'What-if' scenarios in the commissions lawsuits, and how to prepare for them
As several buyer agent compensation cases work their way through the court system, it’s time for brokers and agents to come up with a plan.
- In a comprehensive presentation, T3 Sixty's Jack Miller outlined the allegations and most likely outcomes of several ongoing compensation lawsuits.
- The Sitzer/Burnett case, scheduled for trial in October, could provide a blueprint for what will happen with buyer agent compensation across the country.
- Some policy changes are already underway, but buyer agents need to focus on how to present their value to clients.
As the real estate industry waits to see if courts will turn buyer agent compensation on its head, brokerage leaders, agents and MLSs should be considering the possible outcomes and ways they may need to adapt.
That was the theme of a recent online presentation to more than 200 real estate professionals led by Jack Miller, president and CEO of real estate consultancy T3 Sixty. (Note: T3 Sixty and Real Estate News share a founder, Stefan Swanepoel.)
Allegations, and the case to watch
Several cases are working through the court system accusing the National Association of Realtors and some of the country's largest brokerages of participating in anticompetitive practices by forcing sellers into a system where they pay a commission that is split between buyer and seller agents.
Some of the specific allegations include claims that the current system has led to inflated compensation, that buyers are steered toward listings that offer higher compensation, and that a unilateral offer of compensation to buyer agents doesn't account for differences in agents' skills and experience, inhibiting competition.
The case that the industry should be watching closely right now is Burnett vs. The National Association of Realtors, et al (formerly Sitzer vs. NAR), said Miller. The Burnett trial, scheduled to start Oct. 16, covers deals that happened in Missouri, but because it will take place in the U.S. District Court for the Western District of Missouri — part of the federal judiciary — the implications could be national.
"It's a case that can impact more broadly, and that's a great concern," Miller said, noting that the judge could call for the commission system to be fundamentally changed. "So yeah, that is one to watch."
Moehrl vs. the National Association of Realtors, et al, which was certified as a class action in late March and has national reach, is expected to go to trial in 2024. Miller also noted that "copycat" lawsuits in local markets are starting to spring up.
If the plaintiffs in any of the related cases prevail, it could force the industry to change how buyer agents get paid — and the damages awarded in these class action lawsuits could be in the billions of dollars.
Three scenarios to consider
What has many worried is the potential fallout resulting from the court rulings. Miller called out three potential scenarios:
Nothing changes — the status quo remains in place and buyer brokers are compensated as they are now;
Compensation is partially decoupled and optional for sellers to offer, and the buyer agent can negotiate with the seller and/or their client;
Compensation is fully decoupled, and sellers are prohibited from offering compensation to buyer agents, forcing buyers to pay their agent out of pocket or negotiate payment.
Miller said the complete decoupling scenario would not only have a big impact on the industry, but create an additional hardship for first-time and low-income buyers who would have to negotiate payment terms and possibly pay a retainer or other form of compensation to an agent before even looking at houses.
"[First-time and low-income buyers] may have a hard enough time getting the deposit together to get the process started, let alone paying for services," Miller said.
How the industry is responding
Although these cases have yet to go to trial, the National Association of Realtors and some other industry players have already begun to make changes. NAR, for example, now requires buyer broker compensation to be displayed on MLS sites, and buyer agent services cannot be advertised as "free." In addition, listings cannot be filtered by the amount of buyer broker compensation.
Miller noted that some major brokerages, including RE/MAX and Redfin, have also said they will display buyer broker commissions, and the country's largest MLS, California Regional MLS, is already doing this.
With greater transparency around compensation, buyer agents need to be prepared to explain how they are compensated and sell the value of their services to clients — many of whom don't fully understand what buyer agents do or how they get paid.
"That means everybody… is going to be talking about money sooner and more upfront with potential clients," Miller said.
Implications if NAR, brokerages lose in court
If the plaintiffs prevail on some level, it could have far-reaching effects on the industry and change how buyer agents engage with clients. One possible outcome is more buyer agency services that offer different compensation models to make it easier for buyers, Miller said.
Buyer agent compensation could also become more variable and ultimately decrease as consumers realize they can negotiate more. Miller noted that compensation has already been trending down, and a ruling in the plaintiffs' favor could accelerate that trend.
If these changes occur, Miller suspects some agents will leave the industry.
"There are many agents that are not comfortable having that negotiation or that sales conversation with their client on the front end," Miller said. "There may be some agents who say I'm just not interested in having to figure this out."
The buyer pool could shrink as well, particularly among low-income and first-time buyers who would be disproportionately affected.
One unknown is whether home prices will be affected, said Miller. "[The ruling] may impact services that people pay for in the transaction, but it's not clear that this is going to lower home prices."
Two ways brokerage leaders can prepare
Miller said there were two key takeaways for brokers and agents thinking about the potential outcomes of these momentous court cases: Be prepared to explain and sell your value to buyers, and commit to using buyer agency agreements.
Managers and broker leaders who help their agents learn how to have those conversations will have a competitive advantage, said Miller.
"The brokerages that figure out how to do this — how to train their agents, how to have constructive buyer agent conversations and create those agency relationships — they are going to be able to teach the ones that don't," Miller told the audience of real estate professionals.
"You're going to be able to recruit buyer agents who don't know how to have that [conversation] into your brokerage. You're going to be able to fold in or acquire companies that haven't figured this out."