Update: Jury sides with home sellers in commissions trial
After less than three hours of deliberation, the jury ruled for the plaintiffs in the landmark Sitzer/Burnett trial, awarding nearly $1.8 billion. - Real Estate News
The trial started this week. Yes, in an actual courtroom. Sellers in a class action are suing the key real estate industry groups for protecting their agents’ commissions.
The companies could have to pay billions in damages. That’ll hurt them.
What about the rest of us? If the people suing the real estate companies win, will closing on a home be any different? Will our deeds be any different?
Let’s take a look at what we know so far.
The Standard 6% for Agents: An Unfair Trade Practice?
The major agent association and some big-name real estate companies are under scrutiny in this court case. Alongside the National Association of REALTORS® (NAR), the defendants include big companies: Re/Max, Keller Williams, and more.
The industry players are fighting to uphold the home-selling status quo: Multiple Listing Service (MLS), agent commissions.
In the current court case, called Sitzer/Burnett (Sitzer v. NAR) and unfolding now in a Kansas City, Missouri courtroom, plaintiffs say agents’ commissions take billions of dollars out of ordinary home sellers’ pockets every year.
Agents know what commission they’ll get when they check the listing for a home. That means they might just have an interest in selling expensive homes and skipping cheaper ones.
As for sellers, they don’t get much of a chance to negotiate on commissions, the plaintiffs assert, given the way both sides’ commissions go through the seller’s agent upon closing.
And that’s just how things work. A successful seller typically hands over 6% of the sale proceeds to their own agent — who then splits that amount with the buyer’s agent. All costs, of course, are ultimately passed on to the buyer, who’s the one bringing money to the table. Yet the dominant model of commission-taking goes unquestioned by many buyers.
Why Is the MLS Central to the Case?
Hundreds of online databases for areas across the country make up the Multiple Listing Service, commonly known as the MLS. Agents populate these databases with images and details about homes for sale.
The vast majority of the local listing networks within this system are operated under the NAR rules. Agents who want access to the network must adhere to NAR’s “cooperative compensation” rule. This rule makes the seller cover the commission for both agents — the seller’s and the buyer’s, too.
The class-action lawsuit challenges that rule as unfair to sellers. Sellers have to list through the MLS to get marketing clout, so they’re effectively forced to agree to the network’s rules. And the rules expect sellers to pay hefty commissions to their buyers’ agents, just to get them to take notice of their property.
How Do Real Estate Groups Defend the Current Setup?
NAR points out that the current model provides an incentive for agents to cooperate and get deals done.
They say buyers are freed by the model to avoid paying upfront for the benefit of having an agent.
They like things the way they are.
Who asked the buyer, though? The buyer isn’t negotiating the commission, and therefore isn’t questioning it, the plaintiffs argue. They say this current setup makes sellers pay a high price for agents in order to get their homes seen and sold.
Could 3% Per Agent Already Be Obsolete?
In the digital age, in-person guidance is becoming less critical to successful selling. Digital closings are now possible. And yet, U.S. agents’ rates haven’t budged.
The class-action suit notes the lower rates in other countries. Why, they ask, must the National Association of REALTORS® and big corporations use the MLS model to entrench high commissions — regardless of the degree of value a particular agent brings to a deal?
If agent commissions weren’t practically written in stone, the plaintiffs point out, clients could save considerably. Ordinary people need more leverage. People are having enough trouble as it is, and the market is just not moving. As real estate market watcher Lance Lambert put the point on social media recently: “Housing affordability is getting cooked.” Lambert cites figures from Morgan Stanley showing monthly mortgage on the typical home is up some 27% year-over-year, and home loan rates are up +120% from their low in January 2021.
In short, high professional fees and commissions make deed transfers all the harder to accomplish.
How Could the Sitzer v. NAR Case Impact Home Sales and Purchases?
If NAR and the companies lose their case, home sellers of the future might not have to pay both agents’ commissions out of their sale proceeds. Instead, buyers could pay their own agents. This could stimulate competition as agents eagerly vie for buyers’ business. And it could lower professional rates.
Indeed, the court case will likely have some impact no matter the outcome. Because it’s putting public attention (including ours!) on commissions, people will become aware that agent commissions can actually be negotiated.
The agents who have entered the profession because of the recent housing boom would become more obvious. Some of them might not want to stick around if it becomes harder for them to prove their value. Entrepreneur.com recently argued that buyers and sellers would do better if the ranks of real estate agents were thinned out.
The ongoing lawsuit doesn’t just question the fairness of agent commissions but extends to the core of real estate transactions – the transfer of deeds. While commissions form a significant part of the expenses incurred by sellers, the actual transfer of property ownership is encapsulated in the deed transaction, a process devoid of agent commissions. This raises a pertinent question: are high commissions justified if the crux of the transaction is a legal procedure?
Will People’s Deeds Be Affected?
Transactions come down to the transfer of deeds. Putting aside what clients agree to in contracts, deeds themselves do not require agents or agent commissions. A deed conveys the property interest from a seller to a buyer by:
- Identifying the parties by their legal names.
- Stating how the property is being vested.
- Stating that the seller “grants” or “conveys” the title.
- Providing a legal description, copied from the prior title carefully, to avoid creating any title defect.
- Setting forth the previous title holder and recording information.
- Stating any (special or general) warranty the seller provides to the buyer.
- Identifying the legal limits to the buyer’s ownership and control, such as covenants and easements.
- Containing the seller’s signature (matching the way they are named on the deed), the acknowledgment, and the certificate of residence which states the buyer’s address for the record (usually the new home).
The deed should then be notarized and recorded. Local real estate attorneys offer case-specific answers about particular real estate deeds, to ensure they facilitate the goals of a seller or buyer.
Book Your Seats in the Legal Arena
In the current case of Sitzer v. NAR, NAR and the companies are being sued for close to $4 billion. But there’s more ahead. In a case still in the pipeline, Moehrl v. NAR, payments could top $40 billion. That case will unfold in Illinois during the coming year.
This is a news story well worth following. The lawsuits, taken together, could forever change what it’s like to buy or sell your home.
Supporting References
Marki Lemons Ryhal, interviewing Katie Johnson of the National Association of REALTORS® for REALTOR® Magazine: Special Report – What’s at Stake in the Sitzer/Burnett Trial? (Oct. 16, 2023).
James Rodriguez for BusinessInsider.com: Discourse – The Multibillion-Dollar Lawsuits That Could Radically Reshape How We Buy and Sell Homes Forever (Jun. 26, 2023).
Brian Carter for PARealtors.com: But What About the Deed? (Sep. 30, 2022).
Lance Lambert on X (formerly Twitter): Status update (Oct. 19, 2023).
And as linked.