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Grace vs. NAR Realtor Commission Lawsuit Will Disrupt California Real Estate

The $1.8b judgment in the Sitzer/Burnett Realtor commission class action lawsuit in Missouri federal court will change California real estate forever in ways that will benefit real estate attorneys and California consumers. Notably, the class action case of Christine Grace vs National Association of Realtors (NAR) was filed in California federal court on December 8, 2023 against some of the largest brokerages in Northern California and the Bay Area Real Estate Information Services (BAREIS) MLS. Another suit will be filed soon against the Southern California equivalent, CRMLS. This article focuses on the likely outcome of Grace and its Southern California counterpart based on the Sitzer/Burnett judgment.

As explained in this article by a real estate partition lawyer in California and real estate broker, who is also a decade long member of the National Association of Realtors (NAR), the judgment will lead to copycat lawsuits that will drive out of business any brokerage that continues to use the current model of seller’s agents offering to pay the buyer’s agent. A review of the arguments by the parties shows that there is no defense to the antitrust claim made by the seller/plaintiffs that the cooperative commission sharing at the heart of the Realtor-owned regional MLSs (Multiple Listing Service) amounts to cartel engaging in unlawful collusion to increase the commission rates. Much as travel agents have been replaced by the Internet, this article predicts where the industry, notably buyer’s agents, will be headed as a result of the Internet and pro-consumer Sitzer ruling.

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The Plaintiffs Rightfully Prevailed against the Realtor Defendants in Sitzer

The Sitzer complaint alleges that the Realtor defendants violated the Sherman Antitrust Act, 15 U.S.C. § 1, which provides that: “Every contract…or conspiracy, in restraint of trade or commerce…is declared to be illegal.”

In furtherance of this cause of action, the Sitzer complaint alleged that:

The cornerstone of Defendants’ conspiracy is NAR’s adoption and implementation of a rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation (the ‘Adversary Commission Rule’) when listing a property on a Multiple Listing Service (“MLS”).

As explained below, the blanket offer of a commission to a buyer’s agent is indeed the lynchpin of the conspiracy operated by the Realtors to artificially increase commissions to their own benefit, to the detriment of consumers throughout California.

What is the blanket non-negotiable commission offer made to buyer’s agents?

The essence of the Sitzer lawsuit is that commissions are artificially inflated based on the way that the MLS currently operates. Specifically, various multiple listing services throughout California and the country allow only Realtors to list a property for sale. As part of that listing, Realtors almost universally offer approximately half of the total listing commission to any buyer’s agent who procures a ready, willing, and able buyer who closes the transaction. These days, the average total list price ranges from 4 to 6%, with virtually all offers of compensation to the buyer’s agent ranging from 2 to 3%. The review of California’s largest MLS, the CRMLS, covering Southern California showed that, post-Sitzer, less than 1% of listings included an offer below 2% for any buyer’s agent.

In the 2021 article “Obstacles to Price Competition in the Residential Real Estate Brokerage Market,” Attorney Mark S. Nadel opined in the Berkeley Business Law Journal that the cooperative compensation is the single greatest source of inflated Realtor commission. The article surmises that: “An environment with lottery-like payoffs for successes generally leads to rent-seeking behavior, whereby competitive marketing efforts dissipate any surplus value associated with a success.” The article notes that, according to Keller Williams University course materials, offering less than a 3 percent co-op fee “will reduce the number of willing and qualified buyer that will see your home.”

In other words, as Nadal opined: “That offer is a solicitation to the buyers’ agents to violate any fiduciary duty they owe to their buyer clients. In fact, offering a fee to a party to cause them to favor the payor’s interests ahead of their client’s interests is essentially the definition of a bribe, and should be recognized as such.” This steering by Realtors to sellers who made more generous offers of buyer compensation was at the heart of the Sitzer lawsuit.

The Realtor Associations Were Deemed the Conspiracy

The plaintiffs in Sitzer alleged that NAR’s Clear Cooperation Policy, referred to as the Adversary Commission Rule by the Sitzer plaintiffs, inflates costs and violates antitrust statutes. 

