Recently U.S. District Court Judge Patti Saris in the Nosalek case against MLS PIN put the real estate industry on notice that the Participation Rule on commissions needs to go.
However, the most explosive damage to the National Association of Realtors and the overall industry would result if the defendants (NAR, Anywhere, HomeServices of America, Keller Williams, and RE/MAX) were to lose one or both so-called bombshell lawsuits (Sitzer/Burnett and Moehrl.)
I recently interviewed James Dwiggins, CEO and co-founder of real estate franchisor NextHome, whose company did over $12 billion in sales in 2022. To be prepared for the worst-case scenario, Dwiggins put together a comprehensive risk assessment examining potential outcomes from the current litigation as well as what their impact might be.
TAKE INMAN’S INAUGURAL SURVEY ON AGENT COMMISSIONS
Nosalek: The canary in the coal mine
In terms of the Nosalek settlement, which was pegged at $3 million, Judge Saris was unhappy that the attorneys would be getting the bulk of the money with the members of the class getting nothing.
Nevertheless, Saris was clear about her feelings about MLS PIN’s version of the NAR Participation Rule, which requires listing brokers to offer a blanket, unilateral offer of compensation to buyer brokers in order to submit a listing to a Realtor-affiliated multiple listing service. She said she “loves” the proposed rule changes in the settlement that would make offering compensation to buyer brokers optional.
Saris also said, “I had problems with that [rule], so I denied the motion to dismiss, and I think two other courts did as well.”
A quick overview of Sitzer/Burnett and Moehrl
Both suits allege that NAR conspired with Anywhere, HomeServices of America, Keller Williams, and RE/MAX to inflate commissions through the Participation Rule, which the Moehrl plaintiffs call the Buyer Broker Commission Rule.
The reference is to the guidelines in NAR MLS Policy Statement 7.23 and the Realtor Code of Ethics that govern commission sharing on the MLS. The complaint alleges that these policies have resulted in price competition among brokers being restrained and seeks damages:
The Buyer-Broker Commission Rule ensures that price competition among buyer brokers is restrained because the person retaining the buyer broker, the buyer, does not negotiate or pay his or her broker’s commission. In addition, the seller’s inflated commission offer cannot be reduced by buyers or their brokers, as Defendants also prohibit buyer brokers from making home purchase offers contingent on the reduction of the buyer broker commission.
Sitzer/Burnett claims that defendants conspired to inflate commissions by requiring all seller brokers to “make a blanket, unilateral and effectively non-negotiable offer of buyer broker compensation.”
Sitzer/Burnett is set for trial on Oct. 16, 2023. Moehrl’s deadline for discovery is set for September, with the trial date expected to be set by mid-October.
The most important point to note about this litigation is that these are antitrust lawsuits. Consequently, treble damages can be applied. These can be in the billions of dollars. The end game may be that buyers will pay their own commissions. In fact, this tremendous sea of change is already upon us:
On June 22, 2023, the New York City Council introduced a bill that would amend the administrative code of the City of New York to require:
An individual who is a representative or an agent of a property owner or a prospective tenant in a residential rental real estate transaction to collect fees charged in the transaction from the party employing the individual. The provisions of this bill would not impact the collection of fees by a landlord or property owner.
Other key issues in the litigation
According to Dwiggins, other key issues in the litigation include the fact that:
NAR is represented by its membership, its directors, which are in many cases represented by the defendants. So, the largest real estate companies in the U.S., (the defendants) have people that are part of these committees that make decisions on how any governance occurs over the multiple listing service.
No. 2, the requirement of offering cooperation in the MLS; if you put a listing in the MLS, you have to offer cooperation on the other side of the deal.
These requirements are what the plaintiffs claim to be a “conspiracy” to fix prices.
Dwiggins went on to explain that NAR’s Clear Cooperation Policy is where the U.S. Department of Justice (DOJ) has been focused, especially on having to post a new listing on the MLS within 24 hours. Dwiggins said:
If you are a member of the MLS, you have to put the listing in the MLS within 24 hours, thereby guaranteeing compensation on the other side of the deal, which benefits the large real estate companies [i.e., the defendants] a majority of the time because they have the most agents.
Best possible outcomes?
The best possible outcome if NAR and the other named defendants lose the lawsuits is that cooperation in the MLS becomes optional, according to Dwiggins. He went on to say:
At a minimum, this is going to happen one way or the other. Cooperation in the MLS becomes optional. You have a use case of Northwest MLS that enacted this (policy) last year in October [and it] hasn’t really changed much. It just hasn’t affected the business the way people thought it would actually occur. I think that’s a minimum that occurs.
Other potential outcomes?
Based upon his conversations with attorneys and industry leaders, Dwiggins outlined the following list of other potential outcomes.
1. NAR and other defendants settle. They open the class further to bring everyone into the settlement, but “there’s only so much money in that pot.”
So, it makes sense to come up with some type of settlement structure that gives everybody a little bit of cash. And essentially, we move on and what I call “remove chess pieces from the table.”
Let’s hypothetically say the settlement was $2 billion. Everybody’s going to throw some money in. NAR comes in and they do an assessment. I hate to say it, some of the math I’ve heard is if a $2 billion settlement [were] paid out over four years, every member pays $400 a year.
In my opinion, if NAR were to assess members $400 more a year in dues for four years to pay for this type of settlement, that would be the death knell for the organization.
2. Cooperation in the MLS becomes optional nationally. Dwiggins believes there is 50 percent chance it may be completely banned.
3. NAR passes a mandatory rule to its MLS policy and Code of Ethics that requires buyer’s brokers to have signed buyer broker agreements that clearly spell out compensation terms signed before showing MLS-listed properties. Some dual agency states have hurdles to get past in order to do this.
