NAR $1.8 Billion Lawsuit Explained
Recently, you may have seen headlines regarding a lawsuit where a judge ruled the National Association of Realtors (NAR) must pay nearly $1.8 billion in damages to home sellers. Many news outlets are claiming this is going to ‘upend’ the real estate industry.
Many headlines are making dire predictions, while others imply there is no issue. And as is generally the case, the truth is somewhere in between.
This article is an overview of the lawsuit, what led up to it, and what impact we think there might be on the real estate industry.
The Lawsuit
This was a class-action antitrust lawsuit known as Sitzer/Burnett, and was filed in the U.S. District Court for the Western District of Missouri. The plaintiffs (a group of Missouri home sellers) alleged the common practice of a seller’s agent splitting a commission with the buyer’s agent (as a condition of advertising a property on a listing site) unnecessarily inflated the cost of transaction cost for sellers. The practice was presented as ‘collusion’ and ‘price fixing’, and after a two-week trial, on October 31st, a Kansas City jury issued a verdict siding with the plaintiffs.
In addition to the NAR, several large brokerages, including HomeServices of America, Keller Williams Realty, Anywhere Real Estate and RE/MAX, were also named as defendants. Anywhere and RE/MAX reached tentative settlements ahead of the trial, paying $83.5 million and $55 million, respectively, but at the time of the verdict, those settlements had not been approved by the presiding judge.
The way the case was presented, it is understandable many would think the lawsuit was justified. It is unfortunate it takes litigation, mischaracterization, and slander to affect changes that are needed.
What led to this? A brief history of the NAR …
Back in the early days of real estate, when someone wanted to sell their home, they simply enlisted the service of a real estate agent who would add their home to the agent’s physical list of homes he had for sale.
Agents eventually began to see the advantage of sharing their personal lists with fellow agents to provide a way for more buyers to be aware of the homes they had for sale. The individual lists were ultimately combined into catalogs of lists, and copies of the catalogs were distributed to each agent whose list of homes was included. This concept became known as a Multiple Listing Service, or MLS.
It soon became obvious an MLS was only going to serve a particular geographical area, so over time, MLSs began to form based on regions. Real estate agents also began to organize themselves into associations serviced by a regional MLS.
Imagine being a real estate agent who has worked hard and has found a buyer, but the buyer is interested in a house on someone else’s list. This was a common scenario. There was no guarantee an agent who brought a buyer to the listing agent would be compensated, so to protect all agents from the less-than-trustworthy few, policies began to be implemented to ensure everyone involved in a transaction was compensated fairly.
In May 1908, the National Association of Real Estate Exchanges was formed with the stated objective of standardizing real estate practices among real estate agents. The organization went through several name changes over the years, and in 1972, the name was changed to the current name of the National Association of Realtors.
Those practices have evolved to where we are today.
In a typical transaction in Oregon, when a home sells, a commission is paid to the listing agent’s brokerage. This commission, often between 5% and 6% of the sales price, is paid from the proceeds of the sale. The commission is split with the brokerage the buyer’s agent is associated with. A typical split might be 2 - 3% of the sales price. From there, each brokerage pays the individual agents according to defined contractual terms.
The model looks something like this.
Buyer agents play a very important role in the home-selling process and deserve to be paid just as listing agents do. Because the buyers themselves, however, often come to the table with limited funds, the practice of the seller advertising a commission split makes sense, as it serves to attract more buyers.
Twenty years ago, it was more palatable to a home seller for two agents to split a 6% commission on a typical home that sold for, say $100,000. Each agent received $3,000. Now, with a typical home selling for $450,000, that same percentage might be $12,000-$13,000. Understandably, home sellers (with the help of attorneys) are crying ‘foul’.
So, what happens now?
How this will all play out is anyone’s guess, but one thing we can count on is real estate transactions will continue. And real estate agents will still be needed. There is so much documentation to navigate through in a real estate transaction, that very few individuals feel comfortable buying or selling their home without help from a real estate agent.
It is highly likely the NAR will appeal the verdict, and the case could go all the way to the Supreme Court, which could take years. It is also highly likely more and more players will jump on the sue-happy bandwagon, as many already have.
When someone on our team represents a buyer, the commission is defined in a negotiable buyer representation agreement. I foresee this practice becoming more common, and very possibly could eventually become law. I also foresee the buyer agent commission (a.k.a. BAC) being formally decoupled from listings. This too could become law.
I do believe sellers will continue to see it is in their best interest to offer to pay the bulk of the BAC because buyers with limited cash will likely seek out those listings anyway.
It will be interesting to see what happens in the industry in the coming months and years. Rest assured in the meantime, with your next real estate adventure, whether buying or selling, The Joyful Roberts Group will be here to support you!
We also have a recent video covering this topic. Check it out here.
