. Max Besbris, an associate professor, and author wrote, “It will prompt one of the biggest transformations to the housing market since New Deal-era regulations were put in place.” No disrespect to Mr. Besbris, but I don’t think you can compare the NAR lawsuit settlement to the time that followed the Great Depression, but I may be wrong.

The upside is the cost of selling will come down in the long run once the mortgage rules are updated, allowing buyers to pay for a buyer’s agent or to be able to finance the cost.

The downside has some significant issues as well with removing the compensation of any type from the MLS. The biggest one I can see is how it will affect first-time home buyers. First-time home buyers as a general rule rely more on agent services to help them through the sometimes complicated and always emotional process of buying a home. A home is the biggest piece to their financial future.

Throughout my career, I’ve dealt with a lot of issues like this one. The concept of sellers and buyers paying for their representation and removing it from the MLS is simple and understandable, but how the execution happens will depend on a wide range of human behavior.

Some people are predicting housing prices will decline along with commissions. I don’t think that’s true because home prices are primarily determined by the supply and demand for housing units. I can’t see how the cost of brokers’ fees will factor in.

I am very happy with the changes. As you know I have been advocating for this for quite some time. As a person who has made his living over the last 30 years in the real estate industry, I am glad to see more transparency in the transaction.

I developed my fee structure of giving sellers options more than 9 years ago. Since then, I have been able to save sellers several thousand on their side of the transaction. Because of the current compensation model, my hands have been tied to save money on the buyer’s side, this should go a long way to correct that.

Thank you for your friendship and your referrals! Dennis