Commission Lawsuit Won’t Change How You Buy Property but It Will Change NAR

By Franco Faraudo

By now, if you are in the property industry, it is almost impossible not to have heard about the Sitzer/Burnett case. The ruling in favor of the plaintiff and against National Association of Realtors (NAR) for the amount of $1.8 billion sent shock waves around the industry. Those shock waves have shaken loose an avalanche of opinions in almost every English-speaking business publication on earth. The majority of the opinions are about what the verdict means for the industry and how it will forever change the way properties are bought and sold. These headlines might get clicks, but they are overstating the effect that this trial will have on the property industry. The real, lasting impact will likely be how, or if, NAR continues on.

First, it should be said that this case is far from settled. NAR has already stated that they will fight this and believe they have strong legal ground to do so. There is a good chance that when this gets appealed, the next judge and jury will not see eye to eye with the current verdict and overturn it. But even if this verdict sticks, it would mean there would be sweeping changes to how real estate is done. The case revolved around broker compensation, specifically that the seller is required to pay both their listing agent and the agent of the buyer as well. But really, it was about how NAR required listing brokers to specify the buyer broker’s compensation when putting their properties on the MLS. The original complaint was focused more on how the compensation agreement is implemented: “The cornerstone of Defendants’ conspiracy is NAR’s adoption and implementation of a rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation (the “Adversary Commission Rule”) when listing a property on a Multiple Listing Service (“MLS”).”

The ruling doesn’t mean that the buyer now has to pay for their own broker; it means that the compensations will be negotiated as part of the contract rather than just specified by the listing broker. Remember that mid-trial, NAR actually changed this rule and issued a statement saying that now the policy “requires participants to communicate an offer of compensation to other MLS participants, and that offer can be any amount, including $0.” Much like the terms of a deal, we will probably see the commission splits change depending on the market. In a seller’s market, the listing agent will be able to command a higher fee; in a buyer’s market, the buying agent will get their turn. Home prices won’t dramatically change either; any more money that the seller might save by passing their commission onto the buyer will reduce the demand for their property, and the forces of supply and demand will do their thing and adjust the sales prices accordingly.

The complaint also mentioned how specifying commissions beforehand creates an incentive to keep fees high: “Most buyer brokers will not show homes to their clients where the seller is offering a lower adversary/buyer commission, or they will give priority to showing homes with higher adversary/buyer commission offers first. As a result, to gain the cooperation of buyer brokers, selling brokers are incentivized to offer a higher adversary/buyer broker commission as part of complying with NAR’s mandatory Adversary Commission Rule.”

What will certainly change from all of this is the way that commissions are determined. But what might also change is NAR’s position as the gatekeeper of the MLS. In the summary judgment, the judge wrote that he agreed with the plaintiff’s accusation that: “each Corporate Defendant agrees to NAR’s anticompetitive restraint by requiring its subsidiaries, franchisees, and associated brokerages to join NAR member groups, participate in the MLS, and adhere to all NAR-imposed listing rules and policies, including [the NAR Buyer-Broker Rule].”

If NAR is not able to require brokers to adhere to their rules, then they might not also be able to require membership in order to use an affiliate MLS as they do now. This would erode the main reason that brokers join NAR. If that were to happen, NAR would look more like other industry associations than the ubiquitous trade group they are now. NAR has a lot of power (it is the second largest lobbying group in the country), so they will likely be around for a long time after all of this, but what they provide as a member service and what they force members to do could be completely different if Sitzer/Burnett is upheld.

News that isn’t about NAR:

Google has scrapped its $15 billion agreement with LendLease to develop four Bay Area tech campuses.

As bad as transaction volume might be right now, CBRE expects it to fall another five percent next year.

A well-known LA developer has tragically taken his own life.

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