Understanding Real Estate Commissions in Denver: A Deep Dive - Part 2

Welcome back to our deep dive into real estate commissions. In Part 1, we explored the historical context of how commissions came to be. Today, we're navigating the present landscape—demystifying how real estate commissions are set, who actually pays the agents, and the current issues shaping our market. With Denver's real estate scene more dynamic than ever, understanding these aspects is crucial for anyone involved in buying or selling property.

Current Issues Facing Real Estate Commissions 

Real estate is a commissions based role.  Realtors only receive a paycheck when a home sells.  Both of the representing agents (the Listing agent and the Buyer's Agent) are typically paid out of the proceeds of the sale. In the rise of consumer based self-service (due to sites like Zillow, Homes.com, etc.), consumers are opting to take on the role of searching for homes. While this used to be exclusively available to Realtors, the sites can make finding your next home fun - scrolling through the new listings, admiring the photos and deciding which ones to personally. Searching for homes has become a hobby to some.  After all, who doesn't want to see pretty houses?

That's definitely a fun part of being a Realtor, too.  But did you also know that our role is governed by a Code of Ethics?  As a Realtor, we belong to an association called "National Association of Realtors" (NAR).  This is a group that supports our interests, creates a Code of Ethics that all Realtors must follow and ensures that we continue to enhance our education and remain knowledgeable in our trade. 

And that's who you've likely heard about in the news lately: The  "Sitzer-Burnett" case against NAR.   

What is the NAR Lawsuit All About?

In summary, the Sitzer-Burnett is a class-action lawsuit that was filed in Missouri federal court by a group of home sellers in the state against NAR and other defendants, including Anywhere, Berkshire Hathaway HomeServices, Keller Williams and RE/MAX. The plaintiffs claimed that real estate commission rates are too high, buyers’ representatives are paid too much, and NAR’s Code of Ethics and MLS Handbook, along with the corporate defendants’ practices, lead to inflated commission rates. 

Here are the highpoints of this case:

• In the October 2023 trial, the plaintiffs raised concerns about cooperative compensation in real estate transactions.
• Cooperative compensation refers to when a listing broker offers compensation to the cooperating broker, which can vary in amount, including $0.
• The National Association of Realtors (NAR) presented evidence demonstrating how cooperative compensation benefits consumers and maintains a competitive marketplace.
• Despite NAR's arguments, the jury ruled in favor of the plaintiffs.
• NAR believes the verdict was influenced by legally erroneous rulings by the judge, which prevented the jury from considering the procompetitive benefits of NAR's policies.
• Post-trial briefing is expected to conclude in March 2024, with any potential appeal likely to be briefed and argued later in the year.
• Following the verdict, plaintiffs' attorneys in other jurisdictions have filed similar complaints, which NAR intends to address formally in court.
• Transparency and Consumer Awareness: Discuss the growing demand for clarity about how commissions are structured and the impact on consumers.
• Legal Challenges and Regulatory Scrutiny: Briefly touch on recent lawsuits and regulatory changes affecting commission practices, emphasizing local implications.

Here's an interesting excerpt from industry expert, Steve Murray:

A few days ago, the three main defendants—National Association of Realtors, Keller Williams and HomeServices—in the Sitzer/Burnett case filed two motions with the court. The first was a motion for judgement as a matter of law and the second was a motion for a new trial. These actions by the three firms are all a matter of public record. I have read them and talked with one of the defendants to get some clarification and an explanation of the basis of the filings.

I am not an attorney, but I have served as an industry expert witness in three other Sherman Act federal-level cases, at least one state level restraint of trade case and over 60 other cases. So, while I make no claim as to the specific deep legal issues, I have some familiarity of antitrust actions and more in the conduct of legal actions in a courtroom.

So, with my modest experience in such matters let me comment on what I read in these motions.

No evidence of collusion

First, according to the filings, the plaintiffs in the case presented no evidence at trial as to any collusion or conspiracy among the defendants. There were no meeting notes, no emails, no joint or concerted actions by or between the defendants in the implementation of the Cooperative Compensation Rule. The defendants say there was no evidence presented at the trial that excludes the possibility of independent action by any of the defendants.

No evidence that plaintiffs suffered harm

According to the filings, there was no evidence that any of the plaintiffs suffered harm from the actions of the defendants. They entered into listing agreements with seller agents and agreed to the terms of those agreements without being under any duress to do so.

