UNDERSTANDING RECENT CHANGES IN THE REAL ESTATE INDUSTRY

You've seen the news. Significant changes are happening in the real estate sector due to resolving a class-action lawsuit known as Sitzer/Burnett. This legal case questioned established practices concerning the structure of real estate commissions and has led to extensive reforms. The National Association of Realtors (NAR) and various major national brokerages were defendants in this lawsuit.

Background: The Traditional Commission Structure

Historically, when a seller engaged a listing agent, they would discuss a fee structure that typically involved splitting a part of the commission with the buyer's agent. This setup was designed to guarantee that buyers, particularly those with financial constraints preventing them from paying extra charges in addition to down payments and closing expenses, would still receive representation. This model was compared to the legal system, where the government appoints an attorney for individuals who cannot afford one, ensuring equal representation. The regulation mandated that any agent listing a property on the MLS must compensate a buyer's agent and specify the offered amount.

The Lawsuit and Its Implications

The main point of the Sitzer/Burnett lawsuit was that sellers were often unaware that commissions were open to negotiation and that their fees were being used to pay the buyer's agent, who might work against their interests. The plaintiffs were successful, resulting in a significant ruling against the National Association of Realtors (NAR) and several major brokerage firms. This led to a preliminary settlement to avoid a potentially more significant penalty and further legal action, as similar lawsuits emerged following the Sitzer/Burnett case. Notably, due to the large number of participants, sellers involved in the lawsuit are expected to receive amounts ranging from $10 to $20, while the attorneys earn millions.

Details of the Settlement

The NAR initially promised to appeal the verdict but could not due to the requirement to post bond at a percentage of the awarded damages.  The awarded damages exceeded 5 billion dollars, which meant appealing would cost millions, and they didn’t have the funds.  Additionally, they needed to stop the slew of copycat lawsuits to protect their members.  As such, they proposed a settlement, which has been “preliminarily” approved by the DOJ and is scheduled for an official decision in November 2024.

 The settlement includes the following key elements:

• These changes will take place in July of this year

• NAR and involved brokerage firms will pay $418 million over four years.

• New guidelines will prohibit agents from disclosing the compensation offered to a buyer's agent by the seller on the MLS. Although compensation cannot be disclosed on the MLS, sellers still have the option to pay a buyer's agent.

• Agents must secure a buyer representation agreement before showing homes. NAR is not dictating the terms of the agreement, but it has stated that it must be in writing and discuss compensation.  

Industry Concerns and Consumer Advice

There is a worry among many professionals in the industry that the recent changes might lead to a decrease in transparency and could open the door to manipulation within the system. This is because discussions regarding compensation will now have to take place in private, away from the clients' scrutiny. Moreover, the updated regulations could put newcomers in the market at a disadvantage, especially those with limited financial resources. These individuals are the least capable of covering their own agent fees. They are more prone to making poor or risky decisions when purchasing a property, as they lack the necessary experience in home-buying.

For Sellers and Buyers: Moving Forward

Sellers:  While it might seem appealing to save on commission by having buyers pay their own agent fees, consider the potential complications. Due to high interest rates and inflation, buyers are already strapped for cash in current market conditions. If they have to pay for their own agent in addition to their down payment and closing costs, they will have less buying power, which may result in a lower offer. If a buyer interested in purchasing your property cannot afford their own representation, this presents a dilemma. Your own agent may need to handle both sides of the transaction, which can lead to conflicts of interest and reduced advocacy for your interests. Alternatively, if the buyer remains unrepresented, they may struggle to understand the contract, navigate inspections, and meet crucial timelines. An unrepresented buyer can introduce unpredictability and risk into the transaction, potentially leading to chaos and even jeopardizing the deal. Discuss with your own agent the strategic implications of various commission structures and choose the one that best aligns with your selling goals and minimizes transaction risks.

Buyers: While bypassing a buyer's agent might seem like a cost-saving measure, consider the broader implications. A buyer's agent opens doors and refines the home-buying process, making it more transparent and efficient. This expertise can significantly reduce the number of properties you need to view. Some suggest hiring an attorney to handle the contract as an alternative; however, while attorneys are skilled in legal aspects, they aren't equipped to advise on the optimal offer price or analyze market conditions and comps. Additionally, their availability is often limited to business hours, which could delay the process, potentially causing you to lose out on purchasing your ideal home. 

According to the new rules, it is necessary to sign a buyer representation agreement before visiting properties. Keep in mind that the terms of this agreement can be discussed. If you are unfamiliar with the agent, we suggest starting with a shorter agreement period to evaluate compatibility before committing to the long-term. However, changing agents frequently can disrupt your search process, as each new agent will need to understand your preferences from scratch and will not have access to the feedback you provided during previous property viewings. To prevent inefficiencies, consider approaching the selection of a buyer's agent in the same way sellers choose agents to list their properties: interview multiple agents to evaluate compatibility, fees, services, and value. It is recommended to initially opt for a three-month contract, which can be extended if more time is needed to find the perfect home.

For more insights into the comprehensive value a buyer’s agent provides, refer to our article, "Do I Need A Buyer's Agent?"

In Conclusion:

If you have any questions or need help navigating these changes, we are here to help.