Total existing-home sales—completed transactions that include single-family homes, townhomes, condominiums and co-ops—rose 3.1% from December to a seasonally adjusted annual rate of 4.00 million in January.
BARRISTER'S BRIEFING: NAR Decision in Sitzer/Burnett: What Do We Do Next?
My last article gave a 30,000-foot view of everything that has been going on with the National Association of Realtors and the MLS. Today, I’m going to focus in on the Sitzer/Burnett litigation and what it means to all of us.
In the Sitzer/Burnett case, the plaintiffs primarily focused on the NAR rule requiring listing brokers to offer cooperating compensation in order to list a property on the MLS. They argued that this violated the Sherman Antitrust Act and NAR was colluding with large brokerages to inflate seller costs. They said that, as a result, commissions were too high and buyer brokers were being paid too much. They added that NAR’s Code of Conduct and the MLS Handbook, along with the corporate defendants’ practices, ultimately lead to price fixing.
On the other side of the coin, NAR’s position was that the cooperating compensation rule was intentionally pro-consumer and pro-competitive and benefits all parties in bringing around a successful transaction.
Prior to the matter going to trial, two defendants agreed to settle. They were Anywhere Real Estate Inc. and RE/MAX. As part of their settlements, they agreed to pay a combined approximately $138 million in cash, they agreed to remind all agents there’s no rule requiring offers of cooperating compensation, that all compensation is fully negotiable, and that brokerages may choose not to belong to NAR. Interestingly enough, aside from the cash settlements, the other factors were irrelevant, as they were always present: nothing changed.
Additionally, what’s important to note is that even though these brokerages gave authority to permit offices/agents to withdraw from NAR membership, it still did not negate the MLS membership requirement that many MLSs carry that require that you must be a Realtor, (i.e. have NAR membership) to gain access to the MLS. This is often seen as a driving force with NAR membership.
Ironically, on Halloween, the horror story came to life when the Missouri federal court found in favor of the plaintiffs. The jury held that NAR and the defendants violated the Sherman Anti-Trust Act and awarded the plaintiffs $1.78 billion. By law, that amount was automatically trebled (tripled) to $5.36 billion. Additionally, the judge on the case must now determine what sort of injunctive relief will be provided (Note: injunctive relief is a court-ordered act to either do something or a prohibition against doing something). Currently, we are waiting to find out what the judge’s ruling will be. It could be nothing; it could be a bar on all cooperating compensation; or it could be something in between. We simply have to wait and see.
NAR has publicly stated that it plans to post a bond and appeal the decision, not only on the liability, but on other procedural grounds as well. But it’s important to keep in mind that an appeal usually is not a “do over.” Also, any appeal may take years to complete. In the interim, NAR, like the rest of us, is waiting on the decision of the judge and has indicated that it will seek a reduction of the award.
After All the Appeals are Exhausted
It is hard to predict what the end result of this litigation will be. First there is the award. This must be satisfied by all the defendants, not just NAR. Will it be reduced? Again, we simply have to wait and see. As for changes to how we do business, there are a few possible outcomes.
A worst-case scenario could be that listing agents would be prohibited from offering cooperating compensation to buyers. Another issue that could arise from this is the possible impact on buyer/agent relationships. Will buyers choose to forego buyer agency representation? Will the cost of purchasing a home and paying a buyer agent’s commission be too much for buyers to bear, forcing them to go it alone? Perhaps we could see the end of dual agency in New York State (numerous states already prohibit it in a real estate setting)?
As for a best-case scenario, if NAR were to succeed in their appeals and their position that offering out buyer agent cooperating compensation is pro-competition and pro-consumer, then we might see things stay the same and it’s “business as usual.”
The Future of Cooperating Compensation
While we await the judge’s decision, the possible appeals, and the outcome of the ongoing and new lawsuits that are substantially identical to the Sitzer/Burnett case moving their way through the courts, we do know one thing; as it stands right now, the future of cooperating compensation being offered on the MLS is in flux. This is because many MLSs, including OneKey MLS, have adopted NAR’s rule that $0.00 is permissible as an offer of cooperating compensation. This means that listings on the MLS may not be offering out any cooperating compensation.
Imagine, you’re a new Realtor. You get your first buyer. You have them sign all the necessary state-required documents and you put them in your car to show them homes. You spend the next month or two taking them around to see homes. Then, one day, you show them a house that they love. They want to make an offer. You’re ecstatic. You write up the offer and it’s accepted! Then you look down and you realize that the listing agent is not offering out any cooperating compensation. Your heart drops. You’ve been working for free. You could ask the buyers to pay your commission, but so much time has gone by and they’re not under any obligation to pay you. Further, they may not have enough money to pay you and finance the purchase of the house. If they say “No, we’re not going to pay you,” what do you do? You may still be required under NY licensing law and the Code of Ethics to act in their best interests as their fiduciary. You’re in a pickle. So, what is an agent to do?
Best Practices: Buyer/Tenant Agency Agreements
First and foremost, buyer/tenant agents need to present a value proposition to their clients when they first meet them. Why are you worth being paid a commission? Buyer/tenant agents need to establish their value to a prospective client. Then, once the value of working with the agent is established, the agent can take the next step to request that the client execute a buyer/tenant agency agreement.
This agreement should be executed when you first establish a relationship. What it guarantees is that, in exchange for a promise from the client that they will pay a commission of “X,” the agent will work tirelessly to find them a property. The agent can seek out properties not only on the MLS, but the agent can approach private listings, FSBOs, social media, the Internet, auctions, and even flyers on telephone poles. Additionally, if the agent is permitted to seek cooperating compensation from a listing party (listing agent, FSBO, etc.) and it’s offered, the agent will agree to offset the agreed-upon commission from the client with the commission they will receive elsewhere, thus reducing the amount that the client has to pay the agent (Note: in addition, the client agrees to allow the agent to receive compensation from more than one party). This is a win/win situation: the client can be assured that this agent is committed to acting in their best interest and is searching all avenues available to find the client a property and the agent is assured to receive compensation, and is even willing to save the client money by seeking cooperating compensation elsewhere.
Best Practices: Listing Agreement
As a result of the litigation, the argument was made that sellers/landlords are not fully aware they have options when it comes to paying commissions. So, from the outset, listing agents need to also establish their value proposition and why listing commissions and even cooperating commissions might be important. Listing agents must begin to fully explain at listing presentations and expressly state in listing agreements that the seller/landlord has the choice to negotiate any/all commissions. This includes listing side commission as well as cooperating commissions. They can offer commissions similar to what was previously provided, different commissions, and even no commissions. There is no longer a “traditional standard commission.” The seller/landlord needs to know that if an agent presents an offer that includes having the seller/landlord pay a cooperating commission, they have the right to accept, reject or renegotiate that amount. Transparency is the key.
The future of how the Sitzer/Burnett case resolves is unclear. The future of the similarly situated additional cases is equally unclear. The future of how we conduct business in the real estate industry is also unclear. What we do know is that there is a path that can be taken to navigate this quagmire of uncertainty. It all starts with value propositions, disclosures, and transparency, and ends with the proper and effective use of agency agreements. In the long run, these tools will help all licensees pilot through this fog of ambiguity into the daylight of successful business transactions.