QUICK HITS
- Sitzer decision: significant milestone in ongoing battle over real estate commission practices, involving allegations of collusion among biggest players – defendants must pay $1.78 billion in damages, trebled to a monumental $5.36 billion.
- Judge could require injunction requiring sellers to pay listing agent and buyers to pay buyer agent – making split commission models obsolete.
- May not impact Canadian brokerages, but prepare for new consumer preferences and an evolving market without traditional commission structures.
Editor’s note: this article was updated to correct the terms Clear Cooperation Rule and cooperating commission rule to Cooperative Compensation Rule.
In a groundbreaking verdict that has sent seismic shockwaves through the real estate industry, the Sitzer decision has marked a significant milestone in the ongoing battle over real estate commission practices.
The trial, which took place in Kansas City, involved allegations of collusion among some of the biggest players in the real estate world: the National Association of Realtors (NAR), Keller Williams and HomeServices of America (Re/Max and Anywhere decided to settle instead of facing a jury – a prudent decision given the outcome).
The verdict
A jury in Kansas City rendered its verdict in the Sitzer/Burnett trial, finding NAR, Keller Williams and HomeServices of America guilty of conspiring to inflate or maintain high commission rates through NAR’s Cooperative Compensation Rule. In Canada, we have a similar rule whereby you must offer a commission to the buyer’s agent to be able to post your listing on the MLS.
The jury ruled that the defendants will have to pay a staggering $1.78 billion in damages, which, as per the law, will be trebled (this is a law that can triple the damages award) to a monumental $5.36 billion. The verdict has not only shaken the industry’s foundation but also paved the way for further legal battles and potential repercussions.
Immediate reactions and new lawsuit could bankrupt big brokerages and NAR
The aftermath of the verdict was swift and eventful. Michael Ketchmark, the lead lawyer for the plaintiffs, filed another momentous lawsuit against NAR and other real estate companies, such as Compass, eXp World Holdings, Redfin and the luxury brand Douglas Elliman.
This new lawsuit, known as “Gibson”, promises to be exponentially more extensive in scope than Sitzer/Burnett and even larger than its counterpart, Moehrl, which is still expected to go to trial in the first half of 2024. In fact, it’s the Moehrl case that inspired the Sunderland lawsuit in Canada.
As NAR and the brokerage defendants pledge to appeal the verdict, they face a significant legal hurdle. Before launching their appeal, they are required to post a bond of an as-yet-undetermined amount, ensuring that the plaintiffs receive their due if the appeal is unsuccessful.
It’s possible that the defendants cannot afford such a sizable bond without going bankrupt. It also remains to be seen as to how such hefty legal costs will impact franchise owners, and therefore the agents, of these major brokerage firms, likely resulting in less “agent-friendly” commission splits, which could cause a flood of agents moving to unaffected Canadian brands (opportunity knocks!)
Buyer agents working on a split commission model may be a thing of the past
The impact of the jury’s decision is not yet carved in stone, as the defendants are appealing and the judge still has to “approve” the decision. Another roadbump that could really upend the way “we” do business is an injunction that Judge Stephen R. Bough may order.
The mandatory injunction that Judge Bough could order would require NAR and the MLSs to create new rules and Code of Ethics provisions prohibiting the sharing of commissions.
This injunction would completely change how real estate agents get paid, as it would require sellers to pay the listing agent, and buyers to pay the buyer agent.
While the injunction may allow sellers to compensate the buyer if they choose to, there would be no such rule to enforce that the buyer agent gets the compensation. Essentially, buyer agents working on a split commission model may be a thing of the past.
While this speculation indicates a potential shift in the real estate landscape and explains why Zillow and the big publicly traded brokerages are losing significant share value, it’s essential to remember that the specifics of the injunction remain unknown. The final injunction could have far-reaching implications for the real estate industry, from agent roles to compensation structures, but it also could not.
Why Canadian brokerages should care about the Sitzer decision
The ramifications of the Sitzer decision in the United States may have a significant impact on Canadian brokerages extending beyond the border due to the interconnected nature of Canadian and U.S. consumer habits and, sometimes, our laws.
In fact, we see such “interconnectedness” in the Canadian Sunderland case, which parallels the conspiracy claims in the Sitzer case. What’s more, while Canadian judges are not legally bound by American case law and Canadian laws do differ, it’s worth noting that American cases can inform Canadian judicial decisions.
The lawsuits in both the U.S. and Canada open the door to a potential resurgence in business models that have not thrived in the past, such as flat-fee models. This reality was directly referenced in the Sitzer case, whereby the plaintiffs claimed that the cooperation model and collusion were aimed to prohibit flat-fee models, and therefore less expensive compensation models for the consumer, to exist. If Canadian consumers start to demand the “discount” services they see in the US, we may see flat-fee models grow and, possibly, become the norm.
