Navigating the Waves of Change in Real Estate Transactions: Insights on the Sitzer-Burnett Verdict

Background

Many of you have likely heard or read varying reports and analysis of the recent Sitzer-Burnett verdict and the proposed settlement of the class action lawsuit. I feel I have the experience as both an attorney and realtor to provide some thoughts on how it may affect you as a Buyer or Seller of real estate in the future.

Let’s start at the beginning with what was the basis of the plaintiff’s suit. In a litigation milestone this class action lawsuit involved plaintiffs raising questions about how commissions are paid in residential real estate transactions. The case of Sitzer/Burnett v. NAR (National Association of Realtors) was about my brokers representing home sellers often pay the commission of brokers representing home buyers. This practice underpins local broker marketplaces (referred to as MLS) where brokers compile centralized listings of all properties for sale and invite other brokers in finding a buyer.

In real estate this practice is called cooperative compensation. The defendants argued that cooperative compensation is good for consumers as both agents for sellers and buyers provide bona fide services to their clients and this process allows everyone to know what will be paid to each agent at the close of the transaction. The cooperation and offer of compensation benefits sellers by bringing more buyers to the market, and buyers benefit from a central source of accurate data on homes and without having compensation due their agents from coming out of their pocket outside of the close of the home. This is important as with some loans such as VA loans the terms of the agreement prohibit the payment by the buyer of agent fees.

Prior to trial several of the defendant companies settled the case. However, the NAR and a couple of companies took the matter to trial. The jury returned a decision in favor of the plaintiffs awarding $1.78 billion in damages.  Because this case involves antitrust findings against the defendants the verdict amount could be tripled. The case is on appeal. The Department of Justice is also involved for antitrust allegations.

In addition to the class action suit, the NAR was investigated by the Department of Justice (DOJ) for violating federal antitrust laws. The investigation also centered around cooperative compensation. The NAR reached a settlement agreement with the DOJ in 2020.

Recently the parties reached a proposed settlement of the case while it pends appeal. All class action settlements must be proposed and accepted by the court before they are final. This process can be lengthy. There will be some strong arguments made requesting the judge decline the proposed settlement.

The main immediate actions from the settlement that will impact residential transactions is the NAR agreed to create a new MLS rule prohibiting offers of compensation on the MLS. For example, now if you signed a Listing Agreement with a Broker it may contain a 6% commission for fees with 3% of that commission being offered to the Broker who brings a buyer that results in the sale of the property. The 3% cooperative commission would be listed in the MLS. The new rule prohibits this cooperative commission from being listed in the MLS. It does not prohibit the offering of a commission by a Seller to the broker of a Buyer. The second action is a new rule that requires all Brokers/Agents working with a Buyer to enter into a written agreement with the buyer before the Buyer tours a home with the Realtor. This is an existing rule in South Carolina and a handful of other states today.

What does this mean for you as a Seller or Buyer?

Wow – that was a lot to unpack, and it was just cliff note version of the case.

Here are my recommendations to prospective buyers and sellers moving forward. Even though the case and settlement are not final it has sent ripples across the industry. The game has changed forever in my opinion.

If you are a Seller, then when you meet with your prospective Realtors (I always recommend you talk to at least 2 or 3 Realtors before signing any contract) know that the only fee you are negotiating with that Realtor are their fees for representing you in the sale of your property. It is up to you on whether you want to offer any compensation to a Buyer for the Realtor fees agreed to in their buyer agreement with their realtor. A good Realtor should be able to give you data points on the advantages and disadvantages of offering any compensation to the Buyer. Also, compensation does not have to be a percentage of the sales price. You can be creative. The only reason you are offering compensation to the Buyer is to attract more buyers to your home. More buyers usually mean there is competition, and you will end up with a better sales price for your property.

Buyers need to be aware that good Realtors will ask them to sign a contract for their services before showing them a home. While this has been the law in South Carolina, it has not been unusual to have the buyer agreement signed as late as the day of closing. This shouldn’t be the case anymore. If a realtor offers to show you property and doesn’t ask you to sign a contract, then know that is someone already willing to skirt the law.  You should be aware of the compensation for the Realtors services in the contract. If the Seller does not offer buyer compensation, then you will be responsible for your realtor’s fees. Ask a realtor to give you their value statement. If they can’t articulate their worth to you then I would look for another Realtor.

Good Realtors provide great value to their clients. Their expertise in knowing the market, understanding the market value, negotiating sales price, providing due diligence on contract language, leading work through contract contingencies, and managing the process from start to close are key attributes that protect you as a Seller or Buyer. Unfortunately, there are too many Realtors who have lived and worked as transactional agents. They do just enough to make sure they get paid. I believe the outcome of this case is many of those Realtors will exit the industry in time.

One addendum to the case I think you should think about is making sure you know everyone to whom your realtor owes a fiduciary duty in the transaction. I see too many Realtors brag about their market share and what percentage of buyers they bring to their seller’s homes. I see communities where the predominant realty company is associated with the developer of the community. If a realtor tells you that they can put your interest ahead of others they owe a fiduciary duty, then they are lying to you.

Summary

I do not expect the Sitzer/Burnett case to substantially change what people pay for homes, or for realtor commissions associated with the buying and selling of homes. It will likely change how the commissioned are presented and which party to the transaction pays each commission owed.

The value of a home does not change with this case. Every home has a value. The value is determined by what a buyer is willing to pay for the home. Realtor commissions do not impact that value.

If you are a Seller and want to offer zero commission to a Buyer’s agent, then that is your choice. I think the outcomes of that decision are some buyers will not consider your home if they must pay full commission outside the sale when others are offering commission, or a Buyer will offer you a lower price for home taking into consideration the commission they will owe their agent.  A good realtor will present the pros and cons to you and allow you to make an informed