As shown in the Sitzer/Burnett jury verdict form, all that was required to reach the $1.8b judgment was:

  • Whether a conspiracy existed to “follow and enforce the Cooperative Compensation Rule in the subject MLSs.”
  • Whether that “conspiracy…had the purpose or effect of raising, inflating, or stabilizing broker commission rates paid by home sellers.”
  • Whether the brokerage defendants “knowingly and intentionally joined the conspiracy…with the purpose of furthering its goals.”
  • Whether the “conspiracy…caused the …plaintiffs to pay more for real estate brokerage services when selling their homes than they would have paid absent that conspiracy.”
  • “State the amount of damages. $_____”

Indeed, the plaintiffs presented evidence to show the obvious: that buyer’s agents would intentionally avoid showing their clients homes that did not offer the going rate (at least 2.5%) for a buyer’s agent. As some buyer’s agents have remarked, not paying the buyer’s agent would amount to working for free. This evidence of unlawful steering showed that the buyer’s agents were not working for the buyer, but instead working to line their own pockets.

As to the justification for a buyer’s agent to be paid, the evidence presented shows that the majority of buyers had already located the home that they wanted to see prior to contacting the buyer’s agent. In other words, the buyer’s agent was merely opening the door to the property, sometimes through lock boxes that are monopolistically controlled only by Realtors. This means that brokers who were not part of the voluntary California Association of Realtors would be unable to show the property using the electronic Supra lock box.

In turn, the primary role of the buyer’s agent was simply to prepare written offers. If that offer was accepted, the buyer’s agent would receive approximately 2.5% of the purchase price.

Buyers’ Agent Steering is Obvious

Most damning in the Sitzer case was the voluminous evidence from broker training manuals whereby listing agents explained the obvious when sellers pushed back on offering a commission to the buyer’s agent, which is generally half of the total commission (e.g., 2.5% of a 5% commission): the buyer’s agents won’t show the property if money is not offered. Anecdotal evidence showed that buyer’s agents would tell their buyers that a home offering no commission had already been sold. Online comments from buyer’s agents were absolutely clear that they will refuse to show properties that provided a below average commission. It’s no wonder that MLSs were forced to eliminate the buyer’s agent commission as a search field under the DOJ’s order.

A 2019 Brookings Institute study entitled “Competition in the real estate brokerage industry: A critical review” found “evidence that substantiates regulators’ concerns that steering may make price competition a potentially unsuccessful competitive strategy, and it is our belief that this is the most important factor explaining the general uniformity of commission rates.”

The 2021 article by Mark S. Nadel explains that “agents can explain their reluctance to pursue a transaction with a non-traditional broker as a preference for avoiding the higher risk of dealing with a less established partner.” Even further, “[t]raditional agents imply that brokers with lower prices must be skimping on quality and/or services compared to the ‘full service’ offered by traditional brokers, although they conveniently fail to define full service.”

A 2023 draft article by University of Southern California School of Law Professor Jordan M. Barry observed steering when comparing website views for properties with low and high buyer’s agent commissions.

It’s no wonder the Sitzer jury found that Realtors were steering buyers based on the commission being offered.

Winning Argument: Sellers were paying the buyer’s agent to negotiate against them

Sellers in the Sitzer lawsuit complained that they were paying the buyer’s agent to negotiate against them.

While Realtors in California do not feel that they’re part of a conspiracy, the local multiple listing services have promulgated rules specifically prohibiting any third-party websites like Zillow or broker websites showing local listings from displaying the amount of the commission that will be paid to the buyer’s agent. Related thereto, many buyer’s agents in the past have advertised their services as “free,” much to the chagrin of sellers who have paid a pretty penny for these buyer’s agents.

As of the time of the Sitzer judgment, the average home in California sold for $840,000, meaning a 2.5% buyer’s agent commission would amount to $21,000.

This commission would be due regardless of whether the buyer’s agent was highly competent or totally incompetent. The Sitzer plaintiffs pointed out that many other countries operate without buyers agents, which results in a considerably lower overall commission.

In fact, the Realtors require an educational course that lasts about an hour to enter the organization. At least as of recently, the focus of that course was simply that listing agents must pay the buyer’s agent whatever they agreed to pay as shown on the MLS. Failure to do sound can result in internal Realtor organization discipline. In other words, the glue that holds the MLS together is the agreement by listing agent Realtors to pay the buying agent, whether they are a Realtor or not. With the courts forcing this glue to be dissolved, it is not clear what will be left of the purpose of the MLS, giving yet another reason for a decline in membership of the National Association of Realtors.

Successful Plaintiff’s Argument: Buyer’s agents are paid more if the price is higher

One curious argument that has gained traction is that, the more the home sells for, the more the buyers agent makes. It is unclear if any economic studies have found that this perverse incentive causes the buyer’s agent to work against the buyer.

However, Professor Steven Levitt, one of the co-authors of Freakonomics, found in 2008 that “a real-estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus per cent, or $10,000 on a $300,000 house.”

