Legal Update: Proposed Settlement in Sitzer-Burnett V. National Association of REALTORS® (NAR)

A significant development has emerged that promises to reshape the industry's approach to broker commissions and the way real estate professionals engage with consumers. The recent proposed settlement in the Burnett v. NAR litigation (referred to in this article more accurately as the Sitzer-Burnett litigation) and its related cases marks a pivotal moment for the National Association of Realtors^® (NAR), its members, and the broader real estate community. This article aims to dissect the nuances of the settlement, its implications for the industry, and what it means for both real estate professionals and consumers moving forward.

The Impetus for Change

The Sitzer-Burnett litigation, along with subsequent copycat cases, has cast a spotlight on the practices surrounding broker commissions in the real estate industry. At the heart of these legal battles were concerns over how real estate professionals are compensated and the transparency of these compensation mechanisms to consumers. that After months of litigation and negotiations, a landmark proposed settlement has been announced, subject to court approval, that seeks to address these concerns and chart a course for the future of real estate transactions.

Background of the Litigation

At the heart of the Burnett-Sitzer litigation is a profound dispute over the traditional commission-sharing model facilitated by NAR. Plaintiffs in the case argue that NAR's policies, which have long dictated the dynamics of commission sharing between listing and buying agents, contravene antitrust laws by artificially inflating commissions and stifling competitive practices.

            As mentioned above, at issue in this litigation is the longstanding practice wherein listing agents share a portion of their commission with the buyer's agent—a policy enforced through the rules governing Multiple Listing Services (MLS). The plaintiffs contend that this arrangement disadvantages consumers by maintaining high commission rates that are resistant to competitive pressures. In contrast, NAR has argued in the litigation that this practice creates no such problem since NAR does not enforce a particular dollar or percentage amount of commission to be offered, merely that something be filled in in the offer of compensation field. In reality, some listing agents have in fact developed the practice of putting “$0” in the MLS as an offer of compensation.

Examination of the Proposed Settlement

In a bold move, NAR has proposed a $418 million settlement, suggesting a paradigm shift in its approach to commission-sharing policies. This proposed settlement, however, is subject to judicial review, with the court's approval necessary for its enactment. This is likely to occur in mid-July of 2024.

Central to the proposed settlement are measures aimed at dismantling the current commission-sharing framework. Key proposals include prohibiting the practice of offering commissions through the MLS and mandating the use of buyer representation agreements. These changes are designed to foster greater transparency in real estate transactions and encourage a more competitive marketplace.

The Posture of the Case

As the legal proceedings unfold, the posture of the case remains fluid. The proposed settlement represents a negotiated understanding between the parties involved, yet it requires judicial endorsement to take effect. The legal community and real estate professionals alike are keenly observing the court's deliberations, recognizing the settlement's potential to catalyze sweeping changes in the industry. While many real estate agents have resorted to panic, it is wise to refrain from jumping to any hasty conclusions at this point as the case is still unfolding and there is likely to be a vast amount of guidance, new forms, and best practices promulgated by NAR and local area real estate associations by the time the proposed settlement is approved (if at all).

Key Terms of the Settlement

The proposed settlement encompasses several critical components designed to alleviate the legal pressures on NAR members and introduce significant changes to the industry's operational practices:

• Release of Liability: A broad release from liability for NAR, its over one million members, and associated entities concerning the claims brought forward in the Sitzer-Burnett case and related litigation. This release signifies a monumental relief for a vast majority of the industry's professionals.
  

• Compensation Practices: A pivotal change is the prohibition of listing compensation offers on the MLS, effective mid-July 2024. This move is intended to encourage off-MLS negotiations and consultations, thereby fostering a more transparent and flexible compensation landscape. Notably, however, seller concessions through MLS would still be permitted (i.e., to cover certain closing costs). In addition, the settlement leaves open the possibility of offers of compensation through off-MLS negotiations with real estate professionals.
  

• Written Representation Agreements: Another significant change is the requirement for MLS participants working with buyers to enter into written representation agreements. This requirement aims to enhance clarity and understanding between real estate professionals and their clients regarding the services provided and the compensation involved. Many real estate professionals are already accustomed to using buyer-side agreements (i.e., the Buyer Brokerage Agreement); this settlement will simply make the use of such an agreement mandatory when working with a buyer.
  

• Settlement Payment: NAR has agreed to a settlement payment of $418 million over approximately four years, a testament to the organization's commitment to resolving these legal challenges and moving forward. Notably, NAR does not admit any wrongdoing by virtue of this proposed settlement payment.

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Implications for the Real Estate Industry

Should the court approve this proposed settlement, the real estate industry could witness a significant transformation in how commissions are negotiated and disclosed. This pending change invites a broader discussion on the value proposition of real estate professionals in a changing market.

For real estate agents, particularly those who have historically relied on commissions from listing agents, the settlement could necessitate a change in practice, documentation, and negotiation techniques. Agents may also need to innovate their service offerings and articulate their value to both buyers and sellers in a new light, emphasizing the expertise, negotiation skills, and market knowledge they bring to the table.

