In the aftermath of the groundbreaking Sitzer-Burnett verdict, I took some time to consider the future of the real estate industry and possible changes it will face. It’s worth noting that the final chapter of the significant commission lawsuits remains unwritten, and it’s vital to stay informed about what’s ahead to plan accordingly.
Regarding headline figure of the damages awarded, it’s essential to understand its relevance. These numbers may seem significant, but, for the most part, they are not crucial. The plaintiffs and their attorneys have expressed their intention to settle these cases, and settlements have already been reached with RE/MAX and Anywhere, totaling $53 million and $83 million, respectively. These settlement amounts are significantly lower than the initial figures discussed. The crucial aspect is that the initial awards are just the beginning, with negotiations for lower settlements in progress. As for potential appeals by the defendants, it’s my belief that they are unlikely to afford the costs and lengthy process of another multi-year appeal. To proceed with an appeal, they must post a bond covering the awarded damages, which is a substantial sum; so I anticipate that during the 30-day period while they seek such a bond, a settlement is expected to occur. When it comes to funding the NAR settlement, I speculate that it may be structured based on membership count. Assuming around 1.4 million Realtors and a payment spread over ten years, this translates to roughly $1,428 per Realtor or $142.80 per Realtor per year. This is a relatively modest amount, and it’s important to note that it’s essential for NAR to settle these cases to prevent further copycat litigations from continuing.
Now, going forward, I firmly believe that state and local real estate associations should take immediate steps to ensure a complete separation of buyer and seller compensation. This move is crucial to align with the goals of the Department of Justice (DOJ), the Federal Trade Commission (FTC), and the plaintiffs in advocating for a clear separation of responsibilities.
To put it simply, the buyer’s agent should represent the buyer and be compensated by the buyer, while the seller’s agent should represent the seller and be compensated by the seller. What we must avoid is the seller’s agent collecting commission from the seller and using it to compensate both the seller’s and buyer’s agents.
One option being explored by the National Association of Realtors (NAR) and Freddie Mac and Fannie Mae, is finding a way the compensation for the buyer’s agent to be financed in the loan. I anticipate that the most common scenario will not involve buyers financing the agent’s commission through the loan. Instead, the purchase contract will specify that the seller directly pays the buyer’s agent’s compensation, bypassing the seller’s agent entirely. Or, the buyer’s agent can include a stipulation in the contract, requesting that the seller provides a credit to the buyer, who can then compensate their buyer’s agent directly.
It’s important to emphasize that it’s unconstitutional for the government to dictate what a seller can or cannot do with their money. If the government were to attempt intervention, it would likely face legal challenges and be ruled unconstitutional.
Regarding the potential ban on offering compensation in the MLS, whether it comes from Judge Stephen Bough or external pressure, I believe it’s quite likely to happen. The Department of Justice (DOJ) has already intervened in some settlements, suggesting that they are not satisfied with the current state of affairs in the MLS.
It’s important to understand that, regardless of the outcome of civil cases, there is a strong likelihood that the Department of Justice and the Federal Trade Commission will step in to remove compensation offerings in the MLS. This change will significantly impact the way we operate, and it’s essential to be prepared for such developments.
Will the MLS cease to exist because shared compensation will no longer be allowed? I believe this is unlikely. The Multiple Listing Service (MLS) plays an exceptionally significant role in our industry, and cooperation among agents and brokers is crucial. The MLS serves as a critical repository for real estate data and ensures its security and accessibility. What will change is the offering of compensation within the MLS, but the core functions of the MLS will remain intact.
In light of the changes in the real estate landscape, I believe it is crucial agents to effectively communicate their services to both buyers and sellers. Agents should also be prepared to explain the evolving structure of contracts in this new environment. This includes clarifying that buyers will need to pay their buyer’s agent directly as part of the purchase contract.
Sellers need to understand that buyers are paying more than what your house was worth 5 years ago, and they don’t have the money to come up front with those commissions to pay their buyer’s agent, so sellers may need to cover the buyer’s agent’s compensation to facilitate the deal. If sellers are unwilling to do so, it could jeopardize the transaction.
In this post-Burnett Sitzer environment, there is a significant opportunity for brokers and agents who can effectively present their value propositions, negotiate commissions, and clearly articulate their worth. Buyers’ agents can now take the lead in determining their compensation and conveying their value. This shift empowers agents to negotiate on their terms, which could result in increased compensation rates, as studies have consistently shown that people are willing to pay more for premium service.
The real estate industry is facing a significant challenge, and it’s important to plan for potential a potential attrition of the workforce of 20% to 40% over the next 24 months. This attrition isn’t solely due to the ongoing litigation but is also influenced by broader market conditions. During discussions at the Real Estate Connect event, I learned that many association leaders were anticipating a membership decline of 20-30%. I concur with this assessment. Market conditions are currently unfavorable and are unlikely to change in the near future. Looking back at the statistics from 2008 to 2010, there was a significant drop in the number of Realtors, from 1.4 million to 1 million. Given the present market conditions, we are likely to witness further attrition, and the litigation-related losses will only compound the situation. Therefore, it’s essential to budget for attrition within the 20-40% range to navigate these challenging times effectively.
The urgency to settle these lawsuits cannot be overstated. Copycat lawsuits are likely to persist until a global settlement agreement is reached. The implications of not doing so are substantial, particularly for the brokerage community. There is a common misconception that Errors and Omission (E&O), Directors and Officers (D&O), and General Liability (GL) insurance will cover antitrust claims like these. However, this is not the case, and failing to settle these claims can lead to significant bankruptcies within the industry.
Looking ahead, I anticipate significant changes in the real estate landscape a year from now. Compensation within the Multiple Listing Service (MLS) is likely to be a thing of the past. We will need to adopt new ways to articulate our value to consumers, and buyer’s agents will become more proficient at what they do. There will be a clearer distinction in representing the interests of buyers and sellers.
At this point, it’s crucial for associations to work on buyer-broker representation agreements, which I predict will become a focal point in the near future. In closing, it’s important to remember that we are going through a learning phase. While it may not be ideal, we will adapt and continue to provide valuable services to buyers and sellers. By shifting our business focus and helping clients understand what we do well, we can remain central to the real estate transaction.