RealTrends research establishes that the use of real estate agents, using access to the Cooperative Compensation Rule, has become more attractive over time, not less, as evidenced by the increased use of agents in selling and buying property.

Second, previous courts had found that the rule of reason should apply to MLS-focused cases, and not under the per-se standard. The per-se standard establishes that the defendants did operate a system that itself was collusive or whose outcome was to restrain trade. This court ignored all those precedents.

Issues with the damage award

The damage award was calculated by imputing that the entire “3%” was awarded to buyer agents by listing agents for the MLS regions in Missouri for the seven years of the class period. That is how they got to $1.8 billion. Even though evidence at trial showed that the actual cooperative commission paid was lower than this amount, the jury awarded all of it.

According to the filings, the jury and the court assigned no value to the services provided by buyer agents to any of the sellers in any of the tens of thousands of transactions contemplated in the award for damages. The argument was made that the court did not require the plaintiffs’ experts to run any actual calculations of damages, just chose a number based on a fictional commission rate that has not existed in the market for years.

Missouri law permits sellers and their agents to compensate buyer agents

One last item—Missouri state law it is permitted for sellers and their agents to compensate buyer agents. This evidence was not allowed to be presented to the jury.

I want to express what readers should know. At least at the Federal level, the U.S. Department of Justice and the Federal Trade Commission have had the Realtor organization and the industry in their sights for an exceedingly long time, and, in my opinion, not in a favorable way. 

How Are Real Estate Commissions Set?

Currently, the commissions associated with the real estate transaction are set when the agent secures a listing with a seller.  As part of the listing agreement contract with the seller, they discuss and negotiate commission and agree on a fee (typically a percentage of sale) and how/if this will be shared with the agent who brings a buyer.  The agreement to share or offer a commission to an agent that brings a buyer is called "Cooperative Compensation" or co-op.  There's a common misunderstanding that there is a standard commission rate for Realtors.  In reality, the commission rates vary between Realtors and are based on the services they provide, the market conditions and of course following any agency policies in place by their office (ie. RE/MAX, Keller Williams, etc.).

There are several factors that come into consideration in this commission discussion. The type of market can be one of the biggest influences.  We are currently in a sellers market (fewer homes available than buyer demand) but during the real estate crash, we were in a 'buyers market' (with more homes available than buyers).  During that period, some sellers were offering extra financial incentives to any agent that brought a buyer to the sale. 

As you can see, the commission costs are indirectly included in the sale price of homes.  As outlined in our Part 1 article, this approach was initiated based on public demand that the buyers have independent representation of their interests. 

Who Pays Buyer's Agent Commission?

One of my biggest pet peeves is when a Buyer's agent says their services are "free".  You might hear this from an agent who is trying to secure a buyer to work with them ("work with me - I'm FREE").  UGH. In reality, as you can see from above, their services are not free.  Now this is where experience comes in.  A seasoned agent who works with a buyer will be honoring the fiduciary responsibility and negotiating on behalf of their buyer to get the best terms and conditions possible.  That's why you need to carefully consider what agent you hire to represent you on the purchase of your home. If an agent sees you as a paycheck and isn't putting your interests first ... run.  In fact, in 2023, the average agent in the U.S. had one or zero transactions.  In that circumstance, it would be easy to see an agent wanting a deal to close (and get a paycheck) versus making sure it's the right deal and approach for their buyer.

I'm not sure where you might stand regarding real estate commissions. And I'm not here to debate your perspective or justify. Partly because every agent is different and offers different services - so it's up to the agent and the seller to decide what is equitable compensation for efforts.

But here's a perspective you may not have considered ... What happens if the buyer's agent commission is no longer part of the commission paid to by the Seller?  This could be an end result from the current litigations. We will unpack what this could look like in Part 3 of this series.  And trust me, there are some impacts that you'll want to consider. 

As we’ve seen, the landscape of real estate commissions is complex, influenced by a myriad of factors from market dynamics to legal regulations to office policies. For buyers and sellers alike, being informed about how commissions work is key to navigating real estate transactions successfully. Stay tuned for Part 3, where we'll explore potential future changes and how they might affect you.  Be sure to subscribe for updates!

If you're considering selling or buying, please don't hesitate to reach out for guidance. I always have an opinion and love helping. Find out more about our programs and options here.