Class Action Lawsuit Against Realtors

 

Question: What are your thoughts on the recent class action lawsuit against the National Association of Realtors?

 

Answer: You’ve probably read headline news over the past week about the Kansas City jury that found the National Association of Realtors and two of the nation’s largest brokerages, HomeServices of America and Keller Williams, guilty of colluding to keep Realtor commissions high via the use of the “clear cooperation” rule, which required there to be an offer of compensation to buyer agents/brokers for properties listed in an MLS.

 

The lawsuit awarded plaintiffs in Missouri, Kansas, and Illinois damages of $1.78B, which gets automatically “trebled” (tripled) by the court to $5.36B. Numbers that the defendants don’t come remotely close to having in combined cash and/or assets.

 

If you missed it, here’s a Housing Wire article with a good summary of the lawsuit, without subjective commentary. The lawsuit and others like it (there was a similar lawsuit settled a month ago and another copycat lawsuit recently filed) are a huge deal for the residential real estate industry and consumers.

 

I’m not going to waste your time making predictions about the legal process this and similar lawsuits will follow, you can google the lawsuit for plenty of opinions. It’s a massively complex issue from a legal and practical standpoint and nobody can honestly say they know where this will lead in the next six months or six years. It could end up at the Supreme Court years from now or it could send shockwaves through the residential real estate industry by next year.

 

I’m going to share my thoughts on a few of the ideas the lawsuit was built on, some of the more popular opinions I’ve read in the news, and things I find particularly difficult to solve in all of this.

 

There are reasonable, strong arguments to be made on both sides of most of the issues revolving around this topic. Most of what you’ll read/hear in the media is going to focus on opinions and ideas that are anti-realtor “Cartel” because they appeal to the masses and generate traffic and eyeballs. I’ll touch on both sides of the argument in some cases, in others I’ll offer my perspective from inside the industry.

 

Most MLSs and Associations require(d) there to be an offer of compensation to the buyer agent/broker on a property listed for sale in the MLS; you could not sell something market with zero buyer-agent compensation. The lawsuit claims that ~500,000 sellers in MO, IL, and KS included in the class action lawsuit would not have offered/paid this compensation had it not been required and the $1.78B is the amount they “overpaid” in commissions.

 

The way most market transactions are structured (and have been for 2-3 decades) is that the seller agrees, before selling, to pay their broker X% and that amount is usually split evenly between the seller’s broker and the buyer’s broker, which is explicitly stated in the Listing Agreement. For reference, here’s the study I did this year on 2022 buyer-agent commissions in Arlington. There is a “market” price for buy-side commissions.

 

While required, there is nothing that prevented offers of compensation of $1 or something well below the market, but people (consumers, agents, brokers) rarely chose that option. The plaintiffs in the case were able to make a strong enough case that sellers were forced to offer compensation at market rates and did not know they had a choice.

 

This is where it gets interesting and difficult, practically speaking. I could write a few columns on this topic and may do so over time, but I’ll keep it simple here.

 

Representation on both sides of the transaction is important. Yes, there are plenty of examples of bad representation and consumers who saw little or even negative value in their representation, but for the most part, studies show that buyers and sellers value having independent, professional representation in real estate transactions.

 

Sellers paying buyer broker commission makes sense and doesn’t make sense all at the same time.

 

It makes sense because it’s a cost taken out of proceeds for the sale rather than an out-of-pocket expense, so it’s much easier for a seller to receive less than a buyer to pay more. Anybody who has owed taxes understands the significance of how different paying taxes feels when it’s taken out of your paycheck versus cutting a big check to Uncle Sam.

 

It doesn’t make sense because of the obvious…why should I pay for your representation?

 

The problem, and I mean problem for consumers not for Realtors because of lost commission, is that if there’s a fundamental change to commission structure and sellers generally stop paying buy-side commission, the result is that most buyers cannot afford to tack on additional closing costs to their transaction and lenders will not allow it to be rolled into the loan (maybe this changes in the future). Wealthier buyers may be able to afford to hire buyer agents, but this scenario all but guarantees an even more difficult path to homeownership for those who can’t afford it.

 

So how do we feel about most buyers not being represented in their purchase? Other countries do it, right? I feel strongly that buyer representation is of critical value to most buyers, especially first-time buyers, less financially advantaged buyers, buyers who don’t speak English as their first language, etc etc. This is particularly true in the new world of real estate that is critically under-supplied and constantly competitive.

 

Let me suggest this exercise for anybody who doesn’t mind seeing buyer rep go away…visit 10 Open Houses and consider how many of the hosting agents you’d be comfortable writing a contract with and relying on guidance from to purchase that house within 24-48 hours of seeing it, knowing that they have a fiduciary responsibility to represent the seller. You might feel comfortable with one or two.

