Real estate agents and brokers are reeling from a federal court’s decision to grant class certification in a commission lawsuit that could rock the real estate industry by recovering more than $1 billion in damages and changing how brokers and agents are paid.
Judge Stephen R. Bough of the U.S. District Court in Western Missouri made the ruling on Friday, just days after hearing oral arguments in the case. Known as Sitzer/Burnett after its lead plaintiffs, the suit names the National Association of Realtors and real estate franchisors Realogy, RE/MAX, Keller Williams, and HomeServices of America as defendants and alleges the sharing of commissions between listing and buyer brokers violates the Sherman Antitrust Act by inflating seller costs.
“The whole thing makes no sense,” said Laurie Weston Davis, broker-owner and CEO of Better Homes and Gardens Lifestyle Property Partners, in Inman’s Coast to Coast Facebook group, where many of the comments in this article are sourced.
The order means that the Sitzer/Burnett suit now represents hundreds of thousands of sellers who paid a broker commission in connection with the sale of residential real estate in Missouri listed on one of four MLSs — MARIS, Heartland MLS, Southern Missouri MLS, and the Columbia Board of Realtors MLS — from April 29, 2014 to the present.
NAR and Realogy have vowed to appeal the decision, but in the meantime, the industry is grappling with its implications. Many agents and brokers seemed bewildered by the idea that sellers could get their money back for something that they signed a contract to pay.
“If you sign a contract agreeing to pay me money and I perform as I agreed to then how do you get money back and how do you get to tell me what I can do with the money,” Weston Davis said in the Facebook group. “Now if you don’t want to pay me that much in a future agreement .. ok.”
“It’s kind of ironic that buyers agency came about to protect the public but now it’s a problem,” she added. “We should all just go back to being sub-agents of the seller. Problem solved.”
Some wondered whether agents or brokers would somehow be on the hook for eight years of commissions if the plaintiffs are successful.
“I have a hard time with the idea that a client can sign a contract and agree to pay a commission and then ask for half of it or more back eight years later,” said Teresa Boardman, broker-owner of Boardman Realty and an Inman contributor.
“As a broker-owner I can tell you that it would be impossible to pay any of it back especially if it were eight years’ worth. That money has been spent by buyers’ agents, it is gone as is the percentage that the company keeps.”
Debra Schwartz, an agent at Realty One Group Infinity, pondered who pays the commission back at a brokerage where agents get 100 percent of their commission and don’t have to share it with their broker.
“Brain exploding!” she said, adding, “Just wondering if they might be coming for the agents too.”
Thomas Pawlenko, an agent at Keller Williams Arizona Realty, envisioned a chain of lawsuits if sellers are able to get agents and brokers to reimburse them.
“If the sellers can sue the agents/brokers for money back that they paid for the buyer agent commission, can the agents then sue the buyers to recover that commission, and then can the buyers sue the seller for the money they overpaid for the house that covered the original commission?” he said.
“What’s good for one party, has to [be] good for the others. Seems fair to me.”
The lawsuit has thus far not named any brokers or agents as defendants and therefore none would be responsible for directly paying any damages in the case. If the defendants lose, whether they decide to pass on that cost somehow, and to whom, is unknown at this point.
The plaintiffs in the case emphasize that, due to NAR rules, sellers are forced to offer a buyer broker commission in order to list their home in a Realtor-affiliated multiple listing service, and that moreover, due to the possibility of steering (where buyer agents avoid showing homes that pay them less than the area’s typical rate), sellers feel compelled to offer that typical rate.
But some agents emphasized that sellers are able to negotiate what they will pay.
“Every seller has the option to say no,” HomeSmart Elite associate broker Nicki Pousson said. “No one held his hand to the fire. Our contracts state what commission will be paid to the listing agent’s broker and what the list agent’s broker agrees to pay the buyer’s agent broker. There’s nothing hidden about it.”
J. D’Ann Melnick, an associate broker at eXp Realty, noted that the listing agreement in every state she’s worked in specifically lists what portion of the commission is being paid to the buyer’s broker.
“I’ve had tons of clients ask if that amount can be changed and we discuss the merits of doing so or not,” she said. “I review my contracts in detail with my clients and do the same when I’m representing buyers.”
Agents also questioned other basic premises behind the suit.
“Most sellers agree to paying the commission without even knowing that it will be shared with the buyer’s agent, so are they really expecting listing agents to start charging less commission to the sellers?” said Jose E. Kunhardt, an agent at United Realty Group. “This is ridiculous.”
Jeffrey Taylor Johnson, broker-owner of Above Atlanta Realtors, suggested that since buyers don’t pay, they shouldn’t be able to negotiate their agent’s commission.
“So they are arguing that Buyers should be able to negotiate their agent’s commission, when the Buyer is not paying them anything?” he said.
“The Seller is agreeing to pay listing brokerage a percentage and that brokerage agrees to share it with buyer’s agent, so the Buyer pays nothing. Why is this unfair or wrong? Absurdity.”
Some agents lamented the impact on buyers if the seller plaintiffs won the suit.
“Buyers are already extremely strapped for cash between down payments, appraisal guarantees, etc.” said eXp agent Tara McCarthy. “Paying thousands of additional dollars out of pocket to cover a Buyer Agent commission is not a possibility for many. Which means they would have to go through this process unrepresented.”
Jodi Beekman, broker at Red 1 Realty, agreed. “I feel like a LOT of buyers would go unrepresented when the cost is more tangible to them. And, more will purchase unrepresented, which is the unfortunate result.”
“What about FAIR HOUSING and CIVIL RIGHTS of the middle and lower class, the underserved, the minorities, the LGBTQ community?” Andrew Show, an exclusive buyer broker at Buyer’s Resource Realty Services, told Inman via email.
