Realtors

 

There has been a ton of talk regarding the lawsuits against the National Association of realtors, but from a practical perspective what does this mean for the market? Will buyer’s agent commissions be eliminated?  One realtor association is not waiting for more lawsuits and has made two profound changes that will likely be a template for the rest of the nation.  One of the changes is to get ahead of another lawsuit against the industry that hasn’t even been decided yet.

 

 

What was in the lawsuit that radically changed the real estate industry?

A federal jury on Tuesday found the National Association of Realtors and large residential brokerages liable for about $1.8 billion in damages after determining they conspired to keep commissions for home sales artificially high.  Two major real estate companies have already settled.

The verdict will lead to industrywide upheaval by changing decades-old rules that have helped lock in commission rates even as home prices have skyrocketed—which has allowed real-estate agents to collect ever-larger sums. It comes in the first of two antitrust lawsuits arguing that unlawful industry practices have left consumers unable to lower their costs even though internet-era innovations have allowed many buyers to find homes themselves online.

Note, this is just the beginning of lawsuits against the NAR as countless other copycat lawsuits have been filed throughout the country and many look likely to succeed based on the Kansas verdict. Realtor associations throughout the country will make changes regardless of the outcome of

 

What changes is the NY board of realtors rolling out in light of the lawsuits?

 

  1. Sellers must pay buyers agents directly: The provision will prohibit listing brokers from paying buyer’s agents and will instead require sellers to pay them directly. The rule also requires listing agreements to clearly outline the seller’s offer of compensation to buyer’s agents.
  2. Pocket listings okay: Under the threat of lawsuits, the NY board of realtors is now allowing pocket listings where brokers can advertise listings directly to brokers by submitting an opt out form to the MLS. This is interesting as many high end deals do not want to be public and trade off market to protect privacy, etc…

How will the market digest the changes above?

It will be interesting to see how the market actually interprets the changes above and what happens as a result.

  1. Sellers pay buyers agents: I can see the market transition to where the seller refuses to pay a buyers agent and the buyer must now cover this expense.  Furthermore sellers may begin offering very low buyers commissions where buyers agents now get some sort of a fixed fee from their prospective buyer.  Regardless of how this shakes out, buyers agents are going to make considerably less money under either scenario.
  2. Pocket listings: I don’t think the update rule moves the needle much as regardless of what associations said this was already happening.

NY a template for other realtor associations

With the recent loss for the national association of realtors, large brokerages and statewide realtor associations are going to get ahead of the curve.  Changes will happen shortly with buyers agent compensation clearly destined for a huge reduction.  Other realtor associations will likely copy the NY rules to try to head off future litigation.

The NY rules do not fully resolve the issue of buyer compensation

There is a second pending lawsuit that might alter the landscape of commissions even further:

The lawsuit challenges a requirement that sellers make “blanket unilateral offers of compensation” to buyers’ brokers when a home goes on sale via a multiple listing service. That system puts pressure on sellers to offer high commissions to attract buyers’ brokers, the sellers claimed.

According to Plaintiffs, the rules implementing and governing the requirement that an MLS listing include a set commission offer to the successful buyer-broker are anticompetitive and caused them to pay artificially inflated, supracompetitive commission rates. They have therefore brought the present antitrust action alleging that Defendant National Association of Realtors (“NAR”), along with Defendants Realogy Holdings Corp.,HomeServices of America, Inc., HSF Affiliates, LLC, The Long & Foster Companies, Inc., BHH Affiliates, LLC, RE/MAX LLC, and Keller Williams Realty, Inc. (collectively, “Corporate Defendants”), engaged in a conspiracy in restraint of trade in violation of § 1 of the Sherman Act, 15 U.S.C. §

 

Ironically the buyer compensation will alter the seller compensation

As the market evolves and more buyers are paying their agents directly I see seller fees coming down considerably as well.  The reasoning is if as a buyer you can pay a fixed rate or hourly fee why would you not use a similar model on the selling side.  Lower cost brokerages will increase as sellers demand options for listings.  For example for X fee they get Y service and similar to buying an airline seat there are a myriad of options including professional pictures, basic listings, etc… As buyers get comfortable with the pay as you go model, eventually the selling side will face huge impacts as well.

Summary

Although the ink is not even dry on the first lawsuit, realtor associations are trying to get ahead of the curve.  Over the next year we will see profound changes in buyers compensation with considerable pressure on buyers commissions.  We will likely see half of the buyers agents leave the business and the low cost fixed fee model start to emerge for buyer representation.

Buyers compensation is just the beginning of huge changes in real estate that will soon impact sellers agents as well.  As buyers get more comfortable with fixed fee services or even hourly compensation we will see considerable pressure on the selling side as well.  These changes will not be immediate, but the market will start adjusting over the next year or so as lawsuits continue to emerge and the realtors association takes further losses in the courts.

Interestingly we haven’t yet seen the same lawsuits on the commercial side, but there is not doubt they are coming as well for lease and sale commissions for buyers/tenants.  Look for lawyers to use residential suits as a template against large commercial brokerages.

The current real estate commission structure is dead due to recent losses by the NAR and pending litigation.  The genie is not going back into the bottle and buyers agents will see steep drops in compensation.  Selling agents and commercial agents will not be immune as the market adapts to the profound changes.

Additional Reading

 

https://therealdeal.com/new-york/2023/10/19/adopts-new-buyers-agent-commission-rules/

https://www.fairviewlending.com/jury-finds-realtors-conspired-to-keep-commissions-high/

 

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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 Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

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