A Lawsuit the Real Estate Industry Can’t Ignore

A Lawsuit the Real Estate Industry Can’t Ignore

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On March 8th, I sat down at my desk and do what I always do every morning when I arrive at the office – read the latest news on the real estate industry.  Just so you know, I am an “information junkie.” I love reading what is happening in the world especially when it impacts my livelihood. 

My first stop on the Internet is always Inman News. Brad Inman does a superb job providing accurate and relevant information on what is happening in this crazy industry of ours. 

After I logged in to my Inman account that morning, the headline at the top of the page read “The bombshell lawsuit that could undo the U.S. real estate industry.”  Trust me, those words quickly grabbed my attention.   I opened the article and began reading.

The Complaint

An unknown home seller, Christopher Moehrl, filed a class action lawsuit in Federal court alleging the National Association of REALTORS®(NAR), Realogy, HomeServices of America, RE/MAX and Keller Williams are violating the Sherman Antitrust Act by requiring ‘buyer broker compensation.’  Mr. Moehrl’s complaint was filed not only on his behalf but also for “all others similarly situated” in states containing some of the largest metropolitan areas.  “Others similarly situated” are the thousands, if not millions, of people who paid a real estate broker commission since March 6, 2015.

The suit alleges the defendants are violating the Sherman Antitrust Act by requiring listing brokers to make a “blanket, non-negotiable offer of buyer broker compensation” when listing a property on the Multiple Listing Service (MLS), which the suit refers to as the “Buyer Broker Commission Rule.”  The complaint did not include as defendants the twenty MLS systems listed in the introduction section, but it did reference them as “co-conspirators.”  The assertion is that the MLS rule of a unilateral offer of compensation is a violation of the Act.

The plaintiff(s) states this rule has inflated costs for sellers by requiring them to pay the listing broker a higher sales commission than they otherwise would if, instead, buyers paid buyer’s agents directly.  The suit says most buyer brokers will not show homes to buyers if the buyer broker commission is smaller than the “standard” commission rate.  Typically, most commission rates for buyer agents and their brokers is somewhere in the neighborhood of three (3) percent.  If unilateral compensation goes away, most buyers will undoubtedly be on their own because they will not want to pay a commission on top of what they will have to fork out for the house. A few may compensate their agent, but most will not.

I printed a copy of the complaint and read all thirty pages.  My brain hurt when I finished.  It is very well written and concise. The intent of the plaintiff(s) is to completely change the way real estate is transacted in our country.  If Mr. Moehrl and his friends win in court, all REALTOR® associations, including NAR, will be destroyed and most MLS systems will disappear.  As Rob Hahn, Managing Partner with 7DS Associates, says in an article he wrote for Inman on this topic – “the entire infrastructure of residential real estate has to be remade.”

Replacing Buyer Representation with Dual Agency or No Agency

This particular lawsuit has grabbed our attention because it will radically upend our industry.  If this suit succeeds in the courts, it will end buyer representation as we know it.  Buyers will have two options:  purchase a property without any representation or be part of a dual agency relationship where the listing agent is representing both parties.  The former will impact buyers dramatically because they will no longer have a real estate professional by their side to advocate, negotiate, mediate and guide them through the transaction.  The latter is just stupid – and dangerous. 

Let me share a few words on dual agency.  It is my belief that when an agent is a dual agent, he/she struggles to divide their loyalty between two parties.  How can one do that?  In many of the classes I teach I have said when you hold the words “dual agency” up to the light you will see the word “lawsuit.”  A dual agent is more likely to side with a seller because his compensation originates with them.  Buyers can become frustrated and may feel “injured” that their interests were not properly represented. 

Dual agency is practiced in many places around the country, but most state real estate regulatory agencies/commissions provide an option where an agent is a facilitator or transaction broker and does not represent anyone in a transaction.  They have no agency relationship with either the seller or the buyer.  They remain neutral and ensure paperwork is complete and various components of the deal come together so the buyer and seller can successfully arrive at the closing table. 

The Value of the Real Estate Professional

In my book, “Do You Have a Minute? An Award-Winning Real Estate Managing Broker Reveals Keys for Industry Success”, I write “I honestly believe that what we do as real estate professionals makes a significant difference in how real property is transacted in this country.”  In fact, I have this quote on the home page of this blog. We, as REALTORS®, do make a substantial and meaningful difference in assisting consumers with their real estate needs.  We have the education and experience to navigate buyers and sellers through the ever-increasing complex and treacherous waters of the real estate transaction. 

Mr. Moehrl and his friends do not realize the negative impact their complaint, if successful, will have on the consumer.  Most buyers will not want to pay a buyer’s agent commission because it increases their cost.  If commissions are “rolled in” to the purchase price of the home, it will dramatically affect the appraisal and lenders will be unable to underwrite the loan.  Many buyers, especially first-time home buyers, do not have the available funds to pay an agent.  Without proper representation, a buyer can find themselves paying more for a home and doing most of the due diligence work themselves.

Our industry has done an abysmal job of educating the consumer on why we charge what we charge.  REALTORS® operate as independent contractors and are small business owners.  There is a real cost to the time, marketing, education, and other overhead expenses we incur in our business.  And, it is getting more and more expensive every year to stay in this business. 

When a transaction closes, and we get paid, there is not much left in the commission check when you have to share a portion of it with your broker (anywhere from ten to forty percent), deduct thirty-five percent of it to pay Uncle Sam, and ten to fifteen percent to maintain your business.  What remains is the amount of money we take home to feed and support our family.

A Long Road Ahead

This lawsuit will take years to travel through our court system.  I am almost sure it will end up in the U.S. Supreme Court.  The plaintiff(s) and the attorneys will stay in it until the end.  There is plenty of money behind it, and the law firms representing the plaintiff(s) are massive and well-experienced in going after industries which they feel violate our antitrust laws.  They will not settle.  The good news is NAR has plenty of attorneys and lobbyists who will fight this lawsuit with every weapon in their arsenal.  Let’s hope it will be enough to win the case.

In the meantime, those of us in the industry must continue to do what we do best – assist our clients with their real estate needs.  We have been professionally representing millions and millions of Americans in selling and purchasing residential property for many years.  The consumer needs us, and I am hopeful the courts will be in full agreement.

JMG

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