“If the plaintiffs were to somehow prevail then those groups would certainly not be in a strong financial position to pay their own agent ON TOP OF the purchase price. The plaintiffs actions and basis will have the unintended outcome of severe under-representation and abuse of these protected classes.”
Melnick predicted the biggest loss will be to buyers using mortgages backed by the Department of Veterans Affairs.
“As it sits right now they aren’t permitted to pay a buyer agent commission so they will be forced to either try to negotiate it into the deal that the seller pays or they will simply not be represented,” she said. “We already have enough trouble competing and securing homes for those eligible for VA loans as it is. This would make things exponentially more difficult.”
But Ryan Castle, CEO of the Cape Cod and Islands Association of Realtors, predicted that the federal government — which is currently investigating NAR’s commission rules — would change lending requirements so that buyers wouldn’t have to pay for their agents out of pocket.
“It’s a simple lending rule change to allow you to roll buyer agent financing into the mortgage amount,” he said. “I mean in theory it already happens as the buyer agent gets paid out of the mortgage amount.”
Others questioned why it should be the sellers’ concern whether buyers are represented.
“I guess my ask is why is that the problem of the Seller?” said Andrew Sims, national sales director at SentriLock and a former Realtor association executive.
“Why should the Seller be responsible for making sure the Buyer saves costs on paying the agent THEY chose to represent them? What if that agent is horrible? Doesn’t know anything? I mean you and I both know how many times a buyer’s agent shows up, doesn’t know anything, you do all the work, and that agent still makes thousands of dollars of the Seller’s money.
“The system has been insane for a long time. And I’d bet 1 million of the 1.5 million members of NAR have zero clue what they’d do if they suddenly had to justify those thousands of dollars to a buyer.”
“In fact, by claiming that we are somehow ‘protecting’ the buyer from costs is what has led Realtors for YEARS to claim that buyer agent costs are ‘free’ – which is kind of the cornerstone of this entire lawsuit – because it’s not free,” he continued. “Someone else is just paying for it.”
Sims suggested that buyer’s agents could simply change their business models.
“I’ve talked to a ton of predominantly buyer’s agents only who would love to get paid for the HOURS of work they do up front before a house is purchased, if it even ever is,” he said.
But others said sellers would be harmed if buyers had to pay their agents themselves.
“In reality, the sellers are paying a finders fee,” Barry Albright, associate broker at Keller Williams Realty in Reston, Virginia, told Inman.
“Without the seller paying the fee, many buyers would not be able to purchase a home. They simply don’t have the funds to pay a down payment, closing costs and then the commission. this would result in fewer buyers and ultimately fewer sales. Sellers may even see reduced sales prices.”
“It is probably for these reasons the buyer agent commission is still more often than not offered in Washington State,” he added, referring to data finding that listing brokers offered buyer brokers commissions in Northwest MLS at the same rate before and after a rule requiring a co-op offer was eliminated.
“These lawsuits claim that sellers are harmed by a listing broker offering a ‘co-op’ and being ‘forced’ to pay a buyer agent commission (of whatever amount- flat fee, %, or whatever),” Show said.
“No, they aren’t being forced, but it would severely hamper the advertising and marketing efforts on the sellers’ behalf.”
Furthermore, as an exclusive buyer’s agent, his contract with buyers is what designates what he’s paid not a co-op offer in the MLS, according to Show.
“As an EBA and to combat adverse commission co-ops we have a written 3-page legal document that every one of our buyer prospects consent to so that they become an Exclusive Buyer’s Client! We offer them 3 choices on our compensation. Further, they direct us to have the seller pay our fee on their behalf.
“Our compensation is NOT dependent on any MLS co-op offer. In fact we are never dependent on the offer of compensation because it IS in the offer!”
Deborah Madey, broker at Peninsula Realty Group, predicted the suit, if successful, would result in buyers going directly to listing agents but expecting to be guided as if they were buying with a buyer agent.
“Buyers need to hire and pay their own buyer agents, or not be represented,” she said.
“Let the buyers raise hell with the mortgage industry to allow them to include buyer agency fees in their loan applications as a closing cost. When the mortgage companies feel the slowdown, and the trickle-down impact negatively impacts others, then maybe then solutions can develop that allow buyers to buy with their chosen, retained buyer agents.”
She also predicted that a benefit to the change would be that the bar of professionalism would be raised for buyer agents.
“When buyers start interviewing, retaining and paying buyer agents, the standards will be higher than ‘who has a lockbox key and can get to the property when i want to see it,’” she said. “There are still too many people who do not value or respect the knowledge, skill and experience of a really good buyer agent.”
Still others were suspicious of the plaintiffs and who might be backing them.
“Reading through the complaint really makes me wonder about the plaintiffs motivation,” Allbright said. “Is this their idea or is someone else or a group behind their suit.”
Leonard Steinberg, chief evangelist at Compass, said, “This lawsuit reeks of a more powerful entity hoping to make a lot of money out of a system that actually mostly works extremely well for the consumer right now. Who might that entity/ies be? Who is REALLY the beneficiary of this lawsuit?”
Russ Cofano, CEO of real estate tech firm Collabra Technology, a licensed attorney and former CEO of Missouri Realtors, offered a more tempered view, but said the ruling wasn’t a positive one for the industry, especially since there is a bigger, similar federal case in Illinois brought by homeseller Christopher Moehrl waiting in the wings.
“On one hand, this keeps the matter moving and has nothing to do with the merits of the case,” he said.
“An opposite ruling would have essentially killed it. At the very least, it creates a certainty of spending more on defense costs for the defendants and the industry. It also gives the judge in the bigger matter a bogey to look at. So, in terms of good or bad…it’s not good.”
Email Andrea V. Brambila.