Accessing the Legal and Market Implications of the Landmark Case Against the National Association of Realtors

in Real Estate/Volume VI

By Chance King

Introduction

In the United States, it has long been accepted that real estate agents receive a 5-6% commission of the total sale price split between the buyer and sellers’ agents upon the sale of residential property.[1] A recent verdict against the National Association of Realtors (NAR) and several of the largest real estate brokerages in the country threaten to upend the long-held real estate agent fee structure and could radically change the landscape of homebuying in the U.S.

The precursor to the modern NAR was founded in 1908.[2] Early on, the association helped professionalize an industry where agents were afraid to list properties publicly lest other agents steal their clients by offering lower rates. With support from the national organization, local associations began distributing mandatory fee schedules, and undercutting those rates was considered unethical.[3] In 1950, the Supreme Court said that practice was illegal, and the fee schedules became recommended.[4] By the 1970s, the industry had largely eliminated recommended fees after facing lawsuits, Justice Department investigations, and even criminal charges against real-estate firms for conspiring to fix prices.[5] Under the NAR’s current commission structure, which dates to the 1990s, most sellers listing properties offer to pay the buyers’ representatives.[6]

The Case: Sitzer -Burnett v. Nat’l Ass’n of Realtors

On October 31, 2023 a federal jury in Missouri found the NAR and several large residential brokerages liable for approximately $1.8 billion in damages after determining they conspired to keep commissions for home sales artificially high.[7] The NAR was found to violate Section 1 of the Sherman Act, 15 U.S.C § 1.[8] Section 1 in relevant part states that “every contract, combination in the form of trust or other-wise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.”[9]  

The cornerstone of the plaintiff’s argument is that NAR forced home sellers to pay an inflated commission.[10]The argument is based on the “Mandatory Offer of Compensation Rule” in the NAR bylaws, which requires that a seller offer compensation to the buyer’s agent. The plaintiffs in the case were able to prove by a preponderance of the evidence that the NAR and several large brokerages conspired to keep the buyer’s agent fee high in violation of federal antitrust law. After the verdict, the NAR indicated that it would appeal the jury’s verdict.[11]

Subsequent Litigation 

The day the plaintiffs in Sitzer-Burnett prevailed, Michael Ketchmark, the attorney representing the plaintiffs in Sitzer-Burnett, filed a class action lawsuit on behalf of all people who listed properties on a Multiple Listing Service (“ MLS”)  in the United States using a listing agent or broker affiliated with one of the brokerages named in the complaint and paid a buyer broker commission from October 31, 2019, until the present.[12] The case is in the early stages of litigation and poses damages north of $100 billion to the NAR and several top brokerages. Its continuance is subject to the approval of the March 2024 proposed settlement of the Sitzer-Burnett case discussed below, which would absolve the NAR of liability.[13]

Additionally, the Antitrust Division of the United States Department of Justice (DOJ) is investigating the NAR and anti-competitive practices in the residential real estate brokerage business, focusing on compensation to brokers and restrictions on their access to listings.[14] The NAR investigation began under the Trump administration, and the NAR agreed to measures, including increased price transparency, to settle the case.[15] However, Biden officials in 2021 pulled out of that agreement, saying they wanted the ability to pursue future antitrust claims against the group.[16] In April 2024, the U.S. Court of Appeals for the DC Circuit ruled that the DOJ could reopen its investigation.[17]

The Current Real Estate Market 

On average, $100 billion is paid in real estate commission fees annually, and approximately 3 million individuals work as real estate agents in the United States.[18] Across the country, in all states, it is the norm that sellers pay the buyer’s broker a fee for bringing the buyer to the deal. A seller’s agent assists the owner in listing the property and marketing it to the public. This includes holding open houses, conducting showings, creating marketing materials, and reaching out to buyer networks, among other things. The seller’s agent role has not fundamentally changed over the years apart from more digital marketing. However, in the pre-internet days, a buyer’s agent main job was to screen and filter listings for hopeful home buyers, and today buyers can do much of that early house hunting online through apps like Zillow. The buyer’s agent role has shifted to providing advice such as recommendations for home inspectors, lenders, and lawyers. A good buyer’s agent will know how to make a strong offer and may push to lower the home price.[19]According to NAR, 89% of both sellers and buyers sold or bought their home with the assistance of a real estate broker in 2023.[20]

