Explained: The Real Estate Commission Litigation

Friends,

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There is a great deal of confusion and misinformation being published about the landmark litigation regarding real estate commissions, so I wanted to take a few minutes to lay out the facts about the litigation, explain the proposed settlement and debunk some of the myths.

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‍The Lawsuit . . .

‍Plaintiffs and home sellers who listed their homes on one of twenty MLSs filed a class-action lawsuit against the National Association of Realtors (NAR) and four of the largest national real estate broker franchisors for violating federal antitrust laws by “conspiring to require home sellers to pay the broker representing the buyer of their homes  (the “Cooperative Compensation Rule”), and to pay at an inflated amount.” The basis of the suit is rooted in the most common way in which residential real estate is transacted in the country, which is sellers hiring an agent to represent their interests for a professional fee and then offering compensation to an agent who brings the buyer as an inducement to get their home sold.

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‍The verdict and proposed settlement . . .

‍In October of 2023, a federal jury ruled that “the National Association of Realtors and several large brokerages had conspired to artificially inflate the commissions paid to real estate agents” and were ordered to pay damages of nearly $1.8 billion. In a surprise move last month, that blind-sided most members of NAR, the association proposed a $418 million settlement. These terms have caused total confusion with industry professionals, consumers and the press:

• NAR will pay the nearly half-billion dollar settlement in installments, with a $197 million payment due within 90 days of the final settlement approval.
• Offers of compensation can no longer be made through the MLS and MLSs will have just 150 days to update their platforms to adhere to the rule changes.
• Buyer agents will have to find other ways to be compensated, either by their clients directly, or through seller concessions or negotiations outside the MLS. Commission negotiations can still take place externally.

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‍My opinion . . .

‍In my opinion, there is no lack of transparency or collusion regarding cooperating broker commissions. Everyone who has sold a home in recent years knows that commissions are negotiated between the seller and listing broker. The listing broker then pays a portion of the agreed upon commission to the buyer’s broker. This is a solution to a problem that didn't exist.

But the bottom line is that the traditional approach of communicating offers of compensation via the MLS is going away: "Compensation could be paid upfront by homebuyers, included as a concession from the home seller, or through a portion of the listing broker's compensation — but the arrangement can't be communicated through the MLS."  ‍

‍Liuzza Realty Group will continue to advise our sellers to offer fair compensation to buyer’s brokers in order to make the transaction as transparent and successful as possible, but it will just be structured differently going forward. We will initially use our website and social media posts to statethe buyer's brokers compensation being offered on our listing portfolio and we will incorporate other methods of communicating this as the industry develops them. I expect the industry to begin implementing these changes by the end of June. ‍

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‍Debunking the mainstream media’s narrative . . .

‍The following are exerts from an excellent article from Budge Huskey, the president and CEO of Premier Sotheby’s International Realty, that debunk the hyperbolic myths about the affects of the proposed settlement:

‍1. The settlement forces real estate brokers to reduce their compensation.

False

‍The settlement in no way establishes any standard or limitation on Realtors for what they may charge or the services they elect to deliver. Realtor fees have always been negotiable. Realtors may cooperate on transactions toward a common goal yet are fiercely independent and highly competitive with one another.

‍2. The settlement will prohibit sellers from paying a commission to a buyer’s agent.

False

‍The practice of whether to pay a buyer’s agent is totally a seller’s decision, and nothing changes in terms of options. Many of us would suggest that the most important outcome is the successful sale of the property on the seller’s terms, and having the greatest incentive to buyer’s agents to show and sell the home is the best way to achieve their goals.

‍3. The settlement will now relieve sellers of any financial burden of buyer agent fees.

False

‍Although sellers can elect not to pay any buyer agent compensation, that doesn’t mean they will avoid the economics. Buyers may easily write into any offer a contingency requiring that the seller cover the cost or may request other concessions, such as closing cost assistance in the dollar amount they are paying their representative.

‍4. The settlement ultimately reduces the total cost of transaction services as sellers will no longer pay buyer agent compensation.

False

‍Should sellers now choose to compensate only the listing agent, it merely means that buyers, rather than sellers, will now have to pay for their own representation if they don’t require the seller to pay as a contingency of the contract. Realtor services are not free, nor should they be. Just because two parties may now share the cost of services rather than one doesn’t mean the total cost of the transaction has been lowered.

‍5. The settlement will serve to lower real estate prices and make homeownership affordable again.

False

‍General values in real estate are determined by the fundamentals of supply and demand, not Realtors. Yes, the commission represents an expense of a transaction, yet these also title fees, closing fees, mortgage-related expenses, property taxes, association fees, etc.Should real estate commissions theoretically be reduced by 1 percent as a result of compression, that $500,000 home will now only cost $495,000 — hardly the difference as to whether someone may afford the home or not. The real reason homeownership is increasingly less affordable is that the values of homes in our markets have risen dramatically in recent years.

‍6. The settlement is a fantastic win for buyers who will now be able to negotiate the fee for representation.

Highly questionable

‍For those who have purchased one or more homes over the years, it is more than likely you were quite happy to have the seller compensate your agent so you didn’t have to. For buyers who had to scrape up enough money for the down payment and closing expenses, having the commission paid by seller and incorporated into the price of the home allowed the buyer to finance the amount over time rather than coming up with thousands of additional dollars at closing.The reality is that most mortgages are ultimately sold to Fannie Mae and Freddie Mac, and neither have provisions for commissions to be financed. In fact, the Veterans Affairs (VA) loan program expressly prohibits the borrower from paying any form of commission in a real estate transaction. So just how is a veteran who has honorably served his or her country now better off without representation?

‍7. The settlement will result in significant restitution to real estate consumers who were ‘harmed’ over recent years in their transactions by Realtors.

False

‍The settlement figure is huge, yet when one divides the amount by the number of potentially qualifying consumers it works out to about $10 per person, depending on how many sellers actually file claims. The only people truly profiting are the class-action attorneys who have submitted a request to the court for over $80 million in legal fees.

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All of us at Liuzza Realty Group appreciate your ongoing trust as we continue to work tirelessly to earn your business.

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