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.
Winners
Home Sellers
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.
Losers
First-Time Buyers
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...
