The real estate industry in the United States is undergoing a major legal shakeup with two class action lawsuits, Sitzer/Burnett and Moehrl v. National Association of Realtors (NAR) lawsuits. These lawsuits has spotlighted NAR's alleged anti-competitive practices and rules that are claimed to have adversely impacted American home sellers. In this article, we provide a brief overview and a real estate agent's perspective of the details of the lawsuit, NAR's practices, the alleged violations of antitrust laws, and the proposed settlement that could reshape the real estate market landscape.
Update: The NAR has proposed a settlement.
As two class action lawsuits continue to move closer to trial, the industry is waiting to see if and how they could upend the way buyer agents are paid. While these two significant cases — Sitzer/Burnett and Moehrl v. National Association of Realtors — cover different areas of the country, the plaintiffs have similar goals: They want to change the longstanding practice of home sellers paying commissions for both the buyer and listing agents through the sale proceeds.
The original defendants in the cases were the National Association of Realtors, Anywhere Real Estate, HomeServices of America, RE/MAX, and Keller Williams, with numerous significant MLSs listed as "co-conspirators." In September, two defendants, Anywhere and RE/MAX, settled with the plaintiffs, agreeing to pay damages and make substantial changes to how they handle buyer commissions.
The Scope of the Lawsuit
The Moehrl lawsuit, initiated by home seller Christopher Moehrl, evolved into a class action lawsuit that now encompasses numerous sellers across various MLS areas in the United States. The central claim revolves around anti-competitive practices within the real estate industry, primarily focusing on the commission structure that requires sellers to pay a fee split between buyer and seller agents. According to plaintiffs, this setup has led to inflated buyer agent fees, disadvantaging home sellers. The defendants, including NAR, contend that the existing system ensures transparency and competitive pricing for buyers and sellers.
The Potential Impact of a Plaintiff's Victory
If the plaintiffs succeed in the Moehrl lawsuit, the ramifications for the real estate industry would be profound. Agent compensation models would undergo fundamental changes, potentially requiring homebuyers to negotiate and pay commissions upfront. Furthermore, MLSs might need to alter their business practices, and the defendants could face substantial damages. Given its class-action status, the lawsuit could affect thousands of home sellers who paid commissions to the specified companies from 2015-2020 and "current and future" sellers associated with these entities.
The NAR and the Alleged Anti-competitive Practices
The National Association of Realtors (NAR) is at the center of this lawsuit. NAR is a trade association representing real estate brokers and agents across the United States. It sets rules, policies, and practices adopted by its 1,400+ local associations and their affiliated MLSs, governing the conduct of approximately 1.4 million REALTORS®. The lawsuit alleges that NAR and its affiliates engaged in anti-competitive actions that reduced competition among real estate brokers, negatively affecting American home buyers. These practices include concealing commission information from prospective buyers, enabling buyer brokers to suggest their services are free, filtering MLS listings based on commission levels, and limiting lockbox access to NAR-affiliated brokers.
The Alleged Unlawful Agreements
The Moehrl lawsuit details several specific anti-competitive agreements and practices conducted by NAR and its affiliates. Among these are NAR's "Commission-Concealment Rules," which prohibit disclosing the commission offered to buyer brokers to prospective buyers. These rules relieve buyer brokers from competing on commission rates, potentially leading to higher prices for buyer broker services.
NAR's "Commission-Concealment Rules": These rules involve the non-disclosure of the total commission offered to buyer brokers, which can have an anti-competitive effect by discouraging competition and maintaining high commission rates.
NAR's "Free-Service Rule": NAR's Free-Service Rule enables buyer brokers to mislead buyers into believing their services are free. This, in turn, affects the buyer's ability to negotiate lower commissions.
NAR's Commission-Filter Rules and Practices: These rules allow buyer brokers to filter MLS listings based on commission levels. It leads to steering buyers away from properties with lower commission offers, reducing the quality of services, and increasing prices.
NAR's Lockbox Policy: NAR's Lockbox Policy restricts lockbox access to NAR-affiliated brokers, limiting competition among real estate brokers.
Settlements with Brokerages
Two defendants in these class-action lawsuits have reached settlements with the plaintiffs. The first was Anywhere Real Estate, formerly Realogy Holdings Corp., which settled for $83.5 million. Shortly after, RE/MAX, one of the large brokerages named in the Sitzer/Burnett and Moehrl cases, agreed to pay $55 million to resolve all claims against the company.
The Alleged Unlawful Agreements
NAR's "Commission-Concealment Rules"
These rules involve the non-disclosure of the total commission offered to buyer brokers, which can have an anti-competitive effect by discouraging competition and maintaining high commission rates.
NAR's "Free-Service Rule"
NAR's Free-Service Rule enables buyer brokers to mislead buyers into believing their services are free. This, in turn, affects the buyer's ability to negotiate lower commissions.
NAR's Commission-Filter Rules and Practices
These rules allow buyer brokers to filter MLS listings based on commission levels. It leads to steering buyers away from properties with lower commission offers, reducing the quality of services and increasing prices.
NAR's Lockbox Policy
NAR's Lockbox Policy restricts lockbox access to NAR-affiliated brokers, limiting competition among real estate brokers.
Implications for Buyers and Sellers
What does this mean for buyers?
Buyers could see significant changes in how they interact with real estate agents and pay for agent services. If the plaintiffs succeed and commissions are restructured, buyers might be required to negotiate and pay agent fees upfront. This could lead to more transparency in agent compensation, potentially influencing how buyers engage with real estate professionals. Or it can lead to buyers opting not to use an agent as they will have to pay the commission. As it is now, the buyer's agent is compensated as the listing agent splits their commission with the buyer's agent.
What does this mean for sellers?
