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On Tuesday October 31 2023, a jury in the US District Court in the Western District of Missouri handed down a verdict against the National Association of Realtors and several large brokerages (Burnett et al v. National Association of Realtors et al). According to media reports, the jury found the defendants liable for violating antitrust laws in refusing to do business with sellers who would not contribute to buyer agency fees.
The defendant real estate businesses, who brokered thousands of deals in which buyers received agency services paid for by sellers, have been ordered to pay $1,785,319,872 to the plaintiffs in the case. Buyers who were the beneficiaries of these deals will be asked to pay nothing. Sellers, many of whom would not have been able to market their properties under the favorable terms their agents negotiated had they not contributed to their buyers’ costs, will get to keep their money. If they are members of the plaintiff class, they stand to get a lot more.
How did this case come about? What does it mean for the future of real estate?
The Missouri case revolves around the intersection of real estate brokerage practices and anti-trust law. It concerns a pattern of doing business that is not unique to that state, and is the product of an evolutionary process in the way sellers and buyers have obtained, and paid for, expert advice in real estate transactions.
Agency is an area of common law that has evolved over many centuries. Essentially, agents in real estate transactions are expected to put their clients’ interests above all others’, even their own. Agents must follow their clients’ instructions unless they violate some law designed to protect the public. Thus, agents would not be expected or allowed to follow a seller’s directions that would violate fair housing laws, or obey instructions to hide the existence of a known material defect with the property that a buyer could not reasonably discover on their own. Agents are expected to negotiate on behalf of their client to obtain the best possible terms for a sale. Agents are expected to be loyal to their clients’ interests and keep their clients’ confidences. Agents are relied on as experts in the business of real estate, who can advise their clients on the best decisions to make, and who can trace the progress of any transaction, making sure all the other experts involved – from lawyers to loan officers – are doing their jobs.
Historically, real estate agents were employed by sellers to list their properties on the market. They were paid a commission – usually a percentage of the sales price. Buyers usually did not have agents who worked for them, and thus had no one protecting their interests in the transaction.
Over time, a practice evolved that was known as sub-agency. Real estate licensees would work with buyers – showing them houses, providing them with forms and other paperwork they would need to make an offer. If an offer was accepted, the licensee working with a buyer was considered to be an agent of the listing agent and a sub-agent of the seller. The sub-agent was paid a share of the commission received by the listing agent.
Sub-agency proved to be confusing to many buyers, who naturally assumed that the real estate professional who was working with them was working for them – as their advocate and advisor. In fact and to the contrary, the sub-agent’s legally-required loyalty was to the seller, and there were times when sub-agents worked to negotiate an agreement that was not in the buyers’ best interest. There were lawsuits. In 1994 the Georgia legislature took action by passing the Brokerage Relationships in Real Estate Transactions Act (BRRETA), which was designed to prevent “detrimental misunderstandings” that might otherwise arise in brokerage relationships. BRRETA codified real estate agency in Georgia and set out the legal framework for buyers to work with real estate licensees as buyer’s agents. Clear lines of responsibility were drawn, and real estate buyers finally had expert advocates on their side.
One thing did not change, however. Sellers were still expected to pay a commission to their listing agent, and the listing agent would pay a portion of the commission (typically 50%) to the agent who had brought the buyer to the transaction.
In Georgia, the listing engagement contract forms designed by the Georgia Association of REALTORS (GAR) contain blanks to be filled in with the commission to be paid (usually a percentage of the sales price or a set dollar amount). The numbers that go in these blanks are subject to negotiation between the seller and the agent. In addition to the commission paid to the listing agent, the contract form has blanks to be filled with the amount or percentage the listing agent will share with the buyer’s agent. All terms of the contract must be agreed to by both the listing agent and the seller for the agreement to be valid and binding.
