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Legal Bombshells Reshaping Real Estate: What the Industry's Lawsuits Mean for You

As you've probably heard, a recent wave of legal cases is poised to potentially reshape real estate transactions in the United States. These developments are not just legal footnotes; they could directly impact how you buy or sell your home. Here's what you need to know:

Understanding the Issue

At the core of these legal battles is the question of how real estate commissions are structured and shared. Lawsuits, primarily targeting the National Association of Realtors (NAR) and several major real estate franchises, argue that the current system unfairly inflates home selling costs. These cases challenge the practice where sellers pay not only their agent's commission but also that of the buyer's agent. This arrangement is alleged to maintain high commission rates industry-wide and limit competition, potentially violating antitrust laws.

Key Cases to Know

  1. Sitzer | Burnett Case: This Missouri trial resulted in a significant jury verdict against NAR and various franchisors for allegedly conspiring to keep commission rates high. The verdict is under appeal, but its implications are far-reaching.
  2. Moehrl Case: Set to go to trial next year in Illinois, this lawsuit echoes the Sitzer | Burnett case, challenging the commission structure and practices of NAR and other large real estate entities.
  3. Gibson, Batton, and Other Cases: These lawsuits, filed across the country, involve both homebuyers and sellers and challenge similar practices.

My Thoughts

Is there a conspiracy? The real estate industry is fiercely competitive. In my experience, agents frequently adjust their fees to stand out, and sellers have a range of choices in agents, services, and fees. To suggest a widespread conspiracy to keep prices high seems contrary to the competitive nature I've observed in our market.

Should Sellers Pay for Buyers Agents? While compensation is typically taken from the seller’s side of the closing statement, it's important to remember that ultimately, it's the buyer’s funds that are purchasing the property. Buyers cannot include a buyer's agent professional fee in their mortgage, and most, already facing high closing costs, prefer to include it in their purchase price. While I don't believe there is a conspiracy, we need to be transparent on how agents are paid and the options available to all parties when they hire an agent.

Historically in real estate, all agents represented sellers, with buyers typically not having their own representation. In the 1990s, the concept of buyer's agents emerged to advocate specifically for buyers. Listing agents would share their fee with buyers’ agents as a way to market their listing and attract buyers through their agents. Despite this change, the tradition of sellers paying all the commissions continued, a practice originally established when all agents worked for sellers.

Time for Change, But with Challenges: It's time to rethink this model. Critics point out that agent commissions in the US are higher than in many countries, however, there is more to that story. Many countries operate more like the US did 50 years ago, with no MLS and cooperation between agents. Homes are typically listed with multiple agents, and only the agent who secures the buyer gets paid, so the incentive to spend money to market the home is reduced because there is no guarantee that the listing agent will be paid. This inefficient and disorganized way means that home buyers looking for a specific property need to contact multiple brokers in hopes to find what they are looking for. For sellers, the lack of exposure can have a direct impact on the sales price. It also means that without a strong MLS, data on home sales is hard to find, making pricing unpredictable.

It is counter-intuitive that a seller would want to pay for someone that is negotiating against them, but when asked if they want to offer a co-broke fee in MLS, the logical response is, “How excited do you want Buyer’s Agents to be to sell your home?” When a seller lists their home, they are searching for an active, willing, and able buyer. When a seller accepts an offer from a buyer’s agent, it’s because the buyer’s agent is bringing the best offer currently available in the market.

While buyers' agents advocate for buyers, they also play a crucial role in educating and guiding their clients, often bringing stability and knowledge to transactions. We have found that unrepresented buyers typically bring more uncertainty to home sellers as they may be unfamiliar with market norms and typical risks buyers normally accept.

However, changing this model isn't straightforward. If buyers were responsible for their agent's fees, it could add financial strain, particularly for first-time buyers already struggling with down payments and rising home costs. Home buyers may be forced to decide whether or not to have representation, view a home, or pay a buyer’s agent fee out of pocket.

What home sellers should know: There are no “standard” fees in real estate. Fees are negotiable between sellers and their agents. You are not required to offer compensation to buyers’ agents. If you choose to offer compensation to a buyer’s agent for marketing purposes, it should be stated in your listing agreement and confirmed that amount is reflected in MLS. If you decide to offer a buyer’s agent fee, you should know up front what the total fee would be if your buyer is unrepresented. Lastly, be aware that a buyer may request a different buyer’s agent fee as part of their offer and this fee can be negotiated along with price and terms.

What home buyers need to know: Buyers’ agents are not free. Buyers’ agent fees are negotiable. Agents can be compensated from the buyer directly, from the seller/listing agent, or from a combination of both. (A buyer may not finance this fee in their mortgage but depending on their down payment, they may be able to use a seller’s closing cost credit) As a client, you should know your agent’s fee. Understand upfront how you and your agent will approach listings that are not offering compensation to your agent.

Conclusion

The real estate industry stands at a pivotal crossroads, with ongoing legal challenges signaling potential shifts in how we approach property transactions. The future may be uncertain, but one thing remains clear: knowledge is a powerful tool. We are committed to ensuring that our clients are well-informed, empowering them to make decisions that lead to successful outcomes in their real estate journey.

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