4. NAR lobbies legislative policy changes so buyers’ agent compensation can be financed in the loan.
5. There’s 50 percent chance that the Clear Cooperation Policy is rescinded, and off-market listings become normal.
6. Brokerages, as well as local MLSs and Realtor associations will consolidate, reducing costs and relying more on virtual operations.
7. There will be a 25 percent to 50 percent reduction in buyers’ agents.
8. Unless dual agency is banned at the state level (which is currently the case in nine states), more double-ended deals will occur.
9. Flat fee and hourly service models gain traction.
10. There’s a 100 percent guarantee that pressure on buy-side commissions will occur.
11. Buyer agents are either paid by the buyer (directly or financed) or paid by the seller through the purchase agreement.
12. Stock prices for publicly-traded companies and real estate portals could take a major hit if there is an unfavorable outcome for the defendants.
A major wildcard
The federal judge presiding over these matters could ban cooperation on the MLS. This is not only within the judge’s purview, it could happen as soon as November 2023 in the Sitzer/Burnett case. This would be a huge blow to the industry, but most notably, to first-time buyers who cannot afford to pay the commission and may decide to transact without representation.
Everyone keeps saying this is going to take five to seven years to play out. That is partially true in the sense of the damages portion of this case. The key use cases will take time because whoever loses is going to appeal, guaranteed. That might take five to seven years.
But what if the judge says that while the appeals are going on, there’s an injunction in place where cooperation is no longer allowed in the multiple listing services?
Major risks if the suits are not settled
Failure to settle these suits could force a complete overhaul of the industry:
- Copycat lawsuits ensue nationally. Brokerages, MLSs, and associations across the country are all named.
- Errors and Omissions (E&O) Directors and Officers (D&O), and General Liability (GL) insurance [would not pay] because these are antitrust claims.
This can result in massive bankruptcies taking place across the industry.
How can the industry prepare?
The most important step that the industry can take across the board is to make buyer-broker agreements mandatory in every transaction. Dwiggins described what this would entail.
Where buyer broker agreements are required before a listing [can be posted] in the MLS has shown that is a smart, tactful decision that should be enacted today. There are a lot of things that need to be worked out about that [especially] if dual agency is banned in your state. But in general, it should happen. It’s important for fiduciary to the buyer, it creates less looky-loos coming through a property for the seller [because] they know that there’s actually a genuine client working with an agent. There’s [also] no downside from a consumer perspective.
It also levels the playing field, so it’s not just one agent asking for a buyer broker agreement — it’s a requirement. By the way, there are 12 states currently in the U.S. that require this anyway.
He went on to say:
I don’t think you’ll see the [Federal Trade Commission] or the DOJ have an issue with any of that. It’s pro-consumer and they’ve been wanting to establish fiduciary for a long time — you’ve now done it. That is a smart move that should occur.
Dwiggins also made the following suggestions for NAR, MLSs, brokerages, and agents to be better prepared for what’s coming.
NAR should:
- Rescind the Buyer Broker Commission Rule to make it optional since MLSs are going to do it anyway.
- Immediately pass a mandatory rule to its MLS policy and Code of Ethics that requires buyer brokers to have signed buyer broker agreements that clearly spell out compensation terms signed before showing MLS-listed properties.
- Mobilize national lobbying resources to explicitly allow mortgage loans to finance the buyer broker compensation and educate members on how to talk to consumers about the value of buyer representation.
The multiple listing services should:
- Make buyer-broker cooperation optional, like Bright MLS and Northwest MLS have done and MLS PIN plans to. It’s going to happen regardless.
- Prepare for commission pressure and attrition amongst their membership and continue to focus on consolidation to bring MLSs’ costs down further. Dwiggins believes this could result in a 30-40 percent drop in NAR membership.
- Think beyond being a repository of homes for sale and work together on driving more innovation for their membership.
According to Dwiggins, many of the MLSs he works with are starting to prepare for these changes by considering how they can change their value propositions and thinking about how MLSs will function in a new world. What can they offer their membership? How can they offer cooperation?
Brokerages should:
- As soon as possible, require signed, executed buyer broker agreements at the beginning of their agents’ engagements with buyers.
- Develop educational, marketing, and training materials for agents that clearly explain the specific value of their buyer agent services and audit their existing materials to comply with NAR rules on buyer agent compensation messaging.
- Cut down on overhead and expenses. They will need to be much leaner operationally in the next 12 – 24 months.
- Come up with different compensation model options for their agents. They will need to adapt just as their agents will. Buy-side commission pressure will occur.
Agents should:
- Start using buyer broker agreements at the beginning of their engagements with all buyers.
- Start using buyer presentations, clearly articulating their value and why they get paid the compensation they do. The value proposition must be 10X better than it is today.
- Develop different compensation models such as percentage, hourly, or flat fee, depending upon clients’ needs.
- Listing agents should update their materials to address how they and any agent representing a buyer are compensated, the pros and cons of sellers offering or not offering compensation to buyer agents, as well as language in their contracts regarding compensation, services, and fiduciary duties in states that allow dual agency or transaction brokerage.
We don’t need to be fearful of this. The sky’s not falling and it’s going to change
Dwiggins believes the industry needs to be able to articulate its values to buyers and have the buyers pay us. These changes make sense—they need to happen.
The end result in three or four years will be (that) it’ll be a better-organized business, and you won’t see any more DOJ investigations. You won’t see a lot of this government intervention because it’s set up in a structure where you are representing one individual, you are working as a fiduciary with that one individual, and that one individual is paying you for those services. It is going to end that way, one way or the other, and I think we will be a better industry long term for it.
Bernice Ross, president and CEO of BrokerageUP and RealEstateC
