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Earth-shattering court decision: Will it make buyer agents extinct?

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  • 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.

 


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