In other words, the vast majority of the Realtor commission is based on consummating any deal, rather more effort for the benefit of the principal. The simplest explanation for any failure of a buyer’s agent to achieve the lowest possible price is simply the cost benefit analysis of additional effort. Nonetheless, the public seems to believe otherwise.

Rejected Defendant’s Argument: The buyer’s agents work really hard for their money

Many Realtors have expressed their concern that the buyer’s agent works quite hard, and should be paid for their work.

The problem both in reality and perception is that the buyer’s agent is overpaid in many transactions. For example, since buyers pay nothing out of pocket for their agent, they might use an agent to make just one offer, which is in turn accepted. The buyer’s agent might spend just 10 hours with this buyer, resulting in a gross commission to the buyer’s agent or $21,000 for an average California house. This is a staggering $2,100 an hour for an industry with virtually no educational barrier to entry.

Perhaps other buyers shop around at 50 houses, taking considerable agent time. The question then becomes why those time wasting buyers are not paying for this misuse of agent time, supposing they would even choose to use an agent if there was any cost.

Despite the claims that buyer’s agents are of such great value, Realtors online suggest that representing buyers is an entry level skill before they know enough sellers to get a listing agreement. As the New York Times reports: “Most new agents start out by working with buyers — typically friends or family. Listings are harder to get, but are the key to making a good living.”

Disingenuous Argument: All Commissions are Negotiable

One of the most common arguments set forth by Realtors is that all commissions can be negotiated. By this, the Realtors mean that sellers aren’t required to agree to 5 or 6%.

This argument is halfhearted in that brokers won’t work for free, so they’re not negotiable to zero. Moreover, the plaintiffs showed evidence from broker training manuals that the listing agents were taught to push back on such negotiations. Indeed, Realtors were trained to avoid this conversation entirely to simply ask sellers to sign the agreement as written.

Perhaps more importantly, the idea that commissions are negotiable does not escape that they are being negotiated within a monopolistic and collusive system. This means that sellers were forced to negotiate with one of the many Realtors to obtain access to have their property listed on the MLS. Within this system, the majority of sellers were offering to induce a buyer by paying a buyer’s agent between 2 and 3%. Thus, even if the seller’s agent agreed to be paid a nominal 1%, the inducement to the buyer’s agent of 2.5% made the total commission 3.5%. Thus, the most non-negotiable portion of the commission was the inducement to the buyer’s agent, which became the centerpiece of collusion in the Sitzer lawsuit.

The Realtor Attorneys Did their Best to Defend the Indefensible

Many comments by Realtors claim that the attorneys for the National Association of Realtors did a terrible job, and that the decision in Sitzer will be overturned on appeal.

This displeasure by the losing party sounds much like many litigants who lose at trial: It was all the attorney’s fault. As attorneys sometimes joke, there is no motion for a change of facts.

In this case, the facts were voluminous that Realtors have artificially inflated their fees by insisting on a largely undisclosed, flat rate commission owed to the buyer’s agent regardless of the quality of their services.

Realtors have long been known for driving flashy cars and boasting of their financial success. Realtors have done little to quell the concerns that they are overcompensated for a fairly simple task that has only become easier with the advent of the Internet. Recent supply shortages have made multi offers common, further raising concerns about why listing agents are paid so much.

The idea that a different set of attorneys could have achieved a different result is not grounded in any particular theory. The truth is that NAR and local MLSs have been sued over the years for anticompetitive activity, and the current business model has a gaping hole that is legally indefensible. Blaming the NAR attorneys is hardly a solution to this problem.

The Rise of the Internet and its Impact on Home Sales

Some Realtors argue that the public has voluntarily chosen their high cost model, despite lower cost options. A closer look suggests otherwise.

Realtor Buyer’s Agent Commissions Co-opted Zillow

While Realtors have historically been at war with Zillow, some point to Zillow’s inability to replace the MLS as a sign of Realtor success.

The Economist provides a different explanation: “Firms like Zillow, an online platform which lists homes for sale, once feuded with the NAR over access to information. At times Zillow and other real-estate tech platforms looked like threats to the status quo. But ultimately they found it more lucrative to become part of the existing arrangements. Zillow now makes most of its revenues from fees paid by agents who get referrals from its platform.”

This Premier Agent program constituted “43% of Zillow’s 2020 revenue.”

Realtors Have Silenced Websites that Rebated Buyer Broker Commissions

One recent story of internet-based innovation being quashed by Realtor monopolistic practices reflects the importance of the buyer commission in the current business model existing under NAR rules. Back in 2015, a startup named Trelora LLC launched a website that pulled in the Realtor-based IDX internet feed showing all properties available on the MLS. However, it did so with a twist: It showed the secret commission being offered by sellers agents to buyers agents. In so doing, the website offered to rebate all but a few thousand dollars of the commission to the buyer.

