Exemplary agents will see commissions grow: NextHome CEO

As the industry reeled in the wake of the Sitzer | Burnett landmark verdict — and now the news that the National Association of Realtors CEO Bob Goldberg is retiring early — I sat down with James Dwiggins, the founder and CEO of NextHome, about what’s ahead, where we go next and the steps the industry needs to take moving forward.

Dwiggins called it right

In my August interview with Dwiggins, he correctly predicted what was ahead. The defendants who didn’t settle would lose, there would be treble damages awarded ($5.356 billion) because it was an anti-trust case, and the copycat lawsuits would soon follow if the defendants lost. 

When the Sitzer | Burnett verdict was announced, plaintiffs’ attorney Michael Ketchmark immediately filed a new class action complaint against Compass, Douglas Elliman, eXp World Holdings, Howard Hanna Real Estate, Redfin, Weichert Realtors and NAR, increasing the size of the class to include the rest of the country that was not covered in Sitzer | Burnett and Moerhl complaints. 

Calm down. The damages awarded are irrelevant

The plaintiffs and their attorneys want to get paid. If the defendants go bankrupt, the plaintiffs get nothing.

Dwiggins explained it like this: 

The first thing I want everyone to remember here is the damages portion that you’re going to hear about in these cases is for the most part irrelevant. It’s a weird statement, but you have to remember that the plaintiffs have already signaled that they want to settle these cases. 

All three of them [the attorneys for Sitzer | Burnett, Moerhl, and Noselek] have been in the same room with RE/MAX and Anywhere and reached a nationwide settlement of $53 million for RE/MAX and $83 million for Anywhere. What that means is that everybody across the U.S. can essentially join the class and get a small amount of money from the settlement.

So, it’s very important that everybody understands when you see these big numbers, the plaintiffs’ lawyers are not trying to bankrupt these companies. That is not their intent. They have already signaled and have agreed to settlement amounts that were much lower than most of the pundits have been talking about on these cases … These are just the amounts that were awarded. Now comes the [settlement] negotiation part of that same piece.

The defendants’ appeal is also irrelevant

Dwiggins believes that NAR and others will appeal this case. He goes on to say, however, that “Their appeal is irrelevant because they can’t afford to go through another multi-year appeal.” 

Furthermore, to move forward with the appeal, they must post a bond that will cover the damages portion of these cases in order to cover the $1.78 billion judgment. 

“Theoretically, I don’t know the finances of those organizations, but maybe they could cover the bond. If they can’t cover a bond of that amount, then they have a serious problem,” Dwiggins said. “The point is that during the 30-day period where they’re going to look for a bond to do this, I think you’ll see a settlement occur … Candidly, [the plaintiffs’ attorneys] will keep suing everybody until we settle this whole thing out.” 

How NAR might fund the settlement

In terms of how the NAR portion of the settlement might be structured, Dwiggins believes that it will be based on membership count. 

Dwiggins went on to speculate about how NAR might fund a $2 billion settlement. Assuming that there are 1.4 million Realtors and the payment on the settlement is over 10 years, that would pencil out to $1,428 per Realtor. Divide that over 10 years, and it’s $142.80 per Realtor per year.  

According to Dwiggins, if you’ve ever worked with an attorney, that’s “literally about two hours of a lawyer’s time.” 

The most important thing that needs to happen is NAR needs to settle these cases, or the copycat litigations are only going to continue. 

State associations must completely separate buyer and seller compensation

Dwiggins strongly urged state and local associations to take immediate steps to create a clear separation where buyers are no longer compensated through the seller’s agent. 

“The second thing that needs to happen is associations need to take a more proactive role in structuring things for the future. So, I want to be clear what the plaintiffs want, what the DOJ wants, and what the FTC wants: A clear separation between who is responsible for whom,” Dwiggins said. 

In other words, the buyer’s agent represents the buyer and is paid by the buyer, and the seller’s agent represents the seller and is paid by the seller. What the DOJ and the FTC don’t want is the seller’s agent collecting commission from the seller that then compensates both the seller’s agent and the buyer’s agent. 

“That’s very clear on what the DOJ, the FTC, and what the plaintiffs have laid out … Currently, 12 states require broker representation agreements that you must sign before you at least write an offer on a property that’s in the MLS. The 38 other states need to implement the same thing. Local associations or statewide associations need to legislatively go down the path of getting this implemented at the state level,” Dwiggins said. 

