Rocking Realtors’ world

From airline tickets to stocks and bonds, the internet and related technologies have transformed traditional markets and driven down prices for consumers. The residential housing market followed suit, adopting technology that dramatically improves transparency. Detailed information on the supply and price of existing homes is only a few clicks away.

What has not changed is the cost of buying and selling. Real estate commissions in most markets, including Rochester’s, have hardly budged. Legal challenges to these fixed commission rates are not new and have found little success—until now. A recent federal jury verdict in Sitzer/Burnett v. National Association of Realtors could result in a multibillion-dollar damage award and bring “seismic” change to the real estate industry.

Back to basics: the cost of buying and selling a home

Buying a house is expensive, sure. At least looking for a house to buy doesn’t cost anything, right? You call a Realtor and your new best friend becomes your guide to the housing market. Your agent (called the “buyer’s agent” or “buyer broker”) coordinates showings, tells you about the local market, coaches you on offers, manages the relationship with sellers’ agents, recommends service providers like lawyers—and you don’t pay them a thing. Not one cent.

Selling a house is another story. As the seller, you enter into a binding listing agreement that commits you to paying your Realtor a tidy sum—typically 5 to 6 percent of the sales price (so $10,000 to $12,000 for a home selling for $200,000). The seller’s agent (or “seller broker”) guides the seller on pricing, presentation, staging and advertising, and manages the process of receiving and responding to purchase offers.

Ah, but remember economists’ caution about the “free lunch.” While buyers don’t write a check to their agents, buyers’ agents still get paid. If you’ve bought and sold a home, you probably know that the seller’s agent commits to sharing part of the commission with the buyer’s agent, typically half. The entire commission gets factored into the price of the house and the buyer has no say in the matter.

Both buyers and sellers have reason to be unhappy about this payment scheme, once they understand it. Buyers may conclude that they are paying a lot of money for few services—although indirectly—but without the ability to negotiate for a better deal. Sellers, on the other hand, may object to paying the fee of the buyer’s agent, whose job it is to help the buyer drive the price down.

The people suing NAR for damages in the Sitzer/Burnett case—Joshua Sitzer, Amy Winger, Scott and Rhonda Burnett and Ryan Hendrickson—object to paying someone to work against their financial interest.

Knowledge is power

Sellers once found buyers by putting up lawn signs, taking out newspaper ads and talking to neighbors, friends and family. This was not very efficient. Licensed real estate agents revolutionized the market by forming broker associations, which compiled member listings, creating a “multiple listing service” or MLS. As a service of the brokers’ association, access to the MLS was limited to member brokers. Buyers had to establish a relationship with a broker to get access to the big book of listings.

The broker associations improved the efficiency of the national residential real estate market by working through NAR to establish guidelines for the regional multiple listing services.

When my wife and I purchased our current home in 1991, the MLS compiled by the Greater Rochester Association of Realtors was the only comprehensive source of information on available homes. And the only way to the MLS was through a Realtor (the trademarked title for licensed brokers affiliated with NAR).

We were in a hurry and we knew what we wanted. Once granted access to the magical MLS, we did most of the work. After touring only a handful of homes, we put in a purchase offer and our agent earned a 3 percent commission. I’d have preferred to pay the broker a fixed fee for access to the MLS and selected services (or nothing at all, of course), but that was not an option.

Buyer brokers are not always so lucky as our agent was. In the last couple of years, buyers have been submitting offer after offer without success, their brokers arranging countless home tours and writing offer after offer after offer. Brokers get paid only with a successful purchase by those buyers who have the stamina to keep looking and the ability to pay what they must. As a straight percentage of the sale price, that 3 percent can be easy money in some markets and hard earned in others.

The payout also depends on the neighborhood and buyer. The work of guiding a transaction may differ little between wealthy and middle-class neighborhoods, yet the reward can differ by orders of magnitude. In 2022, the median sale price in Brighton was $275,000, twice the $135,000 price in the city of Rochester. Moreover, higher-income buyers are often better educated, particularly about financial matters, and may need relatively little help from a broker. That 3 percent may be rich in pricey neighborhoods but inadequate in poorer ones.

