Authored By: Robert E Wall II, Supervising Attorney
Over the past few years, the real estate industry, a fundamental pillar of the American economy, has come under increased legal scrutiny, marked by the filing of several class action lawsuits. The primary target of these lawsuits is the National Association of Realtors (NAR), the foremost organization representing real estate professionals nationwide. In the following article, we will delve into two prominent cases at the heart of this ongoing legal dispute which raise significant questions about antitrust practices within the real estate sector and carry the potential for far-reaching implications for real estate professionals and the industry as a whole. From alleged antitrust violations to concerns about commission fees and competition in the market, these legal actions could potentially reshape the way real estate transactions are conducted and impact the very essence of this crucial sector. In this article, we will explore the fundamental aspects of these legal proceedings, evaluate their potential impact on the real estate industry, and contemplate how they might lead to changes in how real estate professionals conduct their business.
Who are Sitzer & Moehrl?
The cases at the center of this legal crisis taking place within the real estate profession are two class action lawsuits, Sitzer et.al. v. NAR et. al. and Moehrl et. al. v. NAR et. al. Both cases were initiated in 2019 by groups of home sellers who had their properties listed/ sold using various Multiple Listing Services (MLSs). The primary target of these cases is the National Association of Realtors (NAR) whom the Plaintiffs allege has engaged in widespread violation of antitrust law. Specifically, the plaintiffs assert that NAR’s policies, rules, and practices function as anti-competitive restrictions on the market. Which, according to the plaintiffs, have resulted in limitations on consumer choice, artificially inflated commissions, prevention of new business models from being introduced, and ultimately sellers being forced to bear a cost (buyer broker commissions) that, in a competitive environment, would typically be borne by the buyer. Plaintiffs further contend that NAR’s policies have resulted in a lack of transparency on broker compensation and have systematically limited the ability of consumers to negotiate commission fees effectively.
Ultimately, the two cases challenge many of the fundamental practices that have defined the real estate profession for decades, especially in regard to broker compensation. If successful, the plaintiffs would not only succeed in being awarded potentially huge amounts of money damages (some estimates as high as $14 Billion), but the effect on practices within the real industry could transform how brokers operate and have unprecedented levels of influence on the future of the industry.
NAR has responded by steadfastly denying all allegations made by the Plaintiffs in these cases and vowed to defend itself in court, asserting the legality of their policies and their unwavering dedication to safeguarding consumer welfare. While NAR has remained resolute, the same cannot be said for all of the co-defendants in these cases. In September it was announced that Anywhere Real Estate, formerly known as Realogy Holdings, Corp., and Re/Max had both reached separate settlement agreements with the Plaintiffs to comprehensively resolve all claims lodged against them. While the full details of these settlement agreements have yet to be released, pending court approval, it has been reported that these two co-defendants have agreed to pay a combined $138.5 million to settle all claims. In addition, and possibly more significantly, to agreeing to pay millions in damages, both defendants have reportedly committed to making substantial changes to their policies and procedures as part of their individual settlement agreements. While to what extent remains unclear, the settlement agreements of two of NAR’s co-defendants will undoubtedly prove significant as this legal battle continues.
The Sitzer/Burnett case is currently taking place, having begun on October 16th and the Moehrl case is scheduled to go to trial sometime next year.
What are Potential Implications for the Real Estate Industry?
While the precise impact of these legal challenges remains uncertain, it does appear evident that, regardless of their ultimate outcome, these cases will prompt meaningful change within the real estate profession. The resulting changes could reshape the way real estate professionals operate and how consumers experience real estate transactions. The following will look at some of the areas most likely to be impacted by these legal challenges to the industry.
Commissions/ Buyer Broker Compensation: The pending litigation has the potential of triggering a significant policy shift regarding buyer broker compensation. The resulting changes could bring an end to practices requiring payment of buyer broker commissions by the seller and introduce new policies focused on providing consumers with greater flexibility in negotiating broker compensation. The effects of such policy changes would have far-reaching implications on the real estate profession and consumers alike. In a housing market where buyers are already grappling with a 30-year low in affordability, the impact of having to bear the cost of their broker’s compensation would unquestionably leave buyers in a difficult position. Ultimately, when faced with the situation of having to come up with broker compensation as part of their closing costs, buyers are likely to search for alternative solutions that would have less impact on their overall affordability. This would undoubtedly lead to buyers actively seeking lower cost substitutes to broker representation or even electing to forgo buyer broker representation altogether. Any change, or potential removal, of NAR’s existing policy framework pertaining to broker compensation would pave the way for the introduction of new and innovative business models within the industry. That, coupled with a more cost conscience consumer base, would lead to substantial downward pressure being placed on broker commission rates universally.
Changes in MLS/ NAR policies: The MLS system plays a critical role in the conspiracy alleged by the Plaintiffs. They allege that it is the mechanism with which NAR has implemented their strategy of anti-competition and artificial inflation of fees. As such, substantial changes to the MLS system are very likely to occur as a result of these legal challenges.
The most notable policies receiving scrutiny by these cases are the requirement that all listings to be published on MLS platforms, mandatory NAR membership, policies regarding Buyer Broker compensation, and policies mandating cooperation between buyer/seller brokers. All of which are specifically referenced by the plaintiffs as being instruments used by NAR to restrict competition and artificially elevate commissions. Whether the result of the legal challenges to these practices takes the form of an optional, scaled back version of the current MLS system, or the MLS system is eliminated altogether, significant changes to the current system are likely to result.
Such changes would require real estate professionals to adapt to a less structured environment in which new and innovative business models are introduced. The current legal challenges facing the real estate industry have the potential of changing the way real estate transactions are conducted, ushering in a new environment of innovation and alternative business models that could fundamentally change the industry.
