A Decision That Could Radically Transform Silicon Valley Real Estate

In a pivotal legal development, a Kansas City, Missouri jury issued its verdict on October 31, 2023 finding the National Association of Realtors (NAR), HomeServices of America (which includes the Berkshire Hathaway and Intero brands, amongst other), and Keller Williams guilty of conspiring to inflate or uphold high commission rates. This verdict arose from the Sitzer/Burnett buyer broker commission lawsuit.

Verdict and Damages

The decision in this case could have profound implications on the real estate industry − even beyond the massive $1.78 billion verdict (which could be tripled if the plaintiffs are awarded treble damages). If upheld on appeal, this decision should result in dramatic changes to the way real estate agents conduct business and are compensated nationwide.

The jury’s verdict arrived after over two weeks of testimony presented by both the plaintiffs and the defendants, and less than three hours of jury deliberations. Throughout the class-action trial, the plaintiffs contended that, despite the existence of antitrust rules and regulations, the defendants knowingly violated their own rules to uphold elevated commission rates. Put another way, the real estate industry pays lip service to antitrust concepts, but the industry conduct is inconsistent with its rhetoric.

Not surprisingly, a spokesperson from HomeServices, has already expressed their intention to appeal the Missouri ruling and other defendants are likely to follow suit. Therefore, the legal proceedings may not conclude with this verdict. Similarly, before the ink was even dry on this decision, class action plaintiff attorneys have reportedly set their sights on additional defendants.

It’s worth noting that this lawsuit originally included RE/MAX and Anywhere Real Estate (including the Coldwell Banker, Century 21 and Sotheby’s brands, amongst others), as defendants. However, RE/MAX reached a settlement of $55 million in September, and Anywhere Real Estate (formerly known as Realogy) settled for $83.5 million in October. These settlements constituted resolutions in this lawsuit, as well as two other commission-related lawsuits (Moehrl and Nosalek), for these two defendants.

Likely Impact on Silicon Valley Real Estate

In the wake of the Sitzer/Burnett case, which saw the abovementioned Federal jury’s verdict, the question remains: How will the real estate industry respond and adapt to this decision? It is likely there will be substantial changes to the way buyer’s agents are compensated. Further, the heightened level of transparency and competition will likely result in downward pressure on the overall commission paid to buyer’s agents and/or an increase in the level of services provided.

“Traditional” Commission Structure

Under the most common structure employed by Realtors^® in the United States, a homeowner seeking to sell their property contacts one or more agents to discuss listing the property. After selecting an agent, the homeowner and the listing agent agree on the commission amount, which is influenced by factors such as the agent’s experience, the services they provide, the breadth and depth of marketing, and various other considerations.

However, the listing agreement also stipulates the commission paid to the buyer’s agent. Notably, one of the aspects detrimental to the real estate industry’s case was the requirement that a listing couldn’t be added to some Multiple Listing Services (“MLS”) databases unless it was agreed that the seller would pay a commission to the buyer’s agent.

Regrettably, the buyer agent’s level of experience and the extent of services they provide are typically unknown at the time when the seller is obliged to commit to a specific commission rate. Furthermore, there is usually no mechanism for reducing the buyer’s agent commission in cases where the buyer’s agent performs only limited services. In fact, most listing agreements provides that the listing brokerage/agent retains both sides of the commission if the buyer finds the home on their own without a buyer’s agent or works with the listing agent directly. It’s important to highlight that DeLeon Realty stands in the minority of brokerages by not engaging in the common practice of receiving commissions from both sides of any transaction, thus giving buyers a commission-free option.

In Silicon Valley, as well as many other places across the country, buyers have taken on many of the responsibilities traditionally associated with the buyer’s agent. These buyers often sift through available listings on public websites, review the sale prices of similar properties online, attend open houses, and determine the price they want to offer for a property. They then engage a Realtor^® after performing some or all of these tasks independently. Consequently, the Realtor’s^® involvement can be as minimal as acting as a scribe, filling in blanks on a pre-printed form and ensuring the buyer signs required disclosures, possibly without adequate explanation.

Conversely, experienced and high-volume buyer’s agents may offer in-depth neighborhood analysis, a comprehensive review and summation of all disclosed information, expert analysis of a home’s appreciation potential, early access to “off-market” homes that often sell for less than publicly marketed properties, and complimentary access to an in-house stable of experts in areas like law, tax, interior design, and construction.

The issue, from the plaintiff’s perspective, is that buyers are forced to “pay” for services they may not need or even want, despite the flow of funds being nominally from the seller’s proceeds. The plaintiffs’ argument seems to rest upon the notion that the price is somehow inflated to include the commission so the buyer is effectively paying the commission as part of the purchase price.

Interestingly, DeLeon Realty’s distinctive business model could become the industry standard in the future. For years, we have provided self-reliant buyers the opportunity to purchase our listings without any commission going to a buyer agent. If a buyer discovers a DeLeon listing independently, we appoint an experienced agent from the buyer’s side of our company to assist them in understanding disclosures, pricing for similar properties, and other important considerations. The key distinction between our approach and the problematic “traditional” approach examined in the aforementioned case is that DeLeon Realty waives 100% of the buyer’s-side commission when the buyer comes directly to us. Alternatively, buyers have the choice to work with an outside agent if they believe the services those agents offer are valuable to them. In those circumstances, the outside buyer’s agent receives a commission that is competitive with what is typically paid for other properties.

Assuming this verdict is not overturned on appeal, it is likely to usher in favorable changes for clients in the industry. Sellers will continue to evaluate and select the best listing agents to represent them in the sale. Similarly, buyers will start to engage in more comprehensive due diligence when choosing the representation that best suits their needs, experience, and other criteria. Naturally, the compensation of the buyer’s agent will be linked to their inherent value, not an arbitrary amount set in a listing agreement. Competition will likely elevate the quality of representation while driving down commissions.

As a result, the most capable agents will continue to thrive, enjoying a comfortable living, while weaker agents may face challenges unless they enhance their performance.

By Michael Repka