Realtors: The Implications of the NAR Lawsuit
As attorneys at Donna Craft Cain PC, we're always on the pulse of significant changes in the real estate industry. Recently, a class action lawsuit against the National Association of REALTORS® (NAR) and major brokerage firms Keller Williams and HomeServices of America has shaken up the industry.
The impacts are far-reaching and have the potential to change the way real estate professionals do business.
The lawsuit alleges anti-competitive practices that may affect how realtors earn their commission. Should the plaintiffs prevail, the industry could see a restructuring of commission models, impacting realtor income and buyer expenses. Bottom-line effects include a reevaluation of the traditional role of real estate agents and potential shifts in the buyer-agent dynamic, challenging conventions that have long been the bedrock of real estate transactions.
Let's unpack the details of this lawsuit and discuss its potential impact on realtors and the housing market.
Background of the NAR Lawsuit
This lawsuit, known as the Sitzer/Burnett case, centers around the NAR's participation rule and the practice of agent commission sharing. Under this rule, a seller's agent must offer compensation to buyer agents to list a property on a listing site. The aim is to attract more potential buyers.
But here's where things get tricky. The plaintiffs, a group of home sellers in Missouri, argued that this practice artificially inflated transaction costs for sellers. They claimed that commission rates were too high, and buyer brokers were being paid excessively due to NAR rules, which they believed resulted in fixed pricing. Their argument suggested that buyer representation should be available only to wealthy buyers who can afford the services out of pocket.
After a two-week trial in a U.S. district court in Kansas City, Missouri, the jury sided with the plaintiffs, finding the defendants liable for keeping agent compensation artificially high, and they awarded the plaintiffs $1.78 billion in damages.
During the trial, NAR presented evidence that its policies—including the cooperative compensation rule—promote competition and pro-consumer local broker marketplaces that ensure equity, efficiency, transparency, and market-driven pricing options for home buyers and sellers.
But the judge’s legally erroneous instructions to the jury limited how much the jury could consider such evidence, NAR says, adding that the plaintiffs presented no evidence to support their allegations of a conspiracy and did not substantiate their claims that home sellers were harmed.
Future of Agent Commissions
The potential impact of the NAR lawsuit on agent commissions is uncertain and depends on the judge's decisions.
If the judge strikes down the commission-sharing rules, buyer agents would no longer be able to advertise their services as free. Instead, they'd have to be upfront about their fees, regardless of who pays them.
This could lead to increased upfront costs for buyers, as they would need to pay their agent in addition to the down payment and closing costs.
On the other hand, home sellers may benefit from the elimination of commission sharing. They would negotiate a fee with their agent, and buyers would do the same with their representative.
This could potentially save sellers from having to pay another agent out of their home sale profits. Some brokers are already taking steps to eliminate commission sharing from their listings, which could immediately save sellers anywhere from 3% or more.
Additionally, a business model based on fixed-fee compensation could emerge, where sellers or buyers pay a flat fee for their respective representative's services. This could help keep home selling and buying costs down for both parties.
Making Post-Lawsuit Amendments
If this argument prevails, it would require amendments from NAR that could significantly impact the real estate industry. Realtors, buyers, and sellers can utilize this addendum document to lay the groundwork for any future changes.
This addendum is related to a contract between a seller and a buyer for the purchase of a property. It outlines three options regarding the commission of the Buyer Brokerage Firm:
If there's no compensation offered to the Buyer Brokerage Firm in the listing agreement, the seller agrees to pay a certain percentage of the sales price or a specific amount as commission.
If the seller's offer of compensation in the listing agreement is less than what the buyer owes to the Buyer Brokerage Firm under the buyer representation agreement, the seller agrees to pay an additional commission.
If there's no written listing agreement, the seller agrees to pay a certain percentage of the sales price or a specific amount as a commission. If the Earnest Money is retained as liquidated damages, any costs advanced by the Buyer Brokerage Firm will be reimbursed from it, and the remaining balance will be divided equally between the seller and the Buyer Brokerage Firm.
The options laid out within the document provide a framework for how commission payments can be structured post-lawsuit, in a way that could potentially coincide with future legal requirements. They represent a proactive approach by a real estate organization to align with the court's findings and anticipate the possible elimination or alteration of commission-sharing rules.
Specifically, the first and third options offer scenarios where the seller is responsible for determining the commission payment to the Buyer Brokerage Firm, which might increase transparency and reduce the chance of artificially inflated prices—the very issue at the core of the NAR lawsuit.
Moreover, the second option's provision for the seller to pay additional commission could also reflect a shift towards more transparent dealings, with the possibility of buyers becoming more aware of the true costs of broker services.
With the final judgment on agent commission structures pending, this document suggests a shift towards a more clear-cut and equitable framework for determining real estate agent compensation. This signals a potential industry transformation towards practices that not only comply with legal rulings but also prioritize fair market principles and fiscal transparency.
Support Is Here if You Need It
While the full effects of the NAR lawsuit and other similar lawsuits are yet to be determined, it's clear that the housing market will experience some level of disruption. The scope of this disruption remains uncertain, and it may take time for the industry to adjust to any changes that result from the lawsuits.
In the meantime, real estate professionals and consumers should be prepared for a period of uncertainty and potential chaos in the market.
At Donna Craft Cain PC, we're committed to guiding our clients through these changes. With our extensive real estate law experience, we stand ready to navigate these uncertain waters with you. If you have any questions or concerns about how these changes may impact your real estate transactions, don't hesitate to reach out to us.
From our office in Villa Park, Illinois, we serve clients across DuPage County, Cook County, Will County, and McHenry County. No matter where you are in Northwest Illinois, we're here to help you achieve your real estate goals.