Many of you have likely been hearing about a large class-action lawsuit and decision that came out last week impacting the Real Estate industry and brokerage fees. The current case is the Sitzer/Burnett case but there are others filed and brewing in the background. I wanted to offer some background on this case and the gist of the issues in all of them.
At the core of the issues is the past requirement that most Multiple Listing Services—the databases of homes for sale in a general area—had that Sellers had to offer some form of compensation to the Buyer’s agent to put their homes in these databases. Our local MLS and many others around the country stopped this practice almost 5 years ago. The intent was for Sellers to benefit from exposing their home to all agents and brokerages in the area so that all agents and their prospective buyers could know about all homes for sale in the area at the same time.
In historical and more normal market conditions, this system has worked very well. Seller’s homes got maximum exposure to buyers anywhere and everywhere. Larger brokerages wouldn’t have an advantage by hiding properties from smaller brokerages. The requirement for offering compensation was so that all buyer’s agents would know what compensation they’d receive for submitting a successful offer to a home seller. This compensation was offered under what was labelled cooperative compensation. A home seller hires me to represent them. My office and I have a fee we charge to represent you and part of that fee we offer and agree to pay to the office/agent that brings the successful buyer’s offer to us.
The lawsuits are arguing that this cooperative compensation or ANY agreement that requires a home seller to pay ANY money to the Buyer’s agent is an undue burden on home sellers. They claim this raised the costs to sell or buy a home. Their argument is that the only compensation to the Buyer’s agent should be paid by the Buyer. The jury, judge and Plaintiff attorneys all failed to recognize, VA buyers can’t pay a Buyer Agent fee; it’s against lending regulations. Moving on, their theory is that if Buyers and Sellers had to each pay their respective agent fees, then Real Estate fees would be lower. As is the case for many aspects in life, theories can make sense, but in practice, they often fall short of the best option or solution.
Home sellers have always been allowed to sell their homes on their own—For Sale By Owner, or by numerous variations of limited agent assistance or representation, and with various offers of compensation to agents and buyers. Historically these are utilized about 7% of the time; even less when you look into the details of many of these sales. If Sellers could lower their costs, why is this option so under-utilized? Because exposure to a wider market benefits the Sellers. Similarly, Buyers have also been allowed to hire an attorney, or more recently an agent, to find them the home they want and pay their attorney or agent an agreed upon compensation. It’s not been a normal practice for Buyers as this additional cost is often prohibitive and limits Buyer’s abilities to buy the home they want. Sellers and Buyers know they both benefit with exposure to the marketplace and quality guidance from Agent representation. So how do we solve the who’s paying who question? It seems these court cases want to stop our current practices without posing any equitable solutions.
So why all the litigation flare-up with a potential $5B+ in damages against the National Association of Realtors and several National Brokerage Companies? It’s a bit grey on the why or why now, but mostly it seems some home sellers are claiming either they didn’t know they were required to pay or didn’t feel they should be required to pay these fees. Their logic is, “I didn’t know this Buyer’s Agent, by definition they are the Buyer’s agent, this agent didn’t DO anything for my benefit, and therefore I shouldn’t have to pay them anything”. They claim that they weren’t told of this requirement to pay and had no ability to negotiate the amount of this payment.
