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In the 1987 movie, Wall Street, Michael Douglas’ character, Gordon Gekko says, “It’s a zero-sum game; somebody wins and somebody loses. Money itself isn’t lost or made, it’s simply transferred…”.
If you’re not familiar with the Sitzer class action lawsuit against the National Association of Realtors and several of the largest real estate brands, it centers on how real estate agents are compensated. The lawsuit claims that the practice of seller and buyer agent cooperation or sharing of commissions is an anti-trust violation and has resulted in inflated commissions paid by consumers. While a jury in Missouri has already sided with the plaintiffs, the judge has not rendered a final verdict.
Some proponents of the lawsuit, including one very influential consumer group, are hoping the verdict will ultimately end the practice of seller and buyer agent cooperation, and that the net result will be lower real estate commissions across the board.
On the surface, this may sound like a victory for consumers, but a closer look clearly shows that, even if the proponents of the lawsuit are correct and real estate commissions end up being reduced, the money won’t be divided equally, and first-time home buyers and lower-income consumers are likely to shoulder the largest burden.
The following is my assessment of the most likely winners and losers of the Sitzer Class Action Lawsuit.
Because it is customary that the agents for both the buyer and the seller are paid from seller proceeds, in the short-run, eliminating that practice and requiring buyers to pay for their own agent representation, will benefit home sellers.
Deep Pocket Buyers
Buyers who are short on cash will still be able to ask sellers to cover the expense of their agent as a seller concession. However, this would put that buyer at a further disadvantage if their offer is competing against wealthier more experienced investors and institutional buyers, who don’t ask for the concession.
Class Action Lawyers
Class action lawyers, such as those in some of our favorite movies like Erin Brockovich and The Insider are rare. More often than not, class action lawyers are far more self-serving than they are portrayed in movies. The class action lawyers in the Sitzer case are poised to make hundreds of millions of dollars, while some experts believe that the actual plaintiffs (home sellers in Missouri), will be lucky to receive $200 apiece.
First-time buyers with modest wealth are likely to be the biggest losers if proponents of the Sitzer lawsuit get what they want. In addition to the down payment, closing costs, and reserves, buyers will now be saddled with the additional cost of having to pay their real estate agents. Some say this is where commissions will be driven down the most, and they may be right, but is that really a good thing?
Buyers who are on the margin in terms of their wealth will have a few options, none of which are better for them. They will either delay their home purchase to save more money to pay for their agent, or they will try to go with a discount agency or without representation altogether. Delaying their purchase will likely mean they will end up paying more, perhaps substantially more, for their home down the line. The more likely scenario is they will go without representation and attempt to fend for themselves.
Some people believe this is fine but that’s because they don’t understand the critical importance and value of having a real estate agent. The largest financial transaction most people will ever encounter is the purchase of a home. First-time buyers who go without professional representation and who are unfamiliar with the potential pitfalls involved in a real estate transaction will put themselves at tremendous risk.
With the pendulum tipping away from first-time buyers and towards institutional buyers and wealthier investors, buyers’ agents will have fewer transactions to go around. I believe this is tragic. Buyer’s agents do most of the heavy lifting in the industry. They show homes, help prepare buyers for the intimidating process of qualifying for a mortgage, review home inspection reports, and about one hundred other critical tasks. A career in real estate sales is one of the few jobs in which people without a college degree can earn a great living if they work hard and build a good reputation for service. I can’t help but believe that some people have a problem with that, which is unfortunate. Homeownership is the cornerstone of the American Dream and buyer’s agents are arguably the most valuable service provider in the entire process.
One of the solutions being floated if buyers have to pay for their own agent representation is for buyers to have the option to finance those costs as part of their mortgage. This would require a radical change in lending guidelines and consumer regulations. Even if the rules change and the financing of agent commissions is permitted, fewer first-time buyers will result in lenders having fewer deals to close and those they do close will be riskier due to higher loan-to-value ratios.
Obviously, a multi-billion-dollar lawsuit will put any organization’s viability at risk, but if the role of buyers’ agents is marginalized, the number of dues-paying members will also be impacted. Even more likely is that the connection between NAR and local MLS services will change. The center of the case against NAR is that they mandated agent cooperation by virtue of their control of the MLS platform in Missouri. NAR’s reign as the largest and most powerful trade group in America may finally come to an end.
Our system of real estate sales has been in place for more than one hundred years. With all of its flaws and imperfections, the overall result has been pretty good. Nearly 65% of America’s households own their homes and that number soars to 75% for White-Americans.
Esteemed think tanks such as the Urban Institute and the Harvard Joint Center for Housing Studies, predict that in the future, more than 80% of new homeowners will come from Brown and Black communities. I become cynical when consumer advocate groups react to this prediction by suddenly becoming outspoken and suggesting there is something wrong with the system and that home sellers, who by definition are wealthier and more experienced, are paying too much and need to be better protected.
Needless to say, I don’t like where this is going. The outcome is far from determined. NAR is appealing the verdict, and NAHREP is leading the effort to ensure that policymakers and civil rights groups understand what is really at stake.