The “all or nothing” commission arrangement also feels unfair to people who wish to sell on their own. With few exceptions, sellers are not permitted to list their properties in the MLS without signing a listing agreement and agreeing to the customary commission. “For sale by owner” (FSBO or “fizbō”) sellers were stuck with lawn signs, newspaper ads and word of mouth.

The internet disrupts the market

As in so many other domains, the internet has weakened the information monopoly of licensed real estate agents. The internet made it possible for buyers to go online and see what was on the MLS without engaging a Realtor. Sellers (or prospective sellers) could also see what other homes were selling for in their neighborhoods. FSBO sellers were still out of luck, as were buyers seeking homes that weren’t listed with an agent.

In 2006, a pair of ex-Microsoft execs founded Zillow, scraping posted national data and allowing home sellers to post their homes for sale without a relationship with an agent. In 2015, Zillow acquired its longtime rival, Trulia. The two networks combined reported 81 million monthly visits in 2022, roughly twice the number of visits to www.realtor.com, the national website of NAR.

Eliminating intermediaries

Industry after industry has been upended by web-based information services. Heading to Barcelona or Biloxi? The internet empowers air travelers to explore schedules without a travel agent. You can even book your flight and pick your seats from your computer or mobile device—and generally without a fee. The selling of stocks and bonds has undergone a similar transformation as discount brokerages and online tools have slashed commissions.

Searchable public real estate listings empower home buyers and sellers to do their own research when buying or selling. In theory, I could list my property on Zillow for free, take phone calls from interested buyers, arrange tours and finalize a sale, with only modest legal assistance to finalize the deal. And without paying a 5 to 6 percent commission to a broker. Economists would predict that fees would fall in a competitive market like this.

They have not. The 5 to 6 percent commission (paid by the seller and shared with the buyer’s agent) continues to be the norm and, unlike air travel, most transactions still involve using the regional MLS. This makes buying and selling without a licensed broker difficult.

Lawsuits take aim at commissions

The brokerage industry has weathered a number of legal challenges, but it recently suffered a significant loss in Sitzer/Burnett v. National Association of Realtors. On Oct. 31, a jury in the U.S. Western District Court in Missouri found for Joshua Sitzer and his fellow plaintiffs. The defendants were ordered to pay damages of $1.78 billion—and the verdict allows the court to treble damages to more than $5 billion. Judge Stephen Bough has the final word on damages and other forms of relief; his decision is expected next year.

Sitzer/Burnett involved NAR, a number of corporate brokerages and four regional MLSs (two of which settled before the trial). The verdict will almost certainly be appealed. Moreover, the many other lawsuits pending (and the larger group of firms and MLSs named as defendants) will influence the final outcome.

Filed in 2019 just prior to Sitzer/Burnett is another case, Moehrl v. NAR, which has not yet gone to trial. Led by the Cohen Millstein firm, this case initially involved four national real estate brokerage franchisers and 20 MLSs. Two of the nationals—the nation’s largest, Anywhere Real Estate Inc. (formerly Realogy Holding Corp.), and RE/MAX—have settled (as they did in Sitzer/Burnett), but Home Services of America, Inc. and Keller-Williams Realty Inc. remain part of the case along with NAR and the MLSs. As Coldwell-Banker is part of Anywhere Real Estate, its settlement and that of RE/MAX with the plaintiffs might have a local impact. The local Keller-Williams brokerage is surely watching the case with concern.

Another case, filed Nov. 2 in U.S. District Court in Northern Illinois, names Compass, eXp, Redfin, Weichert Realtors, United Real Estate Group, Douglas Elliman and Howard Hanna as defendants. The claims are similar to those made in the Sitzer/Burnett and Moehrl cases. Howard Hanna, which merged with Nothnagle Realty in 2017, has a strong presence in the Rochester market. Weichert also has agents here.

Yet more cases are pending.

The legal argument

Central to these cases is the “buyer broker commission rule” that NAR-affiliated MLSs must adopt. This requires that the listing broker (the seller broker) “make blanket unilateral offers of compensation” to buyer brokers in the MLS listing. Nor may the listing invite negotiation of the commission. The Realtor may not submit nor may an NAR-affiliated MLS publish a listing without that pre-set buyer broker commission.

