I’ve been hearing rumblings of this suit for months and I’m usually skeptical that lawsuits will totally alter an industry but the recent suit against the National Association of realtors, various multiple listing services, and many large real estate brokerages could be a bombshell.  What is the lawsuit?  Why is this different than other suits in the past?  How will this lawsuit, if successful, totally change the entire real estate industry?

 

A little background information

This is the largest most comprehensive suit against the realtor’s association in recent memory.  The crux of the suit is based on homeowners in Chicago who sold their homes via national brokerage firms and were forced to pay the buyer side of the transaction at what they claim was “an inflated rate”.  They allege that they should be able to negotiate the compensation for their home sale and not be forced to pay the buyer’s side commissions.  Furthermore, the United States realtor system is setup radically different than other countries causing commissions to be substantially higher.  The suit alleges that the seller should not be forced to pay an “inflated” buyer commission as the end buyer is now doing much of the home search now.

What is the suit

Plaintiffs, home sellers who listed their homes on one of twenty MLSs bring this action against the National Association of Realtors (NAR) and the four largest national real estate broker franchisors, Realogy Holdings Corp., HomeServices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc., for conspiring to require home sellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount, in violation of federal antitrust law.

Plaintiffs allege that Defendants’ conspiracy has centered around NAR’s adoption and implementation of a mandatory rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation (the “Buyer Broker Commission Rule”) when listing a property on a MLS.

Currently, total broker compensation in the United States is typically five to six percent of the home sales price, with approximately half of that amount—and increasingly more than half—paid to the buyer broker. Defendants’ conspiracy has kept buyer broker commissions in the 2.5 to 3.0 percent range for many years despite the diminishing role of buyer brokers due to buyers independently identifying homes through online services and retaining buyer brokers only after they have found the home they wish to buy. (source: https://www.cohenmilstein.com/case-study/moehrl-v-national-association-realtors-et-al)

 

On the surface it doesn’t sound like such a big deal, but as you dig into the details, the lawsuit, if successful, will radically change the industry as sellers will no longer be forced to pay a buyer’s agent.  Who will now pay the buyer’s agent and what will they be willing to pay?

 

Who filed the suit?

In the past, lawsuits against the national association of realtors have been brought by small regional firms.  This is not the case on the current suit, the lead attorney in the lawsuit is one of the industries largest and most successful class action attorneys, Cohen Milstein.  They have won million- and billion-dollar settlements with Swiss Bank, Apple, Catepillar, BP, etc… This lawsuit is not going away as large firms have deep pockets to fight.

If successful what does this lawsuit mean to the industry

Although this case is just beginning and will take years to resolve, the implications of a successful suit are mind boggling.  This case would allow sellers to stop paying buyers agents and throw the door open for a radically different way of buying and selling.  An interesting question will arise, will buyers be willing to pay their agent?  Furthermore, will buyers be willing to pay their agent 3% of the purchase price?  For example if you are buying a 500k house, would you be willing to pay your agent 15k for showing the house, writing the contract, etc… or 30k for the purchase of a million dollar home.

Having a good broker represent a buyer on a purchase is an invaluable service, however, I think most buyers would balk at the current compensation rates if it is now coming out of their pocket.  Like any service, they will shop around for the best option and new options will form.  For example, companies will sprout up that offer “discount” prices to just write a contract or assist on the negotiation or maybe buyers do it all themselves.  Regardless of what the end game looks like, it will be radically different than today.

Summary:

This suit brings up an interesting economic question of who should pay the buyer’s agent.  I can’t think of any other business transaction where a seller pays someone to represent a buyer that is negotiating against the seller.  It sounds counterintuitive and is the “crux” of the case.  On top of the lawsuit the Department of Justice has embarked on its own civil complaint that is very similar seeking information from Corelogic and other data providers on “the ability to search real estate listings on multiple listings services based on compensation offered to buyer brokers”.  Long and short, this case is not going away anytime soon and will radically alter the compensation practices of realtors throughout the country.

 

Additional Resources/Reading

 

 

 

 

  1. https://www.bloomberg.com/news/articles/2019-05-22/u-s-opens-antitrust-probe-of-real-estate-brokerage-industry?srnd=premium
  2. https://www.courthousenews.com/antitrust-class-action-filed-against-realtors-over-commissions/
  3. https://www.washingtonpost.com/realestate/five-major-real-estate-firms-face-far-reaching-antitrust-lawsuit/2019/03/19/557e6504-499d-11e9-9663-00ac73f49662_story.html?noredirect=on&utm_term=.2cfefebac5f9
  4. https://www.inman.com/2019/03/08/what-the-bombshell-buyer-side-lawsuit-means-for-realtors/

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all they need is their simple one page application (no upfront fees or other games).