So, Canadian brokerages should be prepared to pivot and adapt to these new consumer preferences and respond to an evolving market where traditional commission structures might become a thing of the past.
Nothing’s certain yet
However, the conclusion of an upending in how agents do business and, therefore, the viability of traditional brokerages is not a foregone conclusion. Rather, the impact may be minimal, as demonstrated by the Nosalek settlement in the U.S. The MLSs in this case agreed to get rid of the Cooperative Compensation Rule as a requirement to post a listing on the MLS. Yet, commission rates for buyer agents have remained relatively stable.
On the other hand, what happens in the U.S. doesn’t always happen in Canada. Most notably, despite more information being available to the U.S. buyer or seller, Canadian real estate agents have seen a greater decline in commission rates than their U.S. counterparts. We still could have further to go, as internet access and less strict rules in Sweden saw commissions drop from 5 per cent to 1.5 per cent during the same period.
Canadian brokerages should be aware that these legal battles have the potential to shape consumer preferences, leading to a shift in how agents are compensated and how commissions are structured. While it’s uncertain whether the outcome of the Sitzer case will directly influence Canadian regulations, the awareness and adaptation to shifting industry norms are crucial for the real estate landscape on both sides of the border.
Natalka Falcomer is a lawyer, real estate broker and Certified Leasing Officer who started her real estate career in private equity. She created, hosted and co-produced a popular legal call-in show on Rogers TV and founded and recently sold Groundworks, a firm specializing in commercial leasing law. She is currently the Chief Real Estate Officer of Houseful.ca, leading the development and expansion of the company’s personalized home buying and selling experience for the Canadian market. She sits as an advisor on NAR REACH Canada and is the former multi-year board member of the Ontario Trillium Foundation.
Why every time something happen in US, we get affected. Do not we have our own rules, why we have to follow American. Canadian have already gone through a lot, inflation killing middle class citizen, why middle class citizen have to suffer the most. High taxes, high interest rate causing middle class disappear, just wondering if buyer agents disappear, it affects not only buyer agents, brokerages, but also banks, and revenue Canada, eventually goes back to have more pressure on Canadian and more inflation. I do not understand why they keep changing law, so far whatever they did, was not for better was for worse. Why they poking real estate industry making it worse.
Exuberant headlines and restrained “could be” make click-able articles?
Is HouseFul a referral network or a brokerage or both?
Seems that it’s a subsidiary of RBC and also might operate like Zillow; agents might pay to become affiliated and obtain leads from this platform.
With the mandatory new cREA requirement that agents must place all their listings onto MLS, and no more exclusive listings – plus the new self representation rules for buyers – it could be easily argued these are monopolistic activities and with the USA case law these new rules are going to be ingredients for a major litigation case in Canada.
Just remember the fines go to a cash broke government and not the consumer, so get ready !
Seems the way of the future for a while now with mere postings, etc. It makes sense. However, now lenders will need to get on board and will need to factor in commissions as part of mortgage financing. They do anyway since commissions paid are hidden in the purchase price. It will just be a separate charge. They mortgage HST in new home sales (also hidden in price), so why not commissions? We need all stakeholders to get on board and figure it out.
CMHC fees are incorporated into mortgaged funds as well.
This is happening already in Canada. Courts have approved a class action lawsuit started in Toronto that addresses agents refusing to show discount commission listings and commission/price fixing. Agents are responsible for the overpriced market by creating blind bidding wars. Lets bring the BC rules across Canada that stop double ending and teams can list as a team but no one on the team can represent a buyer. Sellers want to recoup ridiculous commissions and this is contributing to higher home prices. Realtors are not brain surgeons and shouldn’t be paid more than them.
If agents are responsible for the overpriced market due to bidding wars, why did they stop doing it? If agents can control the market, why stop? Perhaps BOC rates had more to do with it?
Natalka, great article. Some progressive MLS® Systems are already making changes to address problems highlighted within recent legal challenges. In fact, the Real Estate Board of New York has said that they will be implementing new buyer’s agent commission rules for their MLS® System – prohibiting listing brokers from paying buyer’s agents. It will require sellers to pay them directly. Some Canadian brokerages already do business in a way that closely resembles this idea. This can be done with very little operational overhaul to the MLS® System. Interesting times for sure.
Unlike America, the judge in Canada’s Sunderland case dropped the franchisors from Canada’s the class action suit, which means that with the franchisors out of the picture the litigation funder’s calculations will need to change. With fewer deep pockets to draw from, this might case might not turn out to be such a great investment for them after all.
