Burnett v. NAR Verdict Won’t Immediately Change Broker Incentives
Violinists must move their left hand up and down the fingerboard to play. When the hand is closest to the violin's scroll, it is said to be in first position. As the hand moves up the fingerboard toward the bridge, the hand will move to second position, then third position, and so forth. The highest position on the violin is 14th or 15th position. But most violinists stop counting when they reach 7th or 8th position and just play the high notes.
Knowing how to play in different positions is not only crucial to playing high notes on the violin. Further, playing in high positions on a lower string can add expressiveness to particular compositions. Plus, some passages are easier to pay in a particular position.
Most violinists don’t learn the positions in numerical order. They start with first position but then learn third position, followed by second, fifth, and fourth positions in that order. Some say the order teaches the positions in order of their difficulty. Yet, fourth position, where the hand rests against the violin body, is possibly easier to learn than third.
Regardless of the reason for this teaching order, even after decades of playing, many violinists (myself included) are most comfortable in odd-numbered positions. Even when a passage is best suited for a second position, we often attempt to play it in the more comfortable first or third positions.
I recently started lessons with a new violin teacher who suggested the odd-numbered pedagogical practice restricted playing. Daily, I practice etudes in even-numbered positions. By challenging the odd-numbered-position paradigm, I am becoming more familiar with where notes are on the fingerboard, and my playing is becoming more flexible. Most importantly, I can better adapt my left hand to the needs of a particular musical passage.
Like violin pedagogy, real estate brokerage commissions for home sales have followed a set practice for decades, even though it might not be the best arrangement for all involved. Sellers listed their homes with a real estate broker, who then listed them on the Multiple Listing Service (MLS). The MLS enabled brokers representing buyers (Buyer's Broker) to view the listing and arrange to show the home. Since Buyer’s Brokers deserve to be paid for their services, a condition for MLS listing was that homeowners agree to pay Buyer’s Brokers a set commission.
In the past few years, several class action lawsuits have been filed against National Association of Realtors (NAR) (which, through affiliates, controls most MLS) and several large brokerage companies claiming this MLS requirement impairs the ability to negotiate commissions. Plaintiffs claim the result is higher commissions than if homeowners could negotiate commissions.
On October 31, 2023, a Kansas City federal jury found for the Plaintiffs in Burnett vs. NAR (Burnett) and ordered the Defendants to pay $1.8 Billion in damages. Although this verdict eventually is likely to change how homes are sold, NAR is filing post-trial motions and intends to appeal the verdict, so it may be several years before the impact is known. This article discusses the allegations in Burnett and similar cases and the changes home buyers and sellers might see in the near future.
How Do Multiple Listing Services Work?
MLS platforms are centralized databases real estate brokers use to list and share information about properties that are for sale. There are hundreds of MLSs throughout the United States, most of which are owned and operated by local real estate associations. Generally, a real estate broker or agent must be a member of the association that owns the MLS before they can obtain full subscriptions to MLS.
When a seller lists their home with a real estate broker, the broker or agent (which I'll refer to interchangeably as brokers or agents despite the technical difference between them) enters the property into the local MLS. An MLS listing provides information about the home to other MLS members. Advocates claim the MLS enhances the home’s visibility to potential buyers, resulting in quicker sales and higher sale practices.
Homeowners benefit from quicker sales and higher sale prices. But so do real estate brokers and agents, who get paid sooner and whose commissions usually are based on a percentage of the sale price.
MLSs also can streamline the home-buying process. Buyer's agents can use the MLS to quickly identify homes that meet their client's needs and can use the MLS to arrange home showings and even negotiate offers with the listing agent. Since MLS platforms make information about available homes widely available, they arguably promote efficiency in the residential real estate market.
To ensure that both the seller’s and buyer’s agents are compensated for the sale, residential real estate commissions typically are structured such that the seller pays a commission, which is split between the listing/seller’s agent and any buyer's agent. MLS also informs buyer's agents of the commission arrangement so they know the compensation they will receive for selling the home.