In typical monopolistic fashion, the local MLS fired off a cease and desist letter insisting that this data be removed. While the outcome of this case is not entirely clear, the message was obvious- the cooperative compensation was meant to be a secret hidden from the buyers so that they could not ask for it to be rebated back to them. In other words, the buyer’s agents sought to pad their own pockets to the detriment of the consumers. In fact, many states have made it unlawful for buyer’s agents to rebate their compensation.

Interestingly, most buyer agents work only on an oral agreement with their buyers to utilize their services. By presenting the services free or at no cost to them, the buyers agents sidestep the idea that a buyer’s agent would rebate the commission to them.

The Internet and Sitzer judgment will cut into each role of the listing agent

Historically, listing agents have provided a bundle of service for sellers, all of which are under attack by the Sitzer ruling.

First, listing agents provide market information and recommendations pertaining to the appropriate asking price. For more than a decade, the Realtors have been at war with Zillow, in particular, because the free Zestimate provides a valuation that is surprisingly valuable in comparison to its price (free). While Zillow has its limitations (not discussed in this article), Zillow has taken away one of the crucial monopolies that Realtors have had for decades: the ability to introduce themselves to prospective sellers to use the proprietary MLS to provide a free valuation to potential sellers. The real purpose of those introductions is to influence the seller to feel a duty to list with that agent, known by famed author of the Psychology of Persuasion as the reciprocity principle.

Second, brokers provide promotional services, notably access to the Multiple Listing Service (MLS), which lists all homes available for sale. They also prepare a house for sales and hold open houses. What many Realtors do not tell their seller-clients is that they use these open houses to meet potential buyers to, in turn, make a buyer’s agent commission on that listing or another listing. The Sitzer ruling will directly attack this service since the fundamental role of the MLS is a commission sharing service, for which commission sharing may be outlawed or simply deemed not worthy of the litigation risk. The real question is what alternative websites might replace the MLS, with many speculating that Co-Star (owned Homes.com) is well positioned for such a play given its lack of role in providing buyer leads to buyer’s agents, instead providing the listing agent’s contact information. Zillow and Redfin may also try to provide this service. The real question will be how these sites share data so that listings posted on one site are seen on the others, effectively replacing the MLS feed of homes for sale known as IDX.

Third, listing agents often assist with negotiations, including screening prospective buyers, and provide paperwork with legal documentation. Thus far, state Realtor associations have provided the best purchase and sale agreements, with teams of lawyers having combed through each clause to ensure fairness and ease of predictability in enforcement should a dispute arise.

Indeed, Redfin tried to disrupt the industry in 2019 with Redfin Direct, which allowed buyers to make offers without an agent by guiding them through common questions and options on a purchase and sale agreement. While the service (like many others attempted pre-Sitzer) does not appear to be active, buyers should expect market participants to come about offering purchase agreements.

The great debate: who pays the cost of the buyer’s agent?

Perhaps most fascinating about the Sitzer lawsuit is that it has brought to the forefront an interesting argument by Realtors where they treat the proceeds of sale at some kind of abandoned pot of money where their commissions magically appear without any moral repercussions.

An excellent article predicting the outcome of this lawsuit back in 2019 on CNN is titled: “The internet didn’t shrink 6% real estate commissions. But this lawsuit might.” As CNN explained the issue: “The question of who pays the buyer’s agent is an almost existential one in the debate over commissions. Technically, the seller pays the listing agent out of the proceeds from the sale, and the listing agent then gives the buyer’s agent her cut. Of course, sellers wouldn’t have the money in the first place if buyers hadn’t paid it to them.”

CNN continues that “And commissions are reflected in the asking price for the home — driving up the amount buyers pay.” However, this author is unaware of any evidence that commissions drive up the amount that buyers pay by showing that buyers represented by buyer’s agents are paying 2.5% more. Indeed, under the current scheme, the vast majority of buyers and sellers appear unaware of how the commission is handled, meaning they are unaware that they could walk away paying less as the buyer or receiving more as the seller by not using a buyer’s agent. Instead, the buyer’s agency service has been presented as free to buyers, at least until NAR agreed with the DOJ that this practice was impermissible.

The Economist described this argument about the buyer’s agent commission “rip-off” as “nonsense. Either the fat fee inflates the house price, or the buyer ends up paying a similar fee when he or she sells.”

