In March, the National Association of Realtors (NAR) announced it had entered into a settlement agreement with class action plaintiffs in what is known as the Sitzer Burnett case, pending approval by the court. The basis of the suit is rooted in the most common way in which residential real estate is transacted in the country, which is sellers hiring an agent to represent their interest for a professional fee, and then offering compensation to an agent who brings the buyer as an incentive to get their home sold.
More Transparency for Buyers and Sellers
Written Buyer Representation Agreements will be required just as Listing Agreements are required with Sellers. Agreements need to be signed before showing properties. These will provide transparent disclosure of the services provided and fees charged for buyer agent services and options on how fees can be paid by the buyer. It also explains agency and buyer representation options. Since about 75% of sellers are also buyers, they too will benefit from greater clarity on compensation options.
Real estate brokerages are regulated by the individual states. Many states already require buyer agreements. Legislation is in process requiring usage in Iowa by this July and in Illinois by January 2025. The NAR settlement requires implementation by July 2024.
Media Coverage Not Accurate
Since the settlement announcement, there have been numerous articles and stories in the media on what this means for buyers and sellers. Regrettably, many reflect a profound lack of understanding of the real estate business as well as mistaken claims. We’d like to share some of the statements we’ve read or heard, and then share a more accurate perspective.
1) The settlement forces real estate brokers to reduce their compensation. False
The settlement in no way establishes any standard or limitation on Realtors for what they may charge, nor the services they elect to deliver. Realtor fees have always been fully negotiable. Realtors may cooperate on transactions toward a common goal yet are fiercely independent and highly competitive with one another when working on behalf of their clients. In every market you will find real estate representation at almost every price, and just as many different levels of service and competency. We would argue there is more variation in real estate pricing than in almost any other product or service one will ever purchase. Now there are comparisons to what fees are in the U.S.A. vs. some other countries, yet in many of the countries referenced the real estate professional is an employee with benefits and often salaries with bonuses. The vast majority of real estate professionals in the U.S. are one hundred percent performance paid through commissions, and make nothing if their client doesn’t close the deal.
2) The settlement will, for the first time, allow sellers to no longer pay compensation for an agent bringing the buyer. False
There has never been any obligation for a seller to pay buyer agent compensation at any time, yet it has been a historical practice that’s worked exceedingly well since the advent of modern residential real estate. This merely prohibits any reference of buyer compensation from the seller on association owned MLS systems.
3) The settlement will prohibit sellers from paying a commission to a buyer’s agent. False
The practice of whether to pay a buyer’s agent is totally a seller’s decision and nothing changes in terms of options. Many of us would suggest that the most important outcome is the successful sale of the property on the seller’s terms, and having the greatest incentive to buyers agents to show and sell the home is the best way to achieve their goals.
4) The settlement will now relieve sellers of any financial burden of buyer agent fees. False
Although sellers can elect not to pay any buyer agent compensation, that doesn’t mean they will avoid the economics. Buyers may easily write into any offer a contingency requiring that the seller cover the cost, or may request other concessions such as closing cost assistance in the dollar amount they are paying their representative.
5) The settlement ultimately reduces the total cost of transaction services as sellers will no longer pay buyer agent compensation. False
Should sellers now choose to compensate only the listing agent, it merely means that buyers, rather than sellers, will now have to pay for their own representation if they don’t require the seller to pay as a contingency of the contract. Realtor services are not free, nor should they be. In instances where two parties may now share the cost of services rather than one doesn’t mean the total cost of the transaction has been lowered.
6) The settlement will serve to meaningfully lower real estate prices and make homeownership affordable again. False
The settlement is unlikely to directly affect overall real estate prices, which are primarily driven by market supply and demand. The real reason home ownership is increasingly less affordable is that home values in our markets have risen dramatically in recent years, and mortgage rates have increased.
7) The settlement is a win for buyers who will now be able to negotiate the fee for representation. Highly questionable.
For those who have purchased one or more homes over the years, you likely appreciated that the seller covered your agent’s fee, saving you the burden of additional out-of-pocket expenses. For buyers who had to scrape up enough money for the down payment and closing expenses, having the commission paid by the seller and incorporated into the price of the home allowed the buyer to finance the amount over time rather than coming up with thousands of additional dollars at closing. The reality is that most mortgages are ultimately sold to Fannie Mae and Freddie Mac, and both have no provisions for commissions to be financed. In fact, the VA loan program expressly prohibits the borrower from paying any form of commission in a real estate transaction. So just how is a veteran who has honorably served his or her country now better off without representation? We don’t think so.
8) The settlement will result in significant restitution to real estate consumers who were “harmed” over recent years in their transactions by Realtors. False
The settlement figure is huge, yet when one divides the amount by the number of potentially qualifying consumers it works out to about $10 per person. The only people truly profiting are the class action attorneys who have submitted a request to the court for over $80 million in legal fees.
A Positive Outlook on the Future of Real Estate
As we look ahead, Ruhl&Ruhl Realtors view these developments as an opportunity to highlight the true value of professional real estate agents. This settlement will help refine the industry, pushing out less committed agents and spotlighting those who provide exceptional service. With fewer agents in the market, the professionalism and dedication of seasoned Realtors will shine brighter than ever. We remain committed to leading by example, underscoring the importance of quality and integrity in every transaction.
Partial Source: Budge Huskey, President and CEO of Premier Sotheby’s International Realty