By working together to set broker fees paid by buyers and sellers, these cases argue, the defendants have engaged in a conspiracy in restraint of trade in violation of Section 1 of the Sherman Antitrust Act.

The plaintiffs in Moehrl rely on two economists to make their case, Harvard Law’s Einer Elhauge and the New York University Stern School of Business’ Nicholas Economides. The judge in the case devotes many pages to discussing the qualifications and findings of these two witnesses. (See the case text here beginning on page 8.)

Elhauge believes that the status quo encourages “overuse of buyer brokers by separating the consumer of buyer broker services (i.e., the home buyer) from the payment for those services.” It’s a mantra in economics: If something costs more, you buy less. If it costs nothing (or seems to)—well, you get the idea. Elhauge is on safe ground by suggesting that ordinary people will buy few broker services if they have to pay for them.

Economides identifies markets that are comparable to the U.S.—but without a similar fee rule for buyer brokers—as Australia, the Netherlands and the United Kingdom. In these “comparator markets,” he reports that only 5 to 20 percent of buyers use a broker while 87 percent do so in the United States. When they did use brokers, fees paid to buyer brokers in these markets averaged 1 to 2 percent of the sale price versus 2 to 3 percent in the U.S.

How the real estate market might change

One possible outcome of these cases—in addition to a judgment that could cost billions of dollars—is a court-ordered change to rules requiring a non-negotiable buyer broker commission or some mandated set of transparency rules for real estate transactions. The decision handed down by the judge in Sitzer/Burnett may set a pattern for the remaining cases, if successful.

The plaintiff attorneys argue that reforms to broker fees may reduce dependence on buyer brokers and could reduce fees paid by both buyers and sellers.

Asked about the implications for Rochester, GRAR CEO Jim Yockel provided this statement:

“The Greater Rochester Association of Realtors is monitoring the Sitzer/Burnett case in Missouri and waiting for the details the judge includes in his judgment. At this point, there isn’t much to go on, but we are watching with interest. As more specific information is available, we will work with the local brokers and agents to help them continue to serve the housing needs of the Greater Rochester region.”

Prominent Rochester Realtor Mark Siwiec writes in his blog that “there is going to be a seismic shift in how real estate is bought and sold.” He notes that the traditional commission model reduces the cash cost of purchasing a home by placing the payment burden on the seller as broker commissions cannot be included in the mortgage (per federal law).

As confirmed with Christine Nothnagle of 1^st Priority Mortgage, the traditional “seller pays” commission model reduces a buyer’s need for cash at closing. The commission indirectly raises the purchase price, therefore the buyer is able to “include” the cost of the commission in the mortgage.

If the buyer has to pay the buyer broker commission directly (and federal law does not change to allow this expense to be covered by the mortgage), home buyers will need to bring more cash to the closing than just the down payment, notes Siwiec. First-time home buyers may be particularly disadvantaged by the change.

Suppose the home price is $100,000 and the buyer is putting 10 percent down. Currently the seller pays the buyer broker a commission of 2.5 to 3 percent of the purchase price, or $2,500 to $3,000. If the buyer has to pay this directly, the cash need of the buyer rises from $10,000 (the down payment) to between $12,500 and $13,000, a significant impact on affordability. Buyers who have to empty their pockets for the down payment alone would leave the market.

But that scenario ignores the expected impact on the price of the property. In a competitive market, cutting the commission in half would be reflected in the sale price of the house.

If the price dropped to $97,000, the buyer’s 10 percent down payment would fall to $9,700 and the commission (now 1.5 percent) to $1,455. The down payment plus buyer broker commission—$11,155—would still be more than the $10,000 the buyer would pay for the downpayment alone under the old commission arrangement but the fall in the sale price softens the impact.

If the Sitzer/Burnett decision survives appeal and similar cases are successful, a number of changes may be forced upon the industry.

Negotiable commission fees are one option. To be clear, commissions are technically negotiable in many markets, including Rochester’s. By forcing the commissions to be public, however, broker associations can bring peer pressure to bear on agents who might dare to discount their fees.

Fixed fees are another approach—by getting away from the percentage model, brokers might develop pricing of services either à la carte or in packages customized to fit the varying needs of buyers.