For consumers, the settlement’s impact may result in increased competition between real estate professionals, which may result in lower standards for compensation. Proponents of the litigation’s result argue that the ability to negotiate compensation arrangements directly with professionals, coupled with the requirement for written agreements, will empower consumers with a clearer understanding of the services they receive and the costs involved.

Looking Ahead

As the real estate industry navigates these changes, the adaptability and resilience of agents and brokers will be crucial. The proposed settlement not only resolves a significant legal challenge but also sets the stage for a more competitive real estate market. As we move towards the implementation of these practice changes in mid-July 2024, the focus will be on ensuring that real estate professionals and consumers alike are well-informed and prepared for the new landscape.

The settlement process, subject to court approval, will unfold over the coming months, offering opportunities for feedback and adjustment. It is a time for reflection, education, and adaptation as we collectively strive to uphold the values of transparency, fairness, and consumer choice that lie at the heart of the real estate profession.

As always, we remain dedicated to providing our readers with the latest legal insights and guidance in the real estate industry. Stay tuned for further updates as we continue to monitor the developments in this landmark settlement and its impact on the real estate landscape.

It is crucial that you stay informed as the developments in the case and proposed settlement unfold further. For more information and updates, please visit our website and follow us on social media for our ongoing coverage of this and other important developments in the real estate industry.

Frequently Asked Questions (FAQs)

In light of the proposed settlement, many real estate professionals are left to wonder about the impact on their industry in general, and their careers specifically. If you are in this position, we encourage you to seek answers first and foremost from your broker, and then your local association of real estate professionals. If you have any remaining questions and are a member, please also consider contacting the Florida Association of Realtors^® via their legal hotline as well.

The hypothetical questions below are not a substitute for seeking guidance as suggested above. However, these questions are intended to provide you with some quick reference points for further discussion with your broker, your local area association of real estate professionals, and your colleagues. In each of the questions, it is assumed that the proposed settlement will be approved as-is. However, please note that the proposed settlement is just that—it is a proposal, and is subject to change. Therefore, the answers to these questions may change as well.

1. Q: Who stands to be impacted by this settlement, and what does this mean for smaller vs. larger brokerages?
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   The settlement encompasses NAR, its members, state, and local real estate professional associations, along with brokerages possessing a 2022 residential transaction volume of $2 billion or less. This ensures that a vast majority of the industry, barring larger brokerages and HomeServices of America, is affected by its provisions. And, while it may give the appearance of leveling the playing field, smaller brokerages and independent agents will need to be particularly adept at adapting to these changes. It's a call to action for all, regardless of size, to reassess and innovate their approach to real estate transactions.
   
   In short, if you use MLS or are a REALTOR^®, this settlement will affect you in some way.
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2. Q: How should we navigate commission negotiations to protect our earnings?
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   With the dismantling of the MLS framework for commission offers, real estate agents are encouraged to proactively showcase their value to both sellers and buyers.
   
   Listing agents (a/k/a seller’s agents) may face pressure from sellers, who may now think that the listing agent is going to keep all of the commission instead of co-brokering. Listing agents therefore need to be prepared to explain that they may still need to co-broke, just outside of MLS, and/or be prepared to articulate their value and entitlement to a full commission.
   
   On the other side, selling agents (a/k/a buyer’s agents) will need to be prepared to either (a). ask their buyer for a fee, (b). ask the seller’s agent for commission outside of MLS, (c). ask the seller’s agent (or seller directly, if a FSBO) for a concession to cover their fee, or (d). any combination of these options.
   
   While this shift may seem daunting, it's an opportunity for agents to highlight their indispensable role in the transaction process, ensuring their compensation reflects their hard work and dedication.
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3. Q: What modifications are required in an MLS in light of the settlement?
   
   ‍MLS platforms are now tasked with making significant adjustments to how compensation information is presented. This change, aimed at fostering a more transparent market, will require agents and brokers to refine their listing strategies. It's a chance to improve direct communication with clients about compensation, aligning with the industry's move towards greater transparency.
   
   What this also specifically means for selling agents (a/k/a buyer’s agents) is that they can no longer simply peruse a listing to find out if and how much of a co-broke commission is being offered by the listing agent. Instead, they would have to specifically and separately reach out to the listing agent to find out whether there is any offer of compensation.
   
   What may end up becoming commonplace, however, is for the listing agent to offer a “seller concession,” which is intended to cover the fee that the buyer would have to pay their agent under their buyer brokerage agreement. This could theoretically result in the same dollars-in-pockets, so to speak, but simply through a different channel.
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4. Q: With the mandate for buyer representation agreements, how can we ensure these are beneficial for both agents and clients?
   
   ‍The introduction of mandatory buyer representation agreements is a significant shift, emphasizing the need for clear communication between agents and clients. Look for updated, standardized form contracts to be promulgated by NAR and the Florida Association of Realtors^® in the near future.
   