Pro-consumer website HomeOpenly argues that “The home seller sheds their net equity when offering a commission to a listing agent, but the home buyer pays ALL real estate commissions when buying a home.”

However, the analysis isn’t so simple. The idea that because a buyer is the only person bringing a check that they paid for everything is flawed. For example, if, after an offer is accepted, the buyer asks for repairs to be paid by the seller with no change in sales price, to which the seller agrees, didn’t the seller pay for that repair?

As to Realtor commissions, if the buyer was unrepresented, the seller would have placed that money in their pocket, assuming the seller’s agent didn’t attempt to double end the transaction by representing both sides. This is why escrows in California show the buyer’s agent commission coming out on the seller’s escrow statement.

“Economists view this fee as a type of tax and refer to who bears the burden of this cost as the ‘incidence’ of the tax,” reports the University of Chicago School of Business.

There are currently cases pending arguing that the buyer is the one who suffered the damage based on the same arguments raised in Sitzer, meaning there may ultimately be judicial opinions on this topic of who- the buyer, the seller, or both – from the collusive increase in agency commissions caused by the non-negotiable fee offered to buyer’s agents.

Realtor Myth: FSBOs sell for less than they otherwise would

Yet another moral justification raised by Realtors is that their service is critical to obtaining the highest price, and that for sale by owner properties (FSBOs) sell for a lower price.

However, the data on this precept treated as gospel by Realtors is completely lacking. Instead, Forbes found at no truth to this theory, positing that: “If real estate agents really sold homes for 32% more, wouldn’t every home buyer in the country just go around real estate agents and buy their homes directly from ‘For Sale By Owner’ sellers?” Indeed, there seems to be a lack of stories about smoking deals on FSBO homes.

Of course, Freakonomics has been hot on the trail of Realtor commissions for years, concluding in one article that: “We find no evidence that the use of a broker significantly affects either the selling price or the initial asking price, though it does lead to more rapid sale.”

These studies have exposed as a likely myth the old adage that you get what you pay for by not paying for a full priced Realtor. Rather, the Sitzer trial concluded that these prices are artificially inflated, helping to explain the gap between the price and the value of most real estate brokerage services. It appears that the excessive compensation is most beneficial to those adding sale skills like a likable personality, rather than those with real estate acumen.

An Appeal in Sitzer Won’t Change the Impact

While it remains to be decided exactly what injunction may be issued in the Sitzer case, the idea that an appeal will change anything is wishful thinking. As Attorney Rob “Notorious ROB” Hahn explains: “An appeal does nothing to stop the coming avalanche of copycat lawsuits all across the country.” This means that brokers in California have a difficult choice: Stop offering buyer commissions or continue to do business as usual, with each transaction creating treble damages of the gross amount of the buyer commission.

Listing Brokers Take on a Liability that is 15 times the Benefit Each Time They Sell a Home with a Buyer’s Agent Fee

The math for why listing brokers stop offering buyers agent commissions is damning. Supposing a typical sale results in 2.5% to the buyer’s broker and 2.5% to the seller’s broker, and supposing the listing broker retains 40% of the gross commission (giving 60% to the listing agent), this means the listing brokerage grossed 1% of the sale price (20% of 5%).

From this 1%, they have expenses, which will be assumed to be 50% of the gross income, resulting in 0.5% net commission to the listing broker. Thus, an average California house produces net profit to the listing brokerage of $4,200. With each such commission, the listing broker could be liable for three times (treble damages) the sum paid to the buyer’s broker, i.e., 2.5% x 3 (treble damages), which means 7.5%. For an average house in California, this amounts to $63,000. This means the listing broker received a 0.5% net profit and a liability of 7.5%, which amounts to 15 times the benefit.

Copycat Lawsuits Are Coming

Brokers in California are likely to hear shortly about copycat lawsuits against some of the state’s largest brokerages.

18 U.S.C. § 3282(a) sets a five year statute of limitation for the conspiracy to collude allegations. The sooner that brokers change their business model, sooner they will begin to limit their damages and the potential that the broker and the brokerage will find themselves in bankruptcy, as Rob Hahn reports at 31:01. For any brokers inquiring into whether such lawsuits will be covered by errors and omissions insurance, Attorney Rob Hahn reports that brokers may be provided with a legal defense, but no indemnity for these Antitrust lawsuits.

Even more telling, Attorney Rob Hahn noted that it is unclear what an appeal would challenge, since the court found per se liability. Realtors should assume the court ruling is correct and govern themselves as such.

The Future of Real Estate Brokerage and Law

Sitzer will impact the real estate industry regardless of how the appeal plays out.

