The $1.78 billion verdict in October against the National Association of REALTORS® has sent shockwaves across the residential real estate industry. The ruling in the case of Sitzer/Burnett v. The National Association of Realtors et al, including Compass Inc., EXP World Holdings Inc., Redfin Corp., Weichert Realtors, United Real Estate, Howard Hanna Real Estate Services, and Douglas Elliman Inc., claimed that the NARs “participation rule” and “cooperative compensation” practices forced home sellers to pay inflated commissions to buyer agents. Within hours of the verdict, the plaintiff attorneys in the case filed a separate class-action lawsuit against another set of companies with the same allegations.
Anywhere Real Estate Inc., the parent company of Coldwell Banker, also agreed in early October to pay $83.5 million to settle a pair of class-action lawsuits and to overhaul its policies toward commissions. RE/MAX Holdings Inc. has separately agreed to pay $55 million. Since then, the residential real estate world has been reeling as brokerages navigate the appeals process and reformation of their existing commission practices.
Many have asked us if and how these rulings will affect commercial compensation practices and what impact these rulings will have overall. To answer this question, it is important to understand the different views and practices in the residential and commercial industries which we believe, in part, influenced this decision and its outcomes.
Multiple Listing Services
Multiple Listing Services or “MLS”, were created as a way to share information about listings for residential real estate. They serve as a single source of listing information for a market, and that information is easily accessible to the consumer.
The creation of MLS’ leveled the playing field by providing equal exposure to all properties. Brokers invite other brokers to cooperate in their sale in exchange for the guaranteed right to compensation. These benefit sellers by increasing exposure to their property and benefit buyers by providing equal access to all listings, thus minimizing the risk of exclusive practices, intentional or unintentional.
At any given time, external influences can impact the demand for, and subsequently the value of, real estate. The current market has been impacted by the pandemic and rising interest rates. In residential real estate, additional factors such as rising home prices and limited inventory have also had an impact. And with demand outweighing supply and fewer homeowners listing, the market has become a seller’s market.
During the Great Recession of 2008, property values fell significantly, and supply outpaced demand, which resulted in a buyer’s market.
As the economy stalled, commercial real estate values were also affected, and commercial property owners became very aggressive in offering increased commissions to buyer and tenant rep brokers for more exposure to their property.
Even still today, this practice continues situationally with commercial landlords to increase exposure and decrease time on the market.
The advantage in the market shifts periodically, giving either the buyer or seller a perceived advantage depending on the circumstances.
Perception of Value
When considering the practice of cooperative compensation and its legality, it is important to understand how these market influences may impact the perception of value.
When demand exceeds supply, it could seem as if there is little value in offering a commission for bringing a qualified buyer to the seller, and vice versa in a market that might be saturated by sellers.
The difference in the perceived value of residential real estate representation and commercial real estate representation also stems from the fact that consumers often place an emphasis on the purchase price and may not consider the complexity or nuances of the transaction.
In commercial real estate, clients are typically businesses or investors. Just as a business would pay for legal or accounting services, it also views the advice of brokers as a professional service they find value in and are willing to pay for.
Commercial Compensation Practice
Because there is no centralized listing service in commercial real estate, the consumer is more reliant on utilizing the services of a buyer broker.
Since there is no guaranteed right to compensation, fees are instead negotiated between brokers or submitted along with the offer on a deal-by-deal basis and there are no guarantees by the seller or landlord that they will pay a fee to a buyer broker.
Instead, the listing agent may offer to share a portion of their fee with the buyer broker. If there is no cooperating broker, the listing agent would keep the full fee and serve as a dual agent.
The creation of the MLS, in addition to increasing visibility, also reduced the frequency of dual agency. Though agents are permitted to act as dual agents, the dynamic of the negotiation changes if acting in such a capacity. Not only is the listing agent typically asked by the unrepresented buyer to lead them through the process, but the agent must also walk a fine line between facilitating the offer and not providing market advice. In these situations, it often takes longer to build the buyer’s trust, delays the time to make an offer, and could broaden the gap between the buyer’s and seller’s expectations.
Having two brokers involved in a transaction can increase the buyer’s confidence and decrease their decision-making time. Having a cooperating broker can create a more equitable situation since both brokers can maintain their fiduciary responsibility to their client, receive independent and object market opinion, and both parties can rest assured they are getting fair representation.
Since there is no centralized listing service for commercial real estate or guaranteed right to compensation, and commercial property owners find value in incentivizing cooperating brokers, we anticipate the impact on commercial real estate compensation practices will remain largely unchanged. That said, there may be situations in which tenants and buyers may have to compensate their representative if not paid by the landlord or seller.
Alternatively, once the dust settles and the National Association of REALTORS® and residential brokerages make changes to the MLS and respective compensation practices, residential consumers likely will be faced with unintended consequences.
First, access to listings could be impacted as brokerages may be limited in how they share listings with the market. This could result in more in-house transactions, more time on the market, or possibly depressed offers for the seller as a result of less competition from buyers. It could also lead to an increase in dual agency, which dilutes the representation of each party. The risk of exclusive practice could also increase.
Some sellers will find value in compensating the buyer broker and some will get by without. Homebuyers may be asked to sign contracts with buyer agents for their services and pay a fee or take the risk of buying without representation.
Outcomes will vary on a case-by-case basis. Lenders may agree to absorb the buyer broker fee into the financed amount, however, if that does not occur, we may see home prices drop because buyers may not be able to afford both the down payment and their buyer broker fee.
Lastly, and perhaps the most detrimental of all scenarios, is that for many the dream of home ownership could become less attainable. Buyers may need to be prepared to either pay more upfront to compensate the buyer broker for their service or to roll that fee into their financing and ultimately decrease their buying power.