Furthermore, Americans pay much more in real estate agent commissions than do most other countries.[21] The average commission paid to the buyer and seller in the country is 5.5%; only Japan and Argentina have higher averages, and most other countries have fees below 3% for both agents combined.[22] For example, in the U.K., the average total commission paid to agents is 1.8%.[23]  In response to criticism of these high rates, Mantill Williams, a NAR spokesman, recently said commission offers are determined by the value that real estate agents bring to consumers and “a comparison of rates around the world is very misleading because it often doesn’t give accurate comparisons of value and the numerous other costs consumers have to pay as part of transactions abroad.”[24]

Commission rates, which often get baked into a home’s listing price, arguably contribute to the least affordable housing market in four decades. On a $407,100 house, the median existing-home sales price, a 5.5% commission comes to about $22,390.[25] Between 1985 and 2022, the last full year for which data is available, the median home sale price in the U.S. climbed 423%, while median household income rose just 216%.[26] The average house-price-to-income ratio has climbed to 5.8 nationwide — more than double the recommended ratio of 2.6.[27]  Moreover, Commissions paid to buyer representatives rose 32% from 2013 to 2020, adjusted for inflation, according to an expert witness report in a pending class-action lawsuit in Chicago that examined 20 regions.[28] The rapid rise in home prices are making homeownership an increasingly elusive dream for today’s home buyers.

How the Market Could Change

If the legal cases continue to go against the NAR, the fee structure in real estate deals will radically change. For example, if the NAR no longer requires buyer compensation, then buyers will oversee compensating their agents. This will lead to buyer and agent negotiation regarding compensation structure for representation that is currently absent from the industry. The fee structure may change to hourly fees or another structure that leads to lower costs than the general 2-3% of the purchase price. Moreover, real estate agent seller and buyer representation is not legally mandatory in any U.S. state. Accordingly, without the mandatory offer of compensation to buyers’ agents, more people may decide to purchase homes without the assistance of a real estate agent. However, there is a plethora of markets within residential real estate. Analysts and agents have speculated that sects of the market will be affected differently by the potential changes caused by the antitrust litigation. For example, Kurt Rappaport, the nation’s top luxury agent, recently stated that while the middle market may shift to hourly rates, he is confident that  “no one is buying a $50 million or a $100 million house without having someone represent them,” and that agents in the ultra-luxury market will not get paid for their time, but rather “if they get the result.”[29] Every deal is different and entails varying degrees of sophistication and scope of work on part of the agents, thus, it is not unlikely that the changes for buyer compensation could largely depend on where in the market the deal occurs.  

Potential Positives of Change

There are a myriad of potential positive effects of the changes that could stem from the continued antitrust claims against the NAR and potential nascent regulation of the industry.

One of the issues raised in the lawsuit against the NAR was the lack of transparency in real estate commissions. As a result, there may be pressure for more transparency in pricing, with consumers demanding clearer information on the fees associated with buying or selling a home. This would lead to a more competitive landscape where homebuyers are more informed and have the power to negotiate a lower broker fee.

Accordingly, the traditional commission-based model could become less prevalent. This may lead to the emergence of alternative business models, such as flat-fee or fee-for-service arrangements, which could offer consumers more flexibility and potentially lower costs. Lower costs will make buying a home more affordable, as commissions are largely baked into the listing prices. The lowering of home prices could alleviate the current unaffordability of homes for many Americans. Moreover, as more people purchase homes, this could further stimulate the economy by supporting home building, furniture, loans, and other industries intertwined with real estate. 

Further regulation could mitigate steering practices. USC Gould’s Jordan Barry recently co-authored the first paper to provide systematic, nationwide evidence that buyer’s agents steer clients away from low-commission listings. The study analyzed all the listings from Redfin located in more than 30 major U.S. real estate markets, including Los Angeles, Riverside, Orange County, Chicago, and Houston. Barry found that listings with lower than market average buyer commission rates  “take 33% more time to sell, assuming that these homes sell at all and that in a typical market, such properties are 75% more likely to remain unsold.”[30] This decline in traffic was more severe the lower the commission, suggesting that buyer’s agents frequently skip over low-commission homes in favor of high-commission homes when choosing which listings to forward to their clients.[31] The steering arguably affects sellers more than anyone else as they must pay a 5-6% from the sale of their home which for most Americans is their largest financial asset. Thus, steering could be mitigated by removing the requirement that sellers offer compensation to buyer’s agents. 

Potential Downfalls of Change 

The NAR continuing to lose its cases, and the potential radical shift of the current real estate market could have deleterious effects. The removal of the mandatory offer of compensation could lead to more parties buying homes without the assistance of a real estate agent. The process of purchasing a home is complex and stressful. Many intricate and opaque details are present in the negotiation, escrow, and closing process of a real estate deal. Going through a home purchase without the professional help of a realtor could lead to buyers making uninformed decisions and getting taken advantage of by sellers who likely will be represented by a real estate professional.

