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Commission sharing and business practices are at the heart of the pending litigation against the National Association of Realtors (NAR) and large brokerages nationwide. Although the total dollar figures and damages are substantial, they likely amount to very little when divided among the members of the respective classes involved in the class-action lawsuits.
These suits are not about the damages, but rather the NAR and brokerage policies that a jury found have led to agent practices that stifle competition and shield specific agents from the open market.
For decades, buyer agents didn’t need to negotiate for their commission because that was done by the listing agent when properties were listed in the MLS. Payment of the fee was guaranteed by contract between the brokerages and their respective MLS participants.
So long as the property was in the MLS and a commission was offered, the selling agent knew they would be paid that amount. This will soon be permanently altered if the settlement is accepted by the courts.
New agents, consider the positive that you have not known any different and can build your systems around these changes. If you’re a tenured agent, you benefit from negotiation and process understanding.
Regardless of your time in the industry, you’re reading this right now, and that tells me that you’re committed to adapting and surviving despite the fear-mongering in the mainstream media. Change is coming, but the sky is not falling.
The frustrated consumer
Consumers have been frustrated for a long time about the business practices of real estate brokers and agents. Whether you agree with these practices or not, the fact remains that they have been used to stifle competition and decrease transparency.
There’s a high-level list of standard practices that have all been brought up in court:
- The Cooperative Compensation rule from NAR that mandates commissions be displayed on the agent-facing MLS and paid at closing.
- Agents frequently declined to show their buyers properties with commissions below their perceived “market rate.” As a result, buyers’ options were limited without their consent or knowledge, and they were left without the chance to negotiate their agent’s commission independently.
- Listing agents used the common practice of “filtering search results” to drive up the total commission the seller would pay by telling them, “If you don’t offer X%, agents will not show your house.” The seller then felt obligated to pay their agent at least as much as the buyer’s agent.
- Confusion and lack of transparency arise when buyer’s agents skip using a buyer representation agreement or include it without a detailed review alongside the purchase agreement. When buyers inquire about the agreement or commission details, agents often respond with, “You don’t pay me; the seller does,” which is misleading.
2021: Executive Order 14036
This executive order gave the Federal Trade Commission more power, authority and permission from the president to specifically target real estate brokerages and agents for practices of collusion and pricing and commission inflation.
It’s been a fight that, in many ways, NAR has lost. These circumstances left NAR in an already vulnerable state when a group of Missouri sellers came at it with a class action lawsuit, Sitzer | Burnett.
October 2023: Sitzer | Burnett lawsuit
The Sitzer | Burnett lawsuit concluded in October 2023 with a federal jury finding NAR “guilty of colluding to inflate commission rates.” A jury found NAR and the real estate franchisors conspired and consequently awarded $1.8 billion in damages. NAR has agreed to change its business practices as part of a proposed settlement, which has not yet received final approval from the court
This verdict sparked a wave of similar lawsuits nationwide. In March of this year, NAR settled with these plaintiffs, resulting in changes to industry practices. These changes include removing the ability to advertise shared commissions in the MLS, mandating buyer representation agreements and increasing disclosure requirements.
The aim is to foster more transparent discussions on commissions and allow buyers to negotiate directly with agents. Many believe sellers shouldn’t feel obligated to pay the buyer’s agent unless it’s in their best interest.
The DOJ and the Biden administration
The Department of Justice and NAR have been battling off and on for over a decade. Recently, in February 2024, the DOJ made the following statement about commission-sharing practices:
“As long as sellers can make buyer-broker commission offers, they will continue to offer ‘customary’ commissions out of fear that buyer brokers will direct buyers away from listings with lower commissions,” the filing reads. “When sellers make such offers, buyer brokers need not compete on price to attract buyers.”
Not long after that statement was released, and in response to the proposed settlement agreement from NAR, President Biden had this to say:
“In addition, last week the National Association of Realtors agreed for the first time that Americans can negotiate lower commissions when they buy or sell their home. On a typical home purchase, that alone could save folks an average of $10,000 on the sale or purchase. I’m calling on Realtors to follow through on lowering their commissions to protect homebuyers.”
This should scream loud and clear that the “powers that be” want to overhaul our industry practices. And what’s the only thing standing in their way? NAR.
Despite criticisms leveled against NAR — and I’ve been critical myself — it’s crucial that the current settlement agreement is ratified by a judge and implemented. Failing to do so would undoubtedly complicate our jobs moving forward.
Where is here?
So, how did we get here? It’s a combination of many different things: NAR rules and regulations, poor business practices on the part of some irresponsible brokers and agents, the DOJ and FTC’s specific targeting of our industry, ego and arrogance on the part of our defense attorneys, who thought we couldn’t lose, and a consumer base that has become increasingly distrustful of our industry.
These changes aren’t catastrophic; they’re opportunities for those willing to embrace them. Listing specialists and adept negotiators who advocate for their commission will gain market share. Agents focusing solely on buyers without offering comprehensive real estate advisory services may face challenges.
Passive agents who wait for opportunities to come to them could struggle to remain in the industry. It’s a positive step forward if standards of practice improve and hobbyist agents relying on questionable practices ultimately find less space in our industry.
Nick Schlekeway is the founder of Amherst Madison, a Boise, Idaho-based real estate brokerage. Connect with him on LinkedIn.