Buyers will not be paying for their own agent

Particularly damning for the claim that buyer’s agents added so much value to the transaction is that there is near universal agreement that buyers will not pay for their own agent. These remarks seem to be pointed at the idea that buyers will not pay what currently amounts to about $21,000 for an average California house. Many Realtors have remarked that buyers are already cash-strapped such that they won’t be coming out of pocket, but will instead be utilizing their limited savings to make more attractive offers on properties.

Buyer’s Agent Fees on an Hourly Basis

Time will tell whether alternative compensation methods develop such as an hourly arrangement, or flat fee of a few thousand dollars.

As to how much buyer’s agents will charge, Attorney/Blogger Rob Hahn suggested just $50 an hour would be sufficient to compensate an agent. Indeed, full time Realtors earn about $80,000 a year. Supposing a Realtor could produce 1,500 billable hours a year, this would amount to $53.33 an hour- not far from Rob Hahn’s estimate of what a buyer’s agent might charge per hour.

Note that others, such as Attorney Mark S. Nadel, have used the estimate of $500 to $600 an hour that a buyer’s agent might charge. The truth is that there should be a wide disparity in the hourly rate as some buyer’s agent have considerably higher value than others, something that the market can finally decide following Sitzer. Moreover, buyers who are serious about their search can make wise use of the time of an experienced buyer’s agent, while buyers with less serious intentions may get sick of paying even nominal sums for buyers agents to tour properties with them.

Lenders will not be allowing buyers to finance a buyer’s agency commission

One issue with the potential inability of sellers to pay the buyer’s agent will be the ability of the buyer to include their agent’s fee in their mortgage.

However, there is absolutely no evidence that this will occur. Indeed, even in transactions where only a 3.5% down payment is required, buyers are required to pay their own inspections and escrow fees. The lenders have certain requirements in relation to the percentage of security they demand for their transactions. To the extent that the lender demands 80% security, they will not be allowing that percentage to become 82.5% just because a buyer’s agent might be left out of the transaction. Time will tell whether there will be exceptions to this rule for transactions where Realtors add value with their local knowledge, such as corporate relocations for white collar professionals.

The 2021 article by Attorney Mark S. Nader observed that: “Any lack of availability of this option today is probably due to a lack of demand. If it became illegal for listing brokers or sellers to pay the buyer’s agent, then one would expect lenders to formally define the sale price to include the buyer’s broker fee, even if it was separate from what was paid to the seller.”

Given the likely implication of Sitzer, buyers should expect this option provided that the total financed amount is within the expected equity percentage under the loan product as determined by the appraisal.

Most buyers will not use an agent

Many Realtors appear shocked by this ruling, imagining that the only option going forward would be dual representation by the seller’s agent. In reality, most buyers will be self represented going forward. As the WSJ wrote in a scathing opinion piece lauding the Sitzer ruling: “In other countries buyers rarely use brokers. Mortgage lenders and sellers’ agents handle negotiations, appraisals and closing.”

Alternatives to the CAR Purchase Agreement Will Become Publicly Available

Realtors often exaggerate the requirements of their position to justify their commission, acting as a concierge in the real estate transaction process to act as a conduit with every third party vendor. As a matter of law, the role of an agent is limited strictly to the marketing of the property and negotiation of the purchase and sale agreement.

To accomplish this, virtually all transactions utilize the boilerplate California Association of Realtors form. The idea that a buyer’s agent adds 2.5% value to a transaction by filling in this form is laughable. Rather, the California Association of Realtors privately admits to its members that its proprietary “RPA [Residential Purchase Agreement] form is the cornerstone of every successful real estate transaction in California.”

One downside of the Sitzer ruling will be that the lack of uniformity between the form of offers will increase transaction costs, perhaps causing sellers to inquire with lawyers as to whether an offer on one form is truly better than another based on the legalese in those offers.

Luckily, the cost to draft offers through online services or lawyers is likely to be considerably less than 2.5% of the sale price currently being charged by Realtors representing buyers. With the median home price in California approaching $840,000 as of the date of the Sitzer ruling, 5% equates to $42,000, which would be closer to the cost of a moderate lawsuit- considerably more than a few hours of attorney time to advise on purchase and sale agreement. Sellers should expect to see attorneys specializing in providing this routine advice for perhaps a few hours of time at a few hundred dollars per hour.

Could the state Realtor associations offer their forms for sale online? Sure, but this is highly unlikely for organizations clinging on to the last bit of their monopoly. It’s no wonder that the California Association of Realtors hides all of its form from public access, insisting that “prohibited, unauthorized uses of C.A.R. standard forms include posting blank or partially blank C.A.R. standard forms online.” CAR’s goal is to monopolize this critical step of buying a house to force the public to utilize its members whose value has been recently criticized by the Sitzer ruling.