Advocates of the MLS system say that by making property information widely accessible and fostering cooperation between agents, the MLS helps both buyers and sellers by promoting cooperation among agents. According to those advocates, this process ensures that commissions are fairly distributed and promotes transparency and efficiency in the residential real estate market.
Although NAR does not own any MLS, many owners are local NAR affiliates. NAR plays a significant role in establishing individual MLS practices. NAR’s Multiple Listing Policy Handbook (MLS Handbook) describes the practices that MLS operated by NAR affiliates must follow. NAR’s guidance is highly detailed. For example, the 2023 MLS Handbook consists of 185 pages and describes discipline individuals might receive for violations of MLS policies.
Alleged Antitrust Violations
Burnett and similar cases claim MLS rules violate antitrust laws. Some of the plaintiffs' primary allegations revolve around the “Cooperation Rule” and the "Buyer Broker Commission Rule"(Commission Rule). Plaintiffs claim that together, these rules stifle competition in the residential real estate market.
Cooperation Rule
The Cooperation Rule requires member brokers to cooperate in the sale of homes. As a condition to listing on the MLS, the seller’s broker agrees to share information about the house with other MLS members and cooperate with them to facilitate the sale. One way MLS members must cooperate is by offering a commission to a buyer’s broker involved in selling the house to their client.
Buyer Broker Commission Rule
The Commission Rule is related to the Cooperation Rule. As a condition to listing on their systems, MLS requires the seller's broker to ensure that sellers offer a specific, non-negotiable commission to buyer's agents. Plaintiffs claim that Sellers are disincentivized from negotiating buyer’s agent commissions lest they forfeit the opportunity to list their homes on MLS and risk less market exposure resulting in a lower sale price. The result, plaintiffs say, is that buyer's agent commissions remain at an artificially high level.
The lawsuits allege that since MLS are a vital means for marketing a home in the real estate market, they have significant market power. And by tying buyer’s agent commissions to MLS listing, NAR and other defendants are utilizing that market power to control pricing.
In essence, the plaintiffs contend that together, the Cooperation Rule and Commission Rule lead to a lack of competition among real estate brokers, resulting in higher commission rates and costs for consumers. Plaintiffs argue that a competitive market would likely yield lower commission rates.
How Will the Verdict Change Home Sales in 2024?
Since NAR plans to appeal the verdict, it’s likely to be several years before the results in Burnett and similar cases are established. NAR contends that buyer’s broker commissions are negotiable and has informed brokers that Burnett does not prohibit seller's brokers from negotiating commissions with buyer's brokers based on what seller’s broker believes is best for their client. NAR also is encouraging brokers to “continue to combat misinformation and feed the public true information they can rely on.”
Further, there’s no reason to think the market dynamic that aligns both brokers' and sellers' interests in obtaining the highest possible sales price will evolve anytime soon. So, buyers, who are interested in the lowest possible sale price, may continue to be short-changed.
When negotiating contracts and business arrangements, it's critical that parties understand the behavior they are incentivizing. Many, perhaps even most, parties’ behavior is determined by incentives, rather than contract language. Relationships should be structured so all parties are incentivized to act in the desired manner.
The fundamental problem in the residential real estate market is that the buyer's agent's interest is not aligned with their client's. One way to align the buyer's agent's interest with their client's would be for the client to pay their agent's commission. Yet, buyers often are cash-strapped and unable to pay their broker.
Still, the size of the Burnett verdict is likely to drive at least subtle changes in how commissions are negotiated and documented. Brokerage agreements with sellers are likely to include language that appears to give sellers options about buyer’s agent compensation. Yet, as long as there is an “industry standard” commission, most sellers will be reluctant to offer less lest buyer’s agents not show their homes to prospective buyers. Since buyer's brokers must act in their client’s best interest, there is no reason for those agents to recommend otherwise.
In the short run, we may see more “window-dressing” in brokerage agreements supporting the concept that sellers, rather than the brokers, are determining the commission. However, as long as buyer's brokers' compensation is paid by sellers and incentivize the highest possible sales price, without court intervention, the system is likely to remain largely unchanged.
© 2023 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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