“State associations need to get together now and go to work at the state level to get a buyer-broker representation agreement implemented as state law like the 12 other states across the U.S. currently do it today.” 

This will be an especially difficult challenge for the four states that have transaction brokers and for other states that tie the buyer’s broker compensation to sub-agency. 

Dwiggins does point out an important benefit for sellers: “They’re not going to have a bunch of looky-loos come through their home who really aren’t serious about buying the property.” 

NAR must take immediate steps to start working with Freddie Mac and Fannie Mae

Dwiggins explains that this is one of the things NAR does very well.

“NAR must be working with Fannie and Freddie on figuring on a way the compensation for the buyer’s agent can be financed in the loan. NAR is very good at lobbying and that is one of their core strengths. This is where they’re an advantage to the industry,” Dwiggins said. 

Dwiggins raises two other interesting points. First, he believes that the most common scenario we’re going to see will not be the buyer financing the commission through the loan. Instead, the purchase contract will stipulate that the seller pays the buyer’s agent’s compensation directly, thereby completely bypassing the seller’s agent. 

Second, the buyer’s agent can also write a stipulation that the seller provides a credit to the buyer, who then compensates their buyer’s agent directly. Dwiggins explains the significance of this point. 

“This is one of the reasons that everyone needs to calm down. It is unconstitutional for the government to tell a seller what they can and cannot do with their money. So be very clear about this statement. You cannot tell a seller that they can’t offer a credit, which is something we [already] do every day,” Dwiggins said. 

“And to be clear, if the government tried to intervene on that, it is unconstitutional based upon every lawyer I have talked to. It would be fought in court and they [the government] would lose.” 

An offer of compensation in the MLS is most likely going to be banned

The verdict in the Sitzer | Burnett case will not be final until Judge Stephen Bough issues his final judgment. Bough could choose to ban the cooperative compensation rule nationally on the MLS. 

Whether Bough decides to make this decision or if it results from pressure from the DOJ, FTC, or some other source at a later date, Dwiggins believes this is likely to happen.  

“I do believe that you will see compensation in the MLS be outright banned and that you (seller agents) will no longer be allowed to offer compensation through the MLS,” Dwiggins said. 

Dwiggins added it’s important to note that the DOJ has intervened in the Nosalek settlement saying the proposed settlement between the plaintiffs and Anywhere and RE/MAX did not go far enough. Using the Northwest MLS as an example where compensation in the MLS was already optional and you could enter zero as the buyer’s compensation, the DOJ still wants more. 

“What’s super important for everybody to hear is that regardless of how these civil cases play out, you are very likely going to see the Department of Justice and the Federal Trade Commission get involved and find a way to remove compensation being offered in the MLS,” Dwiggins said. 

Will the MLS go away because shared compensation will no longer be allowed?  

Dwiggins does not believe that is going to happen. 

“The MLS is extraordinarily important. Cooperation is extraordinarily important. The way that data is warehoused, the way that data is secured, all of those things are intact. The difference is an offer of compensation is no longer in the MLS,” Dwiggins said.  

“Do I think MLSs will consolidate? Yes. Do I think associations will consolidate? Yes, candidly, they should. There should be fewer of them to begin with anyway, but I do think the importance of those two organizations are still intact — they will just act differently.”

Agents and brokers must get better at articulating our value proposition to buyers

Dwiggins pointed out that research from 1000 Watt has shown Americans are willing to pay a full commission when they see the value of doing so. He went on to explain why this is the case: 

“In 1960, 30 percent of Americans had dual-income households. Today, it’s between 60 percent to 70 percent of Americans have a dual-income household. Because everybody is busy with their careers, kids, and other activities, we want convenience. They’re not going to wake up one day and say we need to sell our house and do it themselves,” Dwiggins said. 

“Studies by 1000Watt have shown that consumers don’t disagree with what agents are getting paid — we just have to learn how to articulate it more clearly.”

Dwiggins shared an excellent resource from NAR that can help agents and their brokers achieve this goal called 179 Ways: Agents Who Are Realtors Are Worth Every Penny of Their Compensation. 

Should the industry move to an hourly rate like attorneys or use a menu of services? 