Sellers could also experience substantial changes in how they pay agent commissions and the overall home-selling process. If the lawsuit results in a restructuring of commissions, sellers will save thousands of dollars on commissions when they sell their home with an agent. On average, agent commissions are 5% to 6%; that number will be cut in half.
What does this mean for real estate agents and brokers?
The proposed settlement could have significant implications for real estate agents and brokerages. If the plaintiff wins, it may increase competition in the real estate market while displacing many agents. Real estate agents must operate more transparently and competitively, impacting their ability to negotiate commissions and interactions with buyers and sellers. Agents may need to adapt to new rules and practices that could be introduced due to the settlement, ultimately reshaping how they conduct their business.
A Real Estate Agent's Perspective on the Lawsuit and Industry Reform
As a real estate agent, I have long believed that the real estate industry is ripe for disruption, particularly when embracing technology and challenging the status quo regarding rules and transparency. These lawsuits have brought to the forefront some issues I had questioned since becoming a real estate agent. It seemed like a conflict of interest, in my opinion, for the seller to be paying the buyer's agent, especially when dealing with terrible agents. I wanted my clients to decide how much they would compensate a buyer's agent within the current rules.
I've taken it upon myself to advocate for a more transparent transaction process by creating my platform, Allioo.com, working within the bounds of the current rules and laws. Regardless of the lawsuit's outcome, the industry needs substantial changes, particularly in commission structures and transparency.
Embracing Technology
Technology is transforming nearly every industry in the digital age, and real estate should be no exception. The lawsuit underscores the need for real estate professionals to embrace technology and offer innovative solutions that can simplify and enhance the buying and selling process. Online platforms, data analytics, virtual tours, and artificial intelligence can all be harnessed to provide clients with a more efficient and transparent experience.
Tech companies are positioning themselves to take advantage of this lawsuit, and some tech-forward brokerages are preparing themselves for the outcome by purchasing companies within critical aspects of the real estate transaction.
Tech companies and brokerages have been creating a more streamlined experience for buyers while acquiring companies that service essential aspects such as:
Mortgage companies
Title and Escrow companies
Transaction coordination platforms
Digital document signing platforms
My opinion
Tech Companies may utilize real estate agents as salaried employees, acting as agents, showing agents, or transaction advisors.
Brokerages will give the agents the same tools as the tech companies, and buyer agents will be compensated in other ways if the brokerage owns the other aspects of the transaction.
Commission Reform
The issue of commissions is a central concern for many in the real estate industry. The current model often needs more transparency, and buyers, sellers, and renters may be required to fully understand where their money is going or the services they're receiving in return. Regardless of the lawsuit's outcome, it's time for the industry to reevaluate commission structures. This may involve more flexible, tiered commission models or greater transparency in how commissions are divided among real estate professionals. Many real estate agents will not be in business if the plaintiffs win. Still, a shift in commission practices can benefit all parties involved in real estate transactions.
Transparency for All
Transparency is paramount in a fair and healthy marketplace. Buyers, sellers, and renters deserve to know how much they're paying and what they get in return for their money. As real estate agents, we should be committed to providing complete transparency in all our dealings. Transparency can build trust and foster positive client relationships, whether about commissions, property history, or market data.
Conclusion
The Sitzer/Burnett and Moehrl v. National Association of Realtors lawsuits catalyzes change in the real estate industry. As a real estate agent, I am committed to driving this change, advocating for transparency, and embracing technology to create a more efficient, consumer-friendly, competitive real estate landscape. Regardless of the lawsuit's outcome, the industry can evolve and better serve the interests of buyers, sellers, and renters.
Frequently Asked Questions
What is Sitzer/Burnett and Moehrl v. National Association of Realtors about?
These lawsuits revolve around NAR's alleged anti-competitive practices and rules that have disadvantaged American home buyers. These practices include Commission Concealment Rules, Free-Service Rule, Commission-Filter Rules and Practices, and Lockbox Policy.
The Defendant and the Alleged Conduct
The defendant in this case is the NAR. This powerful trade association sets the rules and policies a vast network of real estate professionals follows. It encompasses approximately 1.4 million REALTORS® and 1,400+ local associations across the United States.
What are multiple listing services?
Multiple Listing Services (MLS) are integral to the real estate industry. They allow competing brokers to share information about homes for sale, creating a central hub for real estate listings.
How does NAR issue and enforce these rules, policies, and practices?
NAR exercises control over numerous MLSs in the U.S. and mandates its affiliated associations and MLSs to comply with the rules and policies laid out in the Handbook on Multiple Listing Policy.
How do these rules, policies, and practices violate antitrust laws?
The alleged anti-competitive behavior centers around NAR's role in reducing price competition among brokers, leading to higher prices and lower quality service for home buyers and sellers.
What would happen if the plaintiffs win the lawsuit?
A plaintiff's victory would lead to fundamental changes in agent compensation models, potentially requiring homebuyers to negotiate and pay commissions upfront. MLSs might need to alter their practices, and the defendants could face substantial damages exceeding $13 billion.
What does this mean for commissions?
The potential impact of the lawsuit and proposed settlement on commissions is significant. The lawsuit alleges that NAR's practices have led to higher commission rates, hindering competition among real estate agents. The outcome of these lawsuits could lead to changes in commission structures and pricing strategies, potentially benefiting consumers by providing them with more options and lower commission rates. However, the exact outcome and the extent of these changes will depend on the specific terms and actions taken due to the settlement.
The Defendant and the Alleged Conduct
The defendant in this case is the NAR. This powerful trade association sets the rules and policies a vast network of real estate professionals follows. It encompasses approximately 1.4 million REALTORS® and 1,400+ local associations across the United States.