Necessity is the mother of invention, meaning the public should expect plenty of viable options coming soon, perhaps as a monthly subscription or one time payment for buyers to prepare offers to purchase real estate.

Pocket listings and dual agency will likely decline dramatically

The opaque manner in which buyers agents were paid gave rise to pernicious behavior that may soon go the way of the dodo bird.

Notably, the chance for listing agents to earn a double commission by also representing the buyer, a practice known as double ending or dual representation, gave rise to criticism by many industry observers concerned that no person can serve two masters. Realtors, however, went to extra efforts to double their pay. One tactic was using open houses to find unrepresented buyers to represent on that listing, or to represent on other listings. To make it easier to find a buyer for listings, brokers often engaged in secret listings found nowhere on the MLS, known as pocket listings.

Following Sitzer, there may be no incentive to represent a buyer and seller on the same transaction since the buyer’s agent will not be overpaid by the seller’s agent. Instead, brokers will leave buyers to fend for themselves. They will also have little or no incentive to keep a property off market. With any luck, the Sitzer ruling will disincentive this anti-consumer behavior of double ending and pocket listings.

Listing fees will likely decline

With buyer’s broker compensation by the listing agent a thing of the past, sellers will now be able to compare listing agents based solely on their fees. Seemingly, the market for Realtors will be flooded for several years while it undergoes a resizing. Eventually, listings agents will simply be offering their commission uncoupled with the buyer’s agent commission, making it easier to compare a 2.5% agent with a 1% agent.

It is worth noting that listing agents will likely be doing more work, notably in showing houses to prospective buyers who are unrepresented by a Realtor who can take them on a tour without the listing agent being present. With the service of a listing agent becoming more of a commodity, it is hopeful that Realtors will spend more time marketing properties, and less time prospecting for new listings.

Some Realtors will attempt to take advantage of the Sitzer ruling by charging the old rates without paying a buyer’s agent

While the Realtors present themselves as pro-consumer, sales trainers online are already teaching Realtors how to extract even more money from unsuspecting sellers by relying on the Sitzer ruling.

For example, real estate sales trainer Darryl Davis presents on YouTube that listing agents should present to prospective clients that they will charge a range from 3 to 5%. However, this 3% to a listing agent who will not be sharing with the buyer’s agent amounts to what used to be a 6% split equally to both sides. In fact, Davis doesn’t stop there, suggesting that Realtors should also offer a “better” plan of 4% that includes professional photos and a virtual tour, a few social media posts and unspecified “local advertising.” In the experience of the author, the professional photos and virtual tour cost a mere $400. By contrast, the extra 1% on an average California house of $840,000 amounts to $8,400 extra, meaning the photos are just 4.7% of that additional cost. But Davis goes even further to suggest a 5% plan, which would have been half of a pre-Sitzer 10% commission- a staggering percentage of the hard earned equity of the seller.

Then, Davis suggests that that the listing agent present the buyer with the option to add an “incentive fee” to the buyer’s agent that they don’t have to do, but “the more incentive fee you give any salesperson the more motivated they are, now they’re probably going to show the house anyways….” In other words, the Realtors are simply presenting voluntary steering to homes offering more for buyer’s agents to further line the pockets of their fellow agents.

While the steering presents its own problem, the essential problem for the coming years is that Realtors will be playing semantic games to avoid the Sitzer ruling while using the logic of a lower commission to line their pockets with what used to be the buyer’s agent fee. This further suggests that the Sitzer court or other courts should consider a nationwide ban on pre-negotiated blanket offers to pay any buyer’s agents. Rather, the buyer should be aware that they are paying a higher price to pay their buyer’s agent because the clause giving rise to that buyer’s agent commission is expressly stated in the purchase and sale agreement.

NAR membership will dramatically decline

As the MLS becomes less important because there are few buyer’s agents reviewing the listings, the need for brokers and agents to be members of the National Association of Realtors and local Realtor organizations will diminish. Currently, NAR is the largest professional organization with 1.6 million members. Many of the members pay for their dues by making a sale every year or two by collecting a buyer’s agent commission or representing a family member in a sale. To the extent buyer’s agents no longer collect a generous commission, and to the extent that listing agents no longer need access to the MLS, NAR should expect its numbers to dwindle. Even before the Sitzer verdict, Redfin ordered all 1,800 of its agents to withdraw from NAR.