 

It’s also worth noting that “dual agency,” whereby one agent represents buyers and sellers, is illegal in many states, including Maryland. It’s legal in Virginia, but in my opinion, it’s an inappropriate relationship for the majority of transactions because, if done ethically and correctly, neither party gets the type of representation they often want or need.

 

I’ve seen this claim made quite a few times recently; it’s a perfect headline. Buyers across the country are frustrated by high prices, high mortgage rates, and low inventory so let’s suggest a path to cheaper housing if Realtor commissions are reduced. Sounds nice! But that’s not how markets work.

 

For the most part, prices are set by how much buyers are willing to pay, not how much a seller wants. Does a seller want too much? They’ll probably sit on the market and be forced to reduce or withdraw. A seller is willing to accept too little? Buyers will show up in crowds and push the price up. Seller expenses do not define market values – supply and demand do.

 

If sellers stop paying buy-side commission, effectively cutting their commission cost in half, and buyers aren’t paying for representation either, buyer budgets remain the same, prices don’t fall, and sellers net more. You could even make a case that prices increase because buyers are relying on listing agents who represent the seller to submit and negotiate offers.

 

Buyer budgets shrink to accommodate the cost of buyer rep and because that cost is cash, it likely shrinks budgets by many multiples above the fee being paid to the agent (via a reduction in funds available for a down payment), and prices drop as a result. Sure, you can take this scenario are say prices dropped because of the change in commission structure, but it didn’t make buying a home less expensive, maybe even more expensive, AND due to the multiplier effect of cash in a real estate transaction, sellers might net less in this scenario too.

 

Overall, yes, there’s plenty of waste in our industry and not enough innovation; we have plenty of room for improvement. But find me an industry or company with tens of billions or more of revenue that doesn’t have waste and inefficiency.

 

One of the major differences between the Realtor industry and other large multi-billion-dollar industries is that the excess gets spread across well over one million Realtors across the country plus the secondary services that support the industry. For most people involved, these are modest paying full-time and part-time jobs for many people in every community. Realtors, as a whole, do not make as much income as you think. Compare that with other large businesses/industries and I think you’d find that less of our excess/waste floats to the top or wealthy shareholders but goes towards normal working wage people.

 

I’m not excusing the excess and want to see progress made there, but I think proper perspective is important.

 

One of the lawsuit’s accusations was that agents, who are mostly independent contractors in competition with each other, receive training from brokerage and Association leadership on securing specific commission amounts (6% is the one everybody hears as the “standard”). I do think this is a problem in our industry – training, and the influence of groups of agents to set a specific price sure does feel like collusion.

 

There is a fine line between what feels like collusion (training for 6% commissions or any specific number for that matter) and acceptable training for agents to help them maximize their income, but that has to be done without telling agents en masse what that rate should be.

 

On the other hand, I have a hard time fully buying the collusion argument (aka the Realtor Cartel/Monopoly) when there are endless service and pricing options available to consumers in every market for buyer or seller representation. Redfin carved out a massive market share offering listing services for roughly half of the average sell-side commission and crediting buyers a percentage of the buy-side commission at closing. There are low flat-rate options, listing-entry services, and plenty of agents who charge well above average too. And there’s also nothing preventing somebody from buying or selling without the representation of an agent.

 

Does the industry need to change some of its training practices to ensure Realtors are acting more independently and competitively in determining their rates? Yes, for sure. Is there a monopoly that has cornered the market on commission rates? No, consumers seeking different pricing and services can find it in every market.

 

I am pretty pro-consumer in my belief system and apply that to this lawsuit with clear eyes (I think), but consumers also have a responsibility to do proper due diligence and make informed decisions in what is likely their largest transaction(s) by many multiples in their lifetime. Heck, I just spent 12 hours researching robot vacuums before making that purchase!  I landed on a Roomba j7+ (on sale, of course), which arrives tomorrow, and I’m very excited.

 

I bet many of the same sellers who were part of the class action spend months shopping for a car, scrutinizing dealership fees, and negotiating. Some of them probably spend Sunday mornings clipping coupons and driving to different grocery stores to get the best deals. Was that same energy given to the sale of their home?

 

Sellers have every opportunity to read the contract, ask questions, and meet with different Realtors before selling a home so in that respect, this lawsuit doesn’t make a whole lot of sense to me.

 

Nobody knows. I think the media and pundits are getting carried away with how much of a shockwave this is going to create in the real estate industry. It will surely lead to change, but class-action lawsuits are more about money and a couple of class-action lawsuits don’t help answer the deep, complex issues that need to be reckoned with to create a more efficient, balanced industry that supports homeownership across all classes and demographics. These lawsuits may lead to massive structural changes in the industry in the name of consumers and we end up with a landscape that is a net negative for consumers. We shall see…

 

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].

 

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

 

Video summaries of some articles can be found on YouTube on the Eli Residential channel.

 

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.