There are several parts to this logic that I find troubling and disingenuous. First, many MLS systems across the country, including Washington, have stopped the requirement to offer Buyer Agent compensation, but in the states where the class-action suits are filed, it seems they did have a requirement of offered compensation to be in the MLS system. This requirement will now be removed across the country. My next issue is with the Sellers claiming a lack of knowledge in agreeing to pay a Buyer Agent fee, and their options on what to pay. With 37 years of experience in this field, I’ve sat at enough desks, tables, counters, screens and phone calls to tell you a discussion with Sellers on real estate fees are always a point of conversation; not necessarily a point of conflict but always a point of education and discussion. Why a home seller would want to pay a fee to a Buyer’s agent and how much this fee should be is a normal topic of conversation. Home Sellers don’t expect me or my brokerage to know EVERY buyer that may have an interest in their home. They hire me to expose their home to the world, the widest possible audience I can, including all licensed agents in the area—or around the world these days. Most home sellers also know that removing barriers for a potential buyer is a wise decision. Lowering a Buyer’s cost to get a Buyer’s offer on their home is often a wise decision. But why would any other agent want to sell your home if they don’t know if or what they might receive in compensation? If the buyer can’t afford the home and the fee for the Buyer’s agent, the Seller loses out on a potential sale. That’s bad for Sellers and Buyers, but a solution is available. A Seller could pay the Buyer Agent an acceptable fee and put the sale together.
These lawsuits came up during the steepest rise in home values in history. Most areas of the country were seeing 15-25% per year property value increases. We’ve had more generations of buyers in the marketplace than ever before and more demand for homes as our inward immigration flow brought more people into our country. Combine this demand with the decline of home building from 2007 to the present and we find ourselves with the lowest inventory of available homes and highest demand ever—in almost every City and region of the country. With all of this demand, did a home seller actually have to offer to pay a Buyer Agent fee? “Couldn’t I have just said NO?” Seems logical, except for the MLS rule mandating the offer of compensation. Let’s take a quick moment to understand this “rule’s origin”.
MLS systems started back in the 1960’s to 1970’s in most parts of the county. As mentioned earlier, the intent was for equality of access to information. Not sharing information about all homes in all areas, as happened prior to most MLS formations, led to inequality of access to information and homes. The MLS and Realtor Code of Conduct and Ethics rules sought to eliminate this. Anyone, anywhere, should be able to know about any home, anywhere and be able to buy it, if they have interest and ability to afford it. Simple and straight forward. With this new open sharing of information, Sellers would benefit from increased exposure of their properties to agents and buyers. This voluntary joining to the MLS for this increased exposure came with a cost—the agreement to tell agents what they’d receive for bringing a ready, willing and able buyer with a successful offer to a Seller. Historically all agents were considered agents or sub-agents of the Sellers, as they were the one’s paying the fees, so the MLS and NAR rule stated what was the practice—Sellers pay all the agent fees for a home sale for the benefit of more exposure to the brokerage community and increased buyer awareness. Buyers benefitted and so did Sellers. It has been a common practice, even as recently as the 1980s, for Seller’s to offer a higher compensation fee to the agent bringing the buyer/offer, than the agent/agency the Seller hired to market the home and represent the Seller. When market conditions are not so favorable to Sellers, it’s still common practice for Seller’s to offer Buyers and Buyer Agent Bonuses, in hopes of generating an offer. In today’s market, it’s quite common for Sellers to “buy down” the Buyer’s interest rate to help them qualify for the price on the Seller’s home. The point being, these offers of compensation were broadcast through the MLS systems and often revolved around Seller’s agreement to pay fees, even higher fees, if they can receive an acceptable offer. If Sellers historically offer incentives to Buyers, in hopes of generating an offer, is a Seller offering to pay a Buyer agent fee, any different from a Seller offering to pay other closing costs of the Buyer?
Buyer Agency came into existence in the 1990’s and Buyers were finally allowed to work with an agent vs. an attorney to actually represent their interests and offer them guidance and education about homes and the home buying process. I worked hard to bring Buyer Agency into the state as it made Buyer representation much more affordable than Buyer’s having to hire attorneys to draft and negotiate their offers. Attorneys didn’t want to be out showing buyers homes, matching up wants and needs; explaining the many variables of different homes, market conditions and offer/negotiation strategies. Attorney training is also always based on a win-lose framework—we win, the other side loses. However real estate doesn’t work well with this mentality. Successful negotiations usually require understanding of the other side’s perspective and needs, then finding common ground. That’s not typically an attorney’s forte’. Attorneys also charge for their time, regardless of the outcome, and this again is cost prohibitive for most buyers. Agents only get paid if and when a sale closes. Rule or no rule, most Sellers saw the wisdom in this offer of compensation. Some Buyers are now arguing they should negotiate directly with their agent and not have the Seller set this compensation rate. The theory being the Buyer wants to pay less and reduce their costs. This is possible and has been for many years in most states. I’d note many brokerages that tried to promote their lower fees have not been successful but it is a Buyer’s right.