On the buyer’s side, the GAR form for buyer agency engagement states that buyers will be responsible for paying their agent, and blanks are provided to fill in a dollar amount or percentage of the sales price of the eventual transaction. The form goes on to state that the seller’s agent may provide some or all of this money, in which case the buyer would only need to make up the difference.
Thus, in a typical transaction in Georgia in recent years, the seller would agree to pay the listing agent 6% of the sales price with a 3% share paid to the buyer’s agent. The buyer would have an agreement with their agent that would assure the buyer’s agent 3% of the sales price. The listing agent would then provide all of the money to satisfy the buyer’s obligation to their agent. The buyer would get full-service agency representation at no cost. The listing agent would benefit from the buyer being brought to the table, as well as receiving assistance from the buyer’s agent in completing the transaction.
The multiple listing services (MLS) include in the information they provide on each listing the compensation a buyer’s agent can expect. In this way, a buyer is put on notice. If the buyer has agreed to pay an agent 3% of the sales price, and a seller is offering 2%, that effectively raises the cost to the buyer by 1%. There are cases in which this difference puts the property out of reach for the buyer. In fact, there are many cases in which transactions would fall apart without the seller contributing extra funds to help cover the buyer’s closing costs. There is a blank provided on the GAR form for this contribution. It does reduce the seller’s profit margin, but it often makes the difference between making a deal or having no deal and keeping the property on the market for weeks more.
Thus, the practices of buyers having their own dedicated agent, listing agents sharing commissions with buyers’ agents, and sellers’ contributions to buyers’ closing costs all have a long tradition grounded in practicality.
So how did any of this get crossed up with anti-trust law?
In 1890, Congress passed the Sherman Anti-Trust Act – named for its sponsor, an Ohio senator whose brother had become locally famous in Georgia several years earlier. The Sherman Act prohibited “combinations in restraint of trade” and was intended to break up monopolies. Its enforcement in that area lagged behind for several years until the Progressive Era when public figures like Teddy Roosevelt made their reputations as “trust-busters” by dismantling large corporations in court. Before that time, most of the successful anti-trust cases were brought by business owners to break up the labor unions that threatened their margin of profit. Despite its mixed legacy, however, the Sherman Act has a useful and important function in assuring that consumers have choices as they shop for services.
In the area of real estate, it would be a violation of anti-trust law for a broker with one firm to conspire with brokers in other firms to set standard commission rates or the commission splits offered to cooperating brokers, or any other terms or conditions of brokerage engagements. It would also be a violation to conspire not to do business with a competitor or a provider of services in an attempt to force a change in policy or to force them out of business.
News reports on the case so far have been vague as to how exactly the defendants violated anti-trust law. There are references to a system of “cooperative compensation” in which sellers were forced to pay buyer broker commissions. I look forward to reading the court’s decision when it is published. I would hesitate to guess before learning much more whether such a case could be brought in Georgia.
But I am concerned that the case will exacerbate a trend that is making it harder for buyers to purchase homes in an environment that already is tilted in favor of sellers. We have since 2008 had a shortage of available housing for the current demand, and this condition is expected to continue for many years to come in growing areas like metropolitan Atlanta. Recent inflation, and inflated expectations that accompanied abnormally low interest rates during the pandemic, have driven home prices higher – beyond the means of many young adults.
It may be that in the near future, it will be the norm that sellers will be expected to pay only for the agency services on the listing side of the transaction. Buyers will have to pay in full for any expert advice they receive. Some buyers will have to put off home purchases until later in life, delaying the building of wealth for their families through equity in real property. Sellers will continue to help buyers – not by paying their agents’ commissions, but by contributing more cash to their closing costs, and by accepting lower prices from buyers who are more financially strapped.
Real estate agents will be fine. We are participants in the noble enterprise of helping people find homes. We support policies that make it easier for more people to make transactions in real estate. But we are not a charity, and our services have value. We will continue to offer those services on the free market for fair compensation.
Buyers agent by Nick Youngson CC BY-SA 3.0 Pix4free