Moreover, there are over 3 million realtors in the United States.[32] Regulation or change that disrupts the current market leading to much lower compensation for real estate agents and the potential eradication of the current buyer-broker compensation model, could put a large number of realtors out of business. 

Furthermore, the verdict against the NAR could create uncertainty in the real estate market. Brokerages and agents may need clarification about how the ruling will affect their business practices. This uncertainty could slow down transactions and investments as market participants wait to clarify the verdict’s implications. 

Finally, the antitrust verdict against the NAR could have unintended consequences, such as further consolidating market power among larger brokerages. Smaller independent brokerages may struggle to compete with larger firms that have the resources to navigate the regulatory landscape effectively. Larger brokerages are more equipped to shift their business models and take on less profits, which could create a monopolistic environment that would result in reduced consumer choice in the real estate market. Consumers may have fewer options when it comes to selecting a real estate agent or brokerage, which could lead to lower-quality services.

Recommendation for Legislation  

Some regulations should be implemented in response to the recent cases brought against the NAR. However, lawmakers should generally allow the free market to determine the most efficient and cost-effective method for home buyer representation. The NAR and the brokerages will likely be forced to change their current policies due to the gargantuan judgments rendered against them without any regulation due to the risk of further damages.  

However, any regulation should explicitly prohibit the mandatory offer of buyer compensation, as this is an anti-competitive practice that prevents negotiation and market efficiency. This would mirror the previous effective action the Supreme Court made in 1950 by ruling that mandatory fee distribution schedules were illegal, and thus, they became suggested. This would allow the NAR to suggest that this is offered, and realtors would then have to make their case to the seller that this is the best option to sell the home while informing them that it is not required. This will lead to a more competitive and efficient landscape and vitiate the current alleged conspiracy that the NAR and brokerages have engaged in by requiring the buyer’s broker compensation. 

Moreover, greater transparency in real estate transactions is needed, particularly regarding commissions and fees. Many individuals assume the 5-6% agency fee is required and therefore never negotiate for a more affordable service. New legislation should require brokers to disclose that their commission rates are negotiable, and the 5-6% standard rate for agency commissions is not required by law.

The Settlement

As the submission date for this article approached, the NAR reached a settlement agreement with the plaintiffs in the Sitzer-Burnett case discussed herein rather than continuing its appeal.[33] The settlement must now be approved by the Judge presiding over the case before it can take effect. All the major brokerages involved in the case, besides Berkshire Hathaway, agreed to settle.[34] In the proposed settlement, the NAR agreed to pay $418 million in damages over approximately four years in exchange for being released of all liability from anti-competitive claims brought by home sellers.[35] The settlement would also require that the mandatory offer of compensation be removed from the MLS and all agents working with buyers to enter into written compensation agreements with their buyers effective mid-July of this year.[36]

The proposed settlement largely alleviates the plaintiffs’ concerns in the Sitzer-Burnett case but still has some minor holes. The settlement does not stop home sellers from listing offers of buyer compensation on non-MLS sites, such as Zillow and Redfin. Moreover, home sellers can offer a “seller concession” rather than an offer of compensation on the MLS.[37] The semantics of these rules and loopholes they bring should not be ignored, but due to the current DOJ investigation and scrutiny that the NAR and large brokerages have recently faced, it seems unlikely any loophole would be widely adopted within the industry. Moreover, the settlement and anti-competitive issues have been nationwide news, so while home sellers may still be able to offer a concession, many may negotiate not to, which is indicative of a free and efficient marketplace. 

Accordingly, for the aforementioned reasons, the settlement goes a long way towards ensuring a more competitive landscape for broker compensation and should be endorsed by the Judge.


[1] Laura Kusisto & Nicole Freidman, Realtors Are in Crisis—and Home Buyers Could Be the Winners, Wall Street Journal, (Feb. 16, 2024), https://www.wsj.com/real-estate/national-association-realtors-crisis-lawsuits-home-buyers.

[2]  Id

[3]  Id.

[4]  Id.

[5]  Id.

[6]  Id

[7] Laura Kusisto, Nicole Freidman, Shannon Najmabadi, Jury Finds Realtors Conspired to Keep Commissions High, Wall Street Journal, (Oct. 31, 2023), https://www.wsj.com/real-estate/jury-finds-realtors-conspired-to-keep-commissions-high-awards-nearly-1-8-billion-in-damages-b26f9c2f.