More importantly, it’s not clear if NAR will exist if it is hit with dozens of multibillion dollar judgments. As Attorneys Rob Hahn explains: “The entire country might be $150 billion in damages, trebled automatically. Does NAR really have $450 billion for any final judgement? Does NAR have a tenth of that?” The outflow of Realtors has already begun, with several national brokerages no longer requiring membership in the NAR.

Sitzer Will Reduce Social Waste from Excessive Realtor Prospecting

Initially, there will be too many agents chasing too few commissions. However, once agents numbers drop, it is likely that the remaining agents will handle more sales. As a 2011 study from the National Bureau of Economic Research found: “A one-half reduction in the commission rate leads to a 73% increase in the number of houses each agent sells.” Sitzer appears likely to result in this exact one-half reduction in commissions industry wide, though even more dramatically on the buyer’s agent side.

The New York Times quoted Stephen Brobeck, a senior fellow at the nonprofit Consumer Federation of America, as concluding that: “This is a congested, part-time industry. The part-timers are draining income from the full-timers.”

This glut of part timers is directly correlated to the collusive overcompensation of Realtors where consumers cannot differentiate quality between agents. Or, perhaps, there is little difference in quality, and the most important skill is selling prospective clients on utilizing their services, which is easily gained through affinity, e.g., family and close friends. As one new buyer’s agent told the New York Times: “My target market is my friends who don’t think they can buy a house.”

Indeed, one seldom talked about reality among full time Realtors in California is that the vast majority of their time is spent prospecting for their next client, with estimates suggesting that 60% to 80% of a full time listing agent’s days involving efforts to find prospective sellers and buyers. Only the remaining time is spent on the marketing of the properties, e.g., showing the property, or negotiating purchase agreements.

In a 2003 academic article entitled “Can free entry be inefficient? Fixed commissions and social waste in the real estate industry,” economists concluded that Realtors earn similar income regardless of the median sales price in their region, despite uniform commission rates. The economists found that Realtors in more expensive areas like Los Angeles and the San Francisco Bay Area spent more time prospecting, and less time selling homes, resulting in fewer homes sold each year, but similar resulting incomes.

A 2022 article confirmed this “conclusion that ‘over-entry’ in high-priced markets is due to the inefficiency of fixed percentage commissions.” The Consumer Federation of America issued a similar report in 2023 summarizing extensive complaints by Realtors about the glut and low quality of part time agents.

NAR’s 2022 survey of Realtors reported that: “Lead generation [is] a top pain point. With home inventories rising but still near four-decade lows, it’s no surprise that generating new client leads is hands down the top challenge today for agents of all experience levels. “

Sitzer threatens to change the uniformity of commission rates. Perhaps listing agents in California may start competing on price, particularly if the MLS is no longer a dominating force. If this occurs, Realtors may spend more time selling homes each year and less time prospecting, while each Realtor earns the same amount of money. The only difference is that there will be far fewer Realtors.

Final Thoughts: Sitzer is a win for consumers

Most talk about Sitzer focuses almost entirely on how much will be lost by the real estate industry. What is missing is that the revenue to pay Realtors is generated by the hard earned equity of California homeowners. Most homes in California have a mortgage, meaning a 5% broker commission may amount to 10 or 20% of the equity in the property. A paper from the Brookings Institution found that Realtor fees consumed 22.6% of the capital gains earned in an average home sale. High transaction costs also discourage people from moving when housing is no longer appropriate, making the country less agile.

While many Realtors claim they are concerned for first time homebuyers, those homebuyers will ultimately be tomorrow’s sellers who should be entitled to keep as much of their equity as possible, rather than line the pockets of a buyer’s agent that buyers only engage upon the presumption they are free. The truth is that escrow, title, inspectors, lenders and others in the real estate industry perform many of the core functions in a real estate transaction. Allowing the market to decide the value of buyer’s agents in the purchase and sale of real estate is an undeniable win for consumers, one that is long overdue.

About Scott Talkov

Scott Talkov is a partition lawyer in California. He founded Talkov Law Corp. after more than one decade of experience with one of the region's oldest law firms, where he served as one of the firm's partners. He has been featured on ABC 7, CNN, KCBS, and KCAL-9, and in the Los Angeles Times, the Orange County Register, the San Diego Union-Tribune, the Press-Enterprise, and in Los Angeles Lawyer Magazine. Scott has been named a Super Lawyers Rising Star for 9 consecutive years. He can be reached about new matters at info@talkovlaw.com or (844) 4-TALKOV (825568). He can also be contacted directly at scott@talkovlaw.com.

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