   This change can be seen as an opportunity to solidify the agent-client relationship, ensuring that both parties are on the same page regarding the services provided and the compensation expected. Selling agents (a/k/a buyer’s agents) must be prepared to articulate the new development to buyers who are used to not having to pay anything for their agent. They will need to be able to explain to the buyer why there is still value in paying for a real estate professional’s expertise and how—for example—the agent will still seek to have their fee covered by the listing agent if and where possible outside of MLS.
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5. Q: Should the settlement fail to gain approval, what are the implications for our industry practices?
   
   ‍A lack of approval could see a continuation of current practices until a new settlement is reached or a verdict is rendered. It emphasizes the importance of remaining adaptable, staying abreast of developments, and preparing for a range of outcomes to safeguard your professional interests.
   
   As it stands, we are several months away from these changes going into effect. Much could change between now and then. Therefore, the best thing to do is to remain calm and begin planning proactive steps to improvise, adapt, and overcome these new challenges.
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6. Q: As Florida real estate agents, what steps can we take to seamlessly integrate these changes into our operations?
   
   ‍Immersing yourself in the details of the settlement, engaging in continuous professional development, and revising your business models to align with the impending changes are crucial. This proactive approach will ensure you remain competitive and compliant in the new real estate landscape.
   
   As mentioned above, new standardized forms will become available in the near future. Once they do, quickly become familiar with them and practice explaining them to your colleagues—so that you can be fully prepared to explain them to your client when the time comes.
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7. Q: For those of us dependent on buyer-side commissions, what strategies can we employ to adjust to the new compensation environment?
   
   ‍Diversifying your compensation models and enhancing negotiation skills will be vital in articulating your value to clients. Whether through fixed fees, sale price percentages, or other creative arrangements, clear communication about the services you offer will be paramount. Here are some specific suggestions:
   
   Diversify compensation models:

• Fixed Fee Services: Consider offering services for a fixed fee, which can cover specific parts of the buying process, such as property searches, negotiations, or closing assistance. This model provides clarity and simplicity for clients who prefer to know upfront costs.
• Tiered Service Packages: Develop tiered service packages that offer varying levels of service and expertise at different price points. For example, a basic package might include property searches and viewings, while premium packages could offer additional services like negotiation support, closing assistance, and post-purchase consultations.
• Hybrid Commission Models: A hybrid model combines a lower fixed fee for initial services with a reduced commission rate upon successful purchase. This approach can align the interests of the agent and the buyer, ensuring both parties are committed to a successful transaction.
  
  ‍Enhance negotiation skills:
  

• Value Proposition: Clearly articulate your unique value proposition to potential clients. Explain how your expertise, local market knowledge, negotiation skills, and network can benefit them in their property search and purchase process. Be prepared to itemize and add more specific value drivers as part of your proposition (e.g., strategic partnerships with vendors such as title companies and inspectors offering increased benefits that are included in buyer brokerage agreements).
• Educational Approach: Use an educational approach to help clients understand the real estate buying process, including the complexities and potential pitfalls. By positioning yourself as a knowledgeable guide, you can justify your commission as a valuable investment in their success.
• Success Stories: Share success stories and testimonials from past clients to illustrate how your involvement led to better outcomes, such as securing properties below asking price, finding hidden gems, or navigating challenging negotiations.
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8. Q: Exploring the necessity and impact of buyer agency and representation agreements further, how do these shape our engagements with clients?
   
   ‍This is going to create a new step in the process of 'selling’ a buyer on why they should engage a real estate professional. Normally, one of the biggest selling points of engaging a real estate agent as a buyer is the fact that it typically does not cost anything. Now, that general rule will likely become the exception. The baseline will probably be that the buyer must pay for the agent’s services unless the agent is able to secure payment from the seller or listing agent.
   
   Due to this new paradigm, agents should again be prepared to articulate their value and the benefits of working with an agent instead of going it alone.

9. Q: As we adjust to direct negotiations for buyer agent compensation, what best practices should guide our discussions?
   
   ‍Navigating away from MLS-listed compensation requires a strategic approach to discussing your fees. Being transparent about your services, the value you provide, and why your compensation aligns with this value will be essential to maintaining a robust client base and ensuring fair remuneration.
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10. Q: Will there be any impact on talent mobility and relocation programs?
    
    ‍Yes, and, considering the settlement's significant impact on talent mobility and relocation programs, there are several strategies and considerations that can help real estate professionals, employers, and relocation management companies (RMCs) support clients and manage costs more effectively. Here are a few examples:

• Cost Analysis and Budgeting: Perform a detailed analysis of relocation-related costs, including buyer agent fees, to assist employers in creating accurate budgets.
• Negotiation and Compensation Models: Encourage open discussions about buyer agent fees and seek volume discounts or fixed-rate agreements for companies with significant relocation needs.
• Leverage Technology: Adopt virtual tours and digital document processing to enhance efficiency and reduce costs during the relocation process.
• ‍Educational Initiatives: Offer training for HR departments and relocating employees to ensure they are well-informed about the new real estate processes and manage expectations effectively.

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NOTE: No affiliation or representation of the National Association of Realtors^®, nor any of its regional affiliates or members thereof, is implied or intended by virtue of this article. Readers should not substitute this article for legal advice on their own unique legal situation.