SELLER SETTING REALTOR COMMISSIONS MAY BE A THING OF THE PAST – THE LAWSUIT THAT MAY CHANGE THE WAY REALTORS ARE PAID

A recently filed class-action antitrust suit against the National Association of Realtors, among other major real estate players, could spell a serious shakeup for the industry. If the plaintiffs win out, it may change the face of buying and selling real estate as we know it.

In Moerhl v National Association Realtors (NAR), home sellers from across the nation are claiming that NAR鈥檚 compensation policies鈥攚hich require all member brokers demand blanket, non-negotiable buyer-side commission fees when listing a home on a Multiple Listing Service鈥攊s a violation of antitrust law. Realogy Holdings, HomeServices of America, RE/MAX and Keller Williams are also named in the suit.

Though Minnesota home seller Christopher Moehrl originated the claim, sellers who listed their properties on 21 different Multiple Listing Services across the country are also plaintiffs on the antitrust suit. These MLSs cover Baltimore, Philadelphia, Washington, D.C., Detroit, Cleveland, Milwaukee, Houston, Dallas, Las Vegas and many of the nation鈥檚 largest housing markets.

The Gist of the Suit

According to Adam Swanson, an experienced real estate attorney at McCarter & English, Moerhl and Co. are claiming the current NAR-MLS-agent payment arrangement 鈥減revents buyer鈥檚 agents from negotiating their own commission, which would likely be less.鈥

The claim specifically cites a 2002 study in the International Real Estate Review journal that says that if buyer鈥檚 agents negotiated their own compensation, listing commissions for sellers would be closer to 3%, rather than the 5 to 6% seen in most markets.

鈥淚n this way, the plaintiff claims that he was harmed by having to pay a buyer鈥檚 agent and, therefore a higher listing commission than if he only had to pay his agent,鈥 Swanson said.

Swanson says the suit is also claiming that the payment arrangement encourages agents to steer buyers toward higher cost (and higher commission) listings, as well as listings exclusive to MLS, both of which are 鈥渁nti-competitive.鈥

According to Michael Walsh, CEO at Exclusively Buyers, a real estate firm that works only with homebuyers, 鈥淭his is no garden variety lawsuit.鈥

鈥淧otential damages are estimated at $54 billion,鈥 Walsh said. 鈥淭he plaintiffs allege collusion, hidden payments and anti-competitive practices designed to maintain real estate commissions at artificially high levels.鈥

Robert Hahn, the founder at real estate consulting firm 7DS Associates, has called the case a potential 鈥渘uclear bomb on the industry.鈥

If the plaintiffs win out, it could mean a change to how Multiple Listing Services and real estate agents work鈥攁nd get paid. Currently, in most transactions, the home鈥檚 seller pays a 5 to 6% commission fee, which is split between their agent鈥攖he listing agent鈥攁nd the agent representing the buyer. Walsh calls the arrangement 鈥渁bsurd.鈥

鈥淭his lawsuit could鈥攈opefully, will鈥攃hange the way real estate brokerages operate in the future,鈥 he said. 鈥淩ight now, buyers don鈥檛 negotiate the fee for their agent. The seller pays. The seller is actually paying for the agent who will be negotiating against their financial interests. This is exactly why buyers are often skeptical as to whether their agent is working for them or the seller or just enjoying a nice payday for doing nothing.鈥

Where the Case is Heading

The chances of settlement are slim, according to experts, so this one is likely heading to court. The firms handling the plaintiff side鈥擧agens, Berman, Sobol & Shapiro and Cohen, Milstein, Sellers & Toll鈥攁re known for their drawn-out legal proceedings and lucrative wins. Hagens Berman secured $1.6 billion in a case against Toyota in 2013 and another $206 billion from the tobacco industry in 1998. Cohen Milstein won an antitrust lawsuit against Apple just five years ago for $560 million.

As Swanson explained, 鈥淭hese are not the type of firms that put a suit in place to collect a few thousand dollars and go away.鈥

There鈥檚 also the nature of the suit to consider. According to Swanson, the plaintiffs are after more than just money on this one.

鈥淭his case is not likely about an angry Plaintiff who is unhappy that he paid a higher commission on a property sale,鈥 he said. 鈥淭here is a bigger goal behind this lawsuit and that is to open the competitive field an allow new players to get into the market.鈥

But according to NAR, the suit has no legs.

“The complaint is baseless and contains an abundance of false claims,” said Mantill Williams, VP of communications at NAR. “The U.S. Courts have routinely found that Multiple Listing Services are pro-competitive and benefit consumers by creating great efficiencies in the homebuying and selling process. NAR looks forward to obtaining a similar precedent regarding this filing.鈥

Those precedents NAR is referring to? They likely include a case from 2018, which saw a federal judge dismiss antitrust claims by a real estate attorney (and non-MLS member) against Michigan MLS Realcomp.

Despite similarities, Hahn says this new case does have its merits.

鈥淭heir facts are hard to dispute,鈥 he wrote. 鈥淣AR does have those policies. The MLS does have the unilateral offer of compensation. The brokers and franchises do require their agents to become REALTORS and join the local MLS. The MLS is an essential utility to be in business. None of that is really all that disputable. So the issue will be whether subtle details about how cooperation and compensation really works will be enough to make a difference legally.鈥

Big Repercussions

Industrywide, Hahn says the repercussions could be sweeping.

鈥淚f the court rules in favor of the plaintiffs here, REALTOR Associations evaporate, the MLS likely dies off, and the entire infrastructure of residential real estate in the United States has to be remade,鈥 he wrote when the suit was filed last week. 鈥淚t could be Ragnarok, the final end of the world battle of Norse mythology.鈥

According to Swanson, though, the impact will largely depend on locale.

鈥淭here would be a small impact on some markets, like New York City where there are multiple services available to list properties. In other markets, the MLS is king for residential properties and it is nearly impossible to buy/sell real property without listing it on MLS,鈥 he said. 鈥淲ithout the MLS agreement to compensate the buyer鈥檚 agent there may be far fewer buyers represented by realtors because a buyer鈥檚 agent may otherwise have no assurance of compensation or security.鈥

This could open the door for more consumer-to-consumer sales, Swanson said, with services like Zillow and Redfin filling the gap. Newer, yet-to-emerge services may 鈥渞eplace the role of the buyer鈥檚 broker altogether,鈥 he said.

Whatever happens, Frederick Warburg Peters, CEO of Warburg Realty in New York and fellow Forbes.com contributor, expects confusion to be the main result. But mostly? Buyers and sellers will get what they pay for.

鈥淚 do not believe that it is likely to have too much financial effect on any of the parties involved in the long run,鈥 Peters said. 鈥淪ellers will continue to pay seller鈥檚 agents, sometimes at reduced fees through such companies as Redfin or Purplebricks, but more often at a higher commission model. The same will become true for buyers. Top agents will continue to earn higher fees, and buyers looking for a discount will be serviced by a new sector of low-fee buyer鈥檚 agents.鈥

Those discount providers will offer fewer services for less money, he says. 鈥淪ome will choose it; some will not. Most of the time, it won鈥檛 save either side money.鈥

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