[8] Sitzer v. Nat’l Ass’n of Realtors, No. 4:19-cv-00332-SRB, 2019 U.S. Dist. LEXIS 236447, at *10 (W.D. Mo. Aug. 22, 2019).

[9] Id.

[10] Id.

[11] Laura Kusisto, Nicole Freidman, Shannon Najmabadi, Jury Finds Realtors Conspired to Keep Commissions High, Wall Street Journal, (Oct. 31, 2023), https://www.wsj.com/real-estate/jury-finds-realtors-conspired-to-keep-commissions-high-awards-nearly-1-8-billion-in-damages-b26f9c2f.

[12] Gibson et al v. National Association of Realtors et al, Docket No. 4:23-cv-00788 (W.D. Mo. Oct. 31, 2023).

[13] Katie Arcieri, Home Sellers Seek $100 Billion From Realtor Groups (Correct), Bloomberg Law, (Nov. 1, 2023), https://www.bloomberglaw.com/bloomberglawnews/antitrust/X9PRKG5G000000?bna_news_filter=antitrust#jcite.

[14] Leah Nylen, Justice Department Can Reopen Realtors Case, Court Rules, Bloomberg Law, (Apr. 5, 2024), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/X38D9A4S000000?#jcite.

[15] Id.

[16] Id.

[17] Id.

[18] Laura Kusisto & Nicole Freidman, Real-Estate Commissions Could Be the Next Fee on the Chopping Block, Wall Street Journal, (Oct. 18, 2023), https://www.wsj.com/us-news/law/real-estate-commissions-could-be-the-next-fee-on-the-chopping-block-4d8a68b.

[19] Veronica Dagher, Almost No One Pays a 6% Real-Estate Commission—Except Americans, Wall Street Journal, (Nov. 16, 2023), https://www.wsj.com/personal-finance/real-estate-buying-home-charts-6dc40caa.

[20] Quick Real Estate Statistics, National Association of Realtors, (Mar. 21, 2024), https://www.nar.realtor/research-and-statistics/quick-real-estate-statistics.

[21] Veronica Dagher, Almost No One Pays a 6% Real-Estate Commission—Except Americans, Wall Street Journal, (Nov. 16, 2023), https://www.wsj.com/personal-finance/real-estate-buying-home-charts-6dc40caa.

[22] Id.

[23] Id.

[24] Jordan Yadoo & Leah Nylen, US Realtors’ Lucrative Fee System Faces Mounting Antitrust Risk, (Oct. 16, 2023), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/X6MO17B4000000?#jcite.

[25] Home Prices are Rising 2x Faster Than Income, LBM Journal, (Nov. 9, 2023), https://lbmjournal.com/home-prices-are-rising-2x-faster-than-income/.

[26] Id.

[27] Id.

[28] Laura Kusisto & Nicole Freidman, Realtors Are in Crisis—and Home Buyers Could Be the Winners, Wall Street Journal, (Feb. 16, 2024), https://www.wsj.com/real-estate/national-association-realtors-crisis-lawsuits-home-buyers.

[29] E.B. Solomont, Beyoncé and Jay-Z Are Clients, So Too Larry Ellison: How a Superbroker Operates, Wall Street Journal, (Nov. 11, 2023), https://www.wsj.com/real-estate/luxury-homes/beyonce-and-jay-z-are-clients-so-too-larry-ellison-how-a-superbroker-operates-49bd489d.

[30] Leveling the Selling Field, USC Gould School of Law, (Jan. 31, 2024), https://gould.usc.edu/news/leveling-the-selling-field/.

[31] Id.

[32] Quick Real Estate Statistics, National Association of Realtors, (Mar. 21, 2024), https://www.nar.realtor/research-and-statistics/quick-real-estate-statistics.

[33] Alex Veiga, Real estate lawsuit settlement upends decades long policies that helped set agent commissions, Associated Press, (Mar. 15, 2024), https://apnews.com/article/national-association-of-realtors-agent-commissions-lawsuits-d62a66cb80639be3c4c3b429053a22c5.

[34] Evie Liu, As NAR Settles, Warren Buffett’s HomeServices Is the Last Major Brokerage In the Commission Fight, (Mar. 16, 2024), https://www.barrons.com/articles/real-estate-nar-settlement-berkshire-hathaway-homeservices-7c720660.

[35] Id.

[36] NAR Settlement FAQs, NAR, (Apr. 4, 2024), https://cdn.nar.realtor/sites/default/files/documents/nar-settlement-faq-2024-04-04.pdf.

[37] Id.