At least one thing is very weird about this case. The real estate brokerage at the heart of Sunderland’s two transactions wasn’t sued. Without the involvement of this brokerage, I’m not sure how the defendants were supposed to have pulled off a conspiracy. Telepathy maybe?
In any event, it will be interesting to watch this unfold. Hopefully Canadian courts are smarter than their American counterparts.
REBBA believes this case was just what they have been waiting for and with RECO eliminating advice and opinions to parties not under representation they believe it is the listing agent that is now obsolete.
I agree.
Three steps to fix almost everything in real estate:
1. decouple fees (commissions) from property prices
2. each party sets and pays their own representation fees (i.e. the NAR and TRREB cases)
3. Mortgages are structured to incorporate the fees regardless (as they do with CMHC fees and all commissions today – they’re just built-in a few minutes earlier in the process.
The law suits are helping drive these changes, and TRESA will help too, with self-represented parties and no commission changes downstream from representation agreements (i.e. no advantage to double-ending).
Oh yah, step #4:
4. explicitly prohibit double-ending in any form.
The benefits to consumers are obvious. The benefits to excellent Realtors are too – but so many in the industry don’t think a few steps ahead so they don’t realise it.
Hello Natalka Falcomer,
Would you please provide concrete circumstances where United States of America court cases that have had any relevance towards evidence presented in Canadian court cases?
Reflecting on Canadian issues would have been more effective.
A lot of REALTORS® geographically have difficulty recognizing the differences between American and Canadian Law, especially those residing in southern Ontario due to their proximity to the American border.
Social media, culture and entertainment can be defined in America, and replicated in Canada but legal rulings are never transferred across the border.
I look forward to that documentation.
Thank you.
Kind regards.
This seems another case of some public parties chafing away that realtors get something for nothing. Sometimes agents get a quick sale other times months on end with gasoline bills mounting etc. Anyway, RE commissions are essentially “gravitation” to market equilibrium rate – sellers can go higher or lawyer – no collusion – look at how gasoline prices go up and down together. Packaging buyer and seller commissions makes the transactions costs simple to follow – and also offers sellers option to incentivize – Further buyer brokerage contracts provide transparency on commissions to buyers, and negotiation room. Also Robin’s point well taken
Home prices in the early 2000’s were much more sustainable. For example, a brand new, all brick 1800 square foot home with basement, main, and upper floor was $200,000 in Barrie, Ontario. I know this because I signed a contract with Pratt homes to purchase one. Advance 21 years and that exact same home (20 year old house) is $1,000,000. Now-a-days, agents can literally sell three homes a year and make the same yearly wage as an experienced Ontario school teacher with 20 years worth of experience. What about a PSW worker, or a nurse, or an educational assistant? Is a house realtor really providing as equally valuable and important services for Canadian society? How much work really goes into selling 3 homes? Would that equal 48 weeks, at 8 hours a day? From my experience, it’s a walk through with the home owner to discuss improvements, check comps, organize photos, upload a write up on MLS/Realtor.ca, a week’s worth of showings, maybe an open house, take offers, print contracts and witness signatures, and final follow through! I might estimate three weeks of intensive work per house. They make $50,000 on each $1,000,000 dollar home they sell now! ….and pretty much every home in 2024 is close to that…. if not over one million. That’s literally $150,000 for 3 home sales versus an Ontario teacher that starts out at $38,000 (with thousands of dollars of university debt) and eventually after 13 years gets up to $100,000 yearly…same with a nurse….and they get ‘raked’ through the grills every 4 years having to picket on the sidewalk for a whopping 1% wage increase (terrible)! No wonder Canada is in a health care and education crisis! What young person would really want to do that when they can just become a realtor and make more than $150,000 with minimal yearly work? The problem is it’s destroying our society. What will Canada do when all we have is realtors? No one to teach your kids? To build your house? To fix your HVAC? To repair your car? To give you chemo when you get cancer? Every young person I know is becoming a realtor instead of becoming something else …. Can I blame them when they can sell 6 homes and make more than some family doctors? Wow…no wonder Canadians can’t even find a new family doctor…sell 6 homes or become a doctor. What would you do? Seriously? 10 years of university education and $200,000 of debt or one year of education, no debt, and become a realtor? They both will make the same amount of money in Canada.
A home sale transaction should be a flat rate of $2000-$3000 for any home, at any value …. typical of two to three weeks of work in Canada. There is not multiple years and expense of university education involved to become an agent, and the amount of money they currently are making is outrageous in comparison to those members of Canadian society that we need so desperately.