Increased Competition: Changes resulting from these cases could spark increased competition within the real estate industry. Consumers will be more cost sensitive and willing to shop around for alternatives, sparking a more competitive environment for brokers vying for clients. It will be vital that real estate professionals adapt to innovative business models introduced to the market and be prepared to demonstrate the value that they provide consumers.
What agents can do to prepare
For real estate professionals, this is a critical time to begin preparing for coming changes. The following are steps agents can take now in preparation of the changing dynamics of the real estate industry and profession.
Stay Informed: In order to adapt accordingly, its critical that brokers stay up to date on the progress of these lawsuits. It is important for brokers to familiarize themselves with the arguments being made by both sides and to constantly check for any recent updates regarding the cases, including settlement and/or court decision statements. Staying informed on developments in these cases and other important industry news will allow brokers to better understand how the industry landscape is evolving so they can be better prepared to adapt.
Review and adapt your practices: Brokers should use this time to review their sales strategies and tactics and evaluate them in the context of the potential changes that could occur due to ongoing legal challenges. (Especially practices regarding buyer representations). If necessary, take steps to modify your current strategies to ensure you are best prepared for the changing industry landscape. Develop new strategies for educating potential buyer clients on the value real estate professionals provide. Highlight the importance of having a knowledgeable agent guiding buyers through the process and advocating on their behalf. Lean on your Brokers in Charge and work with them to develop strategies to best navigate the changing regulatory and industry dynamics. The future industry landscape will incentivize brokers who are able to demonstrate to potential clients the value they provide and the importance of their services.
Focus on client centered approach: As transparency and competition increase within the real estate environment, a client centered approach will be even more critical to success. Building stronger client relationships and providing those clients with value will be critical to agents being able to distinguish themselves within a more competitive market.
Educate clients: Take the time to educate your clients on the changes within the industry, especially regarding how commission fees work and the benefits of your services. Being transparent and educating your clients will develop trust and strengthen those client relationships.
Be Flexible/ Adapt: Embrace changes within the industry and be open to innovation. Change is hard and can be a source of anxiety. However, if you embrace the change and look at it not as an obstacle but as an opportunity to set yourself apart, you will be better prepared to not only adapt to the changing landscape within the industry, but to excel in it.
Conclusion
These cases have created a huge level of uncertainty regarding what the future of the real estate profession might look like. From my perspective, as a real estate attorney, I am concerned that these challenges of industry practices will ultimately have negative effects on the very people that they are intended to protect, the consumer.
As a closing attorney, I have a front row seat to the important work real estate professionals do on a daily basis. They are the front lines of protecting against the fraudulent bad actors that have become increasingly prevalent within the industry and they serve a vital role in helping individuals navigate the complicated and intimidating process of buying/selling a home. While I acknowledge that certain changes in the real estate profession are necessary, I fear coming changes could create an environment that further limits affordability for consumers and requires them to decide between being able to buy a home or having adequate representation by a qualified real estate professional. My hope is that all involved parties will be able to come to a compromised solution that considers all of the potential impacts on both consumers and real estate professionals, and that will help serve this incredibly important industry.
In closing, the class action lawsuits revolving around the National Association of Realtors (NAR) represent a pivotal moment in the real estate industry’s history. These legal battles, fueled by concerns about antitrust practices, commission fees, and market competition, have the potential to usher in a new era for real estate professionals and transactions. As the legal landscape continues to evolve, it is crucial for real estate practitioners and industry stakeholders to stay informed and adapt to these changes. The outcomes of these lawsuits may reshape the way business is conducted in the real estate sector and ultimately lead to a much different competitive environment. While the final outcome remains uncertain, one thing is clear, the real estate industry is on the brink of transformation, and it is incumbent upon all involved to navigate these changes with vigilance and adaptability.
At B&K, innovation and resiliency are part of our DNA. We thrive in arenas that require us to come up with new and innovative solutions for our partners and clients that can help them adapt to changing environments. At B&K we combine a technology driven approach focused on innovation and adaptability for the future, with quality client service that recognizes, regardless of how it might change, the real estate industry is about people and relationships. We very much look forward to working closely with our partners and clients to do whatever we can to help them adapt to the changing real estate landscape.
UPDATE 11/02/2023:
After the release of the above article, which details the ongoing legal battle occurring within the real estate industry, a major development occurred that has potentially unprecedented implications for real estate professionals. On October 31st news broke announcing that a decision had been reached in the Sitzer vs. NAR et.al. trial and that the jury had reached a verdict in favor of the plaintiffs. After more than four years of legal wrangling and two weeks of trial testimony, the jury only needed two and a half hours of deliberations to conclude that NAR, and the other co-defendants, violated antitrust laws by engaging in anticompetitive practices, as alleged by the plaintiffs.
In their ruling, the jury awarded damages amounting to $1.78 billion to the plaintiffs, a group that includes the sellers of more than 260,000 homes spanning three states. In response to this verdict, NAR and the other defendants have expressed their intent to appeal this decision. Consequently, the legal battle surrounding this issue is expected to persist. However, although the protracted appeals process may mean that a definitive resolution to this legal saga remains years away, the immediate repercussions of this decision should not be underestimated. That is because the presiding judge has yet to issue the court’s final judgment in the case, and within that final order, the possibility exists for the inclusion of injunctive relief in favor of the plaintiffs. If the judge opts to include an injunction as part of the court’s ultimate decision, real estate professionals may find themselves forced to alter their practices in order to avoid violation of the court injunction.