Now let’s go back to the recent market times of the 20-Teens. Historically low inventory and high demand. Sellers are receiving multiple offers, often 10, 20, 40+% over the Seller’s asking price. I know, I wrote many in the 40+% over and still didn’t win the home. It’s been insane and anything but normal. So why would a Seller be required to pay a Buyer agent fee? Besides “the rules are the rules” comment, the next most common reason is because it benefited the Seller. To say the Buyer’s Agent “didn’t DO anything for me” is again between ignorant and disingenuous. The Buyer’s Agent brought you an offer to buy your home—just like you asked them to do by complying with the rule and listing contract they signed. Only one of those buyer’s agents got paid but you, the Seller, benefitted from all of their efforts—the competing offers you received. The buyer’s ability to qualify and possibly increase the “exuberance” of their offer terms was often predicated on the compensation you agreed to pay the Buyer’s agent. Buyers needed their funds to pay additional down payments, cover low appraisals, or pay other lender fees. Some Buyer’s Agents even agreed to reduce or eliminate this compensation to improve their Buyer’s offer by lowering the Seller’s costs. Many of these buyers would not have been able to perform if they had the added costs of paying the Buyer Agent fee. Fewer offers for Sellers likely meant lower overall offer prices, lower final sale prices and lower proceeds to the Sellers at closing. Still think you got no benefit from the Buyer’s Agent? We also saw Sellers updating and remodeling their homes during these crazy market conditions. Did they have to do this? Absolutely not, but they did. Wise Sellers knew that they’d get bigger returns on their home’s value by making these improvements and offering this compensation. Generating more offers, better offers and holding a stronger negotiation positions for the Home Seller was the intent and the result.
These same home sellers, who likely sold in multiple offer situations, with over-asking price sales benefitted from the fees they agreed to pay to the Buyer’s agents. They signed a contract agreeing to pay these fees and benefitted from their actions. To now receive compensation from the Courts, claiming they were harmed or damaged by a rule or lack of understanding seems unlikely. Let’s also remember that most home sellers become home buyers, who again benefitted from the Seller-paid real estate fees on their purchases. The required rule of compensation has been out or going out of practice for years in many MLS systems. It seems the scope of the damages from these cases may well push us back to a market of less cooperation and information sharing. That isn’t a good practice either. Our current real estate practices may not be ideal, but they’re considered to be the best system in the world for equality of access and opportunity, for representation of separate parties interests and overall efficiency of process. Yes, our overall fees may be higher than other parts of the world but the services we provide are well above what other countries offer to Buyers or Sellers. In less favorable market conditions for home sellers, we are and will see Sellers wanting to offer bonuses to Agents and Buyers, but the Court’s rulings may prevent these options which won’t help Sellers or Buyers. It’s sad to see these cases arise and even more so to see the lack of understanding of how variations in market conditions create options that may benefit Buyers and Sellers. Strike a mandatory compensation requirement for Sellers? Sure; it’s done. Eliminating the ability to offer compensation to the Buyer or their Agent is a bridge too far. Reducing affordability or the sharing of available home information could also be a result and that benefits no one. Real estate is a unique and very difficult business to operate in, as evidenced by the huge influx and failure of businesses that Wall Street and Tech firms have been trying to disrupt our industry with for the past 20 years. It’s a People business and it requires options, not made up, after-the-fact, rules. This business evolves to the benefit of Sellers and Buyers and will continue to do so without the “benefits” of Court rulings to hamper our abilities to help our clients.