Dwiggins explained the main reason the real estate industry cannot move to an hourly rate model like attorneys use. 

“I’ve had a lot of people ask me, do we become hourly? No. Here’s why. First of all, our IRS carve out in that specific statute where we are all 1099, you can’t charge hourly unless you want to employ everyone,” Dwiggins said. 

He also nixed the idea of going to a flat rate or menu of services. The reason? Most flat-rate companies have gone bankrupt. Three notable examples include Foxtons, Purple Bricks and REX. 

The conversation every agent needs to have with every buyer and seller

Dwiggins urges brokers to immediately begin training their agents on how they’re going to explain their services to buyers and sellers as well as how contracts will be structured in this new environment. This includes explaining how the system has worked over the past 40 years and what to expect going forward — that the buyer’s agent is going to write in the purchase contract sellers must pay their fees directly to them.

To help the sellers understand, here’s what to say.

“The buyers are paying three times more than what your house was worth 10 years ago [due largely to the doubling of mortgage interest rates], and they don’t have the money to come up front with those commissions to pay their buyer’s agent,” Dwiggins said. “So, you need to be prepared to pay the compensation to the buyer’s agent. If you are not willing to do so, there’s a chance the deal could fall apart. [In most cases], a seller is going to come up with that amount of money to pay.”

The upside for buyer’s agents

In the post-Burnett Sitzer environment we’re now facing, there is a tremendous upside for those brokers and agents who seize the opportunity, create high-quality buyer presentations, articulate their value propositions, and master the art of negotiating their own commissions from either their buyers with a buyer’s broker agreement or from the seller. Instead of the seller’s agent negotiating the buyer’s commission for them, Dwiggins said.

“Now the buyer’s agent gets to dictate what they get paid. They get to articulate their value in their own terms and dictate whatever fee structure that might actually be,” Dwiggins said. “So, I will go on record as telling you right now, I actually think the good agents will see [their] compensation rates go up, not down, because they’re sitting down and clearly articulating their value to a buyer.” 

He also added that every study he has ever read shows people are willing to pay more for premium service.

The industry needs to plan for 20% to 40% attrition over the next 24 months

This is across the board and is not just due to what is happening with the bombshell litigation. I spoke with several association leaders at last summer’s Real Estate Connect, and several told me that they were projecting at least a 20-30 percent decline in their membership. Dwiggins concurs and urges brokers to be prepared.

“I think every broker should be expecting [and budgeting for] between 20 percent to 40 percent attrition over the next 24 months. Now, that’s not just because of the lawsuits. We’re in horrible market conditions that aren’t going to change anytime soon,” Dwiggins said. 

“So just look at the statistics from 2008 to 2010. We had 1.4 million Realtors, and we bottomed out at one at 1 million Realtors. You’re going to see people bottom out due to the market conditions anyway. The losses [from the lawsuits] will add an additional flavor on top. I’m saying [the attrition will be] somewhere between 20-40 percent, and you need to budget for that.”

These lawsuits need to be settled now

The copycat lawsuits will continue until there is a global settlement agreement. The risk of not doing so for the brokerage community is tremendous: Everyone tends to think that their Errors and Omission (E&O), Directors and Officers (D&O), and General Liability (GL) insurance will cover these claims. Because these are antitrust claims, they are NOT covered. This can result in massive bankruptcies taking place across the industry. 

Where will we be a year from now? 

Dwiggins wrapped up the interview by sharing where he thinks we’ll be a year from now.

“I think compensation in the MLS is gone. I think that we have an entirely new way that we articulate value to consumers. I think buyer’s agents get better at what they do. I think there’s a clear establishment of who represents who,” Dwiggins said.  

“I also think that a big hot button in 12 months is dual agency, and that’s next. Nine states currently ban dual agency, and I think you will see that become a much bigger topic. The DOJ and FTC want to see a clear separation on who you represent.

“Right now, associations need to work on buyer-broker representation agreements — that will be the next hot-button issue.” 

Dwiggins’ final takeaway: “It’s super important to remember that this is just a learning moment. For us, it’s not ideal, but we’re going to move [forward, and] we’re going to adapt. Focus on helping buyers and sellers [understand] what you already do really well. Just shift your business, and you’ll continue to be the main point of contact in the center of the real estate transaction,” he said.