Siwiec suggests another option: perhaps the seller broker commits to pay part—e.g half—of the current rate (so, 1 to 1.5 percent), with the remainder negotiated between the broker and the buyer. That would give the buyer some say over the size of the commission but provide a floor for the buyer brokers.

FSBO still disadvantaged

Despite the emergence of online listings like Zillow, sellers who wish to avoid the services of a broker are still disadvantaged. I contacted two local owners who are selling without the help of a seller broker.

Anthony Costanza is selling a home in Irondequoit without a broker. He expressed a common complaint: “Commissions are too high and I resent paying a broker to do work I can do for myself.” He has also sold real estate on the West Coast and reports that commissions are far more competitive there and that a good proportion are lower than the customary 5 to 6 percent.

When he posted his listing on Zillow, he did not promise a buyer broker commission. If a broker brought him a qualified buyer, would he pay the broker a fee? “No,” he said. “I tell them, ‘The buyer can pay you for finding this property for them.’” 

Oliver, a Rochester homeowner who spoke to me only on condition of anonymity, is also selling a home on Zillow, although he notes that the firm’s listing practice strongly favors the brokers. FSBO listings are separate from broker listings—and the broker listings are the default view. A recent search of properties listed in Monroe County displayed the 658 “agent listed” homes by default. A prospective buyer must select the “More” drop-down menu and switch to “by owner and other” to see the 66 FSBO listings.

Moreover, the FSBO listing prominently displays buttons labeled “Contact an agent”and directs the prospect to an agent who advertises with Zillow. The seller’s phone number is there－but you have to look.

Would Oliver pay a buyer broker? “Sure. If someone goes to the trouble of pre-qualifying a buyer, they deserve to get paid.” How much he would be willing to pay would depend on the services provided. Clearly, he wants to have discretion over what he pays and for what.

Zillow favors selected brokers

If you are cruising Zillow and find a home you want to see, you might click “Contact an agent,” thinking you would be contacting the listing agent. Yet while the listing agent’s contact information is visible on the posting, the link connects the buyer to an agent who has paid Zillow for access to leads. Zillow Premier Agents bid for priority access to new buyers within a specific ZIP code.

Winners and losers

Fairness is illusive. The status quo works well for some and poorly for others. During the extraordinary sellers’ market of the last couple of years, buyers have watched prices rise out of sight. Buyer brokers have worked very hard for their commissions, with offer after offer rejected and price escalation driving away their customers.

Sellers have reaped the reward of timing. Seller brokers have had the advantage of rising prices (thus rising commissions), but low supply has meant fewer listings.

Lower commissions might reduce home prices but may also drive brokers out of the market.

Naive or first-time buyers might be left without the support of an experienced broker’s cool nerves and sound judgment. As the 2008 financial crisis reminded us, the residential real estate market has risk for buyers and sellers alike. Unsophisticated consumers (sometimes aided by incompetent or self-interested brokers) can make decisions that haunt them and their credit rating for many years.

Other compensation models—buyer-paid commissions, fixed fee-for-service and so on—could increase the cash required to buy a house, shutting some out of the market. As Steve Kroes, a real estate broker in the Sacramento area (and an old friend), told me:

“If we have to make a contract with buyers to pay us for helping them, we’ll surely get paid a lot less. Especially with younger buyers—they’re barely scraping together the money for a small down payment and closing costs. I think that would be good for market transparency and efficiency, but it’s really going to rock the world of many Realtors who won’t be prepared for the reduction in income.”

A viable housing market is key to national economic vitality. Rising productivity depends on the willingness and ability of workers to move in response to economic incentives. Improving the efficiency of the existing home market is good for the entire economy.

The Sitzer/Burnett judge, Stephen Bough, must consider how his ruling will affect all market participants—buyers, sellers and their respective brokers. His decision could set a pattern for the settlement of other lawsuits and establish the parameters of a new relationship between consumers and brokers. He should seek to ensure that brokers collaborate in ways that improve efficiency and share efficiency gains fairly with buyers and sellers without exacerbating existing inequities. 

Kent Gardner is Rochester Beacon opinion editor. The Beacon welcomes comments and letters from readers who adhere to our comment policy including use of their full, real name. Submissions to the Letters page should be sent to [email protected].