Litigation Impacting Real Estate Commissions

Multiple lawsuits challenging how real estate commissions are negotiated and shared are impacting the real estate industry. One such case, the Sitzer/Burnett case, involves an antitrust lawsuit against the National Association of Realtors (NAR) and major real estate franchisors. The plaintiffs alleged a conspiracy by the real estate trade association and real estate agents to inflate real estate commissions, in part due to the industry custom and practice of sharing commissions. Traditionally, listing agents and brokers who are members of NAR, have been required to offer compensation to buyer agents and brokers through their local Multiple Listing Services. The plaintiffs argued in court that these requirements set an improper price floor for commissions and limit sellers’ fee negotiation abilities. NAR and the other defendants argue that commissions are freely negotiable and that the market drives commission amounts, not their practices. On October 31, 2023, the federal jury in the Sitzer/Burnett case found for the plaintiffs, awarding $1.8 billion in damages (which could increase if punitive damages are further awarded by the court).

Like the Sitzer/Burnett case, multiple other cases are challenging traditional real estate commission structures, potentially impacting the industry, buyers, and sellers. Plaintiffs argue that NAR and its members are violating antitrust laws, limiting competition and inflating seller costs. NAR contends their practices ensure comprehensive and equitable services, promoting fair competition. They plan to appeal the verdict in the Sitzer/Burnett case, and are actively defending the other cases.

It is reasonable to believe that these cases will lead to fundamental shifts in the U.S. real estate industry, potentially impacting home prices and home buyers. If the result is lower commission rates, it could theoretically reduce overall buying costs. Practically the market is more likely to be the ultimate decision maker when it comes to the sales price of a home. Commissions constitute a small portion of transaction costs, and broader market prices are more influenced by interest rates, supply and demand, and macroeconomic factors.

In the short term, how agents communicate with buyers is going to change. Getting formal representation agreements is one such change, as well as discussing how real estate agent compensation works, how they get paid, and maybe even agreement on the part of the buyer to pay part or all of their agent’s commission. For agents representing buyers, this means developing their value proposition. The evolving landscape underscores the importance of finding the best representation in real estate transactions. Education on the home purchase process, associated risks, and market factors in buying a home remain crucial during these legal developments.