Additional real estate clients have signed on to a lawsuit filed earlier this year accusing top New York brokerage Houlihan Lawrence of breach of fiduciary duty and unjust enrichment, among other claims, for allegedly duping them into dual agency deals where the brokerage represented both buyer and seller.
Anonymous letters sent to the plaintiffs’ law firm also allege the brokerage pays or paid its agents bonuses for keeping transactions in-house — a tactic that is not unheard of in the real estate industry.
But the plaintiffs allege that in this case, it contributed to a culture at Houlihan Lawrence that encouraged double-ended deals in order to boost the firm’s market share and make it more appealing for its eventual acquisition by Berkshire Hathaway affiliate HomeServices of America.
“Since at least January 1, 2011, Houlihan Lawrence has operated a bait-and-switch scheme to lure thousands of homebuyers and sellers into dual-agent transactions,” plaintiffs’ attorneys wrote in an amended complaint filed Oct. 1.
“To induce its 1,300 agents to participate in the scheme, Houlihan Lawrence pays secret kickbacks to the sales agents who secure double commissions through dual-agent transactions. These kickbacks encourage Houlihan Lawrence agents to put their personal interest in a bigger commission check ahead of the interests of their clients by incentivizing them to steer clients into dual-agent transactions.
“The conflict of interest inherent in Houlihan Lawrence’s undisclosed incentive compensation scheme makes it impossible for Houlihan Lawrence sales agents to represent homebuyers and sellers with undivided and undiluted loyalty. The scheme is incompatible with Houlihan Lawrence’s fiduciary duties. At the very least, it is a material fact that must be disclosed to each and every one of Houlihan Lawrence’s clients.”
Asked to comment on the amended complaint’s allegations and whether Houlihan Lawrence pays bonuses to its agents for keeping transactions in-house, a spokesperson for Houlihan Lawrence said in an emailed statement:
“We are aware that additional plaintiffs have been added to the filing and we continue to deny the allegations. We will vigorously defend the quality and integrity of our business practices. Houlihan Lawrence has an outstanding reputation for our commitment to the communities we serve.”
Houlihan Lawrence owns and operates 30 offices with more than 1,300 agents in New York’s Westchester, Putnam, and Dutchess counties.
The lawsuit seeks class-action status and aims to represent all buyers and sellers of residential real estate in those counties from January 1, 2011 to the present where Houlihan Lawrence represented both the buyer and seller in the same deal.
The anonymous letters
The original complaint in this case was filed on July 14. According to the amended complaint, one of the plaintiffs’ attorneys — William Ohlemeyer of Boies, Schiller, Flexner — received an anonymous letter on July 19 alleging that Houlihan Lawrence “paid a bonus of 10 percent of the transactional commission due an agent if the transaction was ‘in-house’, that is, with another Houlihan Lawrence agent.”
The letter alleged that in the case of designated dual agency — where different Houlihan Lawrence agents would represent the buyer and seller — both agents would get the bonus and in the case of true dual agency where only one Houlihan Lawrence agent represented both that only that agent would get the bonus.
The anonymous writer said the bonuses made it “highly advantageous” for agents “to only show Houlihan Lawrence listings to [buyer] clients, who probably thought they were getting to see all of the listings meeting their requirements in the area, no matter which agency represents the seller.”
The letter also indicated that sellers’ interests could also have have been harmed “since the selling agent might be willing to accept a lower offer, because the commission difference would be made up by the 10 percent bonus.”
The next day, Ohlemeyer received another anonymous letter, this time claiming to be from a former Houlihan Lawrence agent who was a top producer at a rival brokerage. That letter said agents get a 5 percent bonus for a dual agency deal — an arrangement the letter writer said he or she refused.
“You CANNOT believe how many agents are driven by the extra commission bump. There are thousands upon thousands of inter-office emails encouraging fellow agents to sell their listing, keep it ‘in-house’ to get the added bonus!” the letter said.
“It is widely known in Westchester real estate circles that it can be very, very tough to win a Houlihan bidding war if other HL agents are bidding.”
According to the complaint, the median residential sale price in Westchester County in 2017 was $616,250 and Houlihan Lawrence claims to represent the buyer, seller or both in 70 percent of county transactions where the homes sell for more than $1 million. Therefore, Houlihan Lawrence’s dual agency bonus can be worth thousands of dollars to agents, the complaint said.
As a result, Houlihan Lawrence incentivizes its agents to steer clients into dual-agent transactions rather than the best transaction for the client and dissuades agents from making “full and frank disclosure to homebuyers and sellers of the risks and practical downsides of dual agency,” the complaint added.
Brother and sister home sellers Tony Berk and Dr. Ellyn Berk and homebuyer Paul Benjamin joined homebuyer Pamela Goldstein as plaintiffs in the amended complaint.
According to the complaint, the Berks hired Houlihan Lawrence team leader Gino Bello to sell their deceased mother’s three-bedroom home on 190 Davis Avenue in White Plains, New York. They allege Bello did not, as suggested by Dr. Berk, put the listing on the local multiple listing service, and did not advertise the property through popular listing sites such as Zillow, Trulia or realtor.com.
Instead, Bello held the property as a pocket listing, only marketing the property to a small pool of buyers through his personal network and therefore failing to provide the “maximum exposure” promised, according to the complaint.
Following Bello’s advice, the Berks sold the home for $479,000 to a buyer represented by another Houlihan Lawrence agent, David Calabrese, who was a “longtime close personal” friend of Bello’s — a fact the plaintiffs allege was never disclosed.
Bello also never told the Berks about the risks and downsides of pocket listings; never discussed with them the possibility that a dual-agent situation could arise in the sale of their mother’s home; never explained the downsides, risks, and options the Berks would face if a dual-agency situation arose; never told the Berks that a dual-agent situation had arisen; never asked them to
consent to the dual-agent situation; and never told them that Houlihan Lawrence financially rewards its salespeople for dual-agent transactions, the complaint said.
According to the complaint, only one home — a fixer-upper — within a three-block area of the Berks’ home has sold for less than 190 Davis Avenue since 2016.
Similarly, the complaint alleges Houlihan Lawrence did not inform Benjamin, a client who ended up buying a property for $125,000 over the asking price at $1.6 million cash, of the risks and options of dual agency and never disclosed Houlihan Lawrence’s agent bonuses for dual agency. The complaint also alleges Benjamin was mislead into believing that the seller was being represented separately and was “strongly discouraged” and ultimately dissuaded from hiring his preferred attorney to represent him in the transaction.
Plaintiffs’ attorneys demand Houlihan Lawrence pay back the commissions it has gotten as a result of breaching its fiduciary duty — with interest — and also ask the court for punitive damages.
“For every transaction where Houlihan Lawrence acted as an undisclosed, non-consensual dual agent, it has acted as a faithless servant, betraying its clients and compromising the public trust in the integrity of the real estate market and the dignity of the real estate profession. It did not earn the sales commissions it collected on those transactions. It should pay them back,” the complaint said.
A scheme to gain market share?
According to the complaint, dual agency transactions at have become “a routine business practice” at Houlihan Lawrence in recent years and contributed to the brokerage’s huge growth since 1990.
“Even adjusting for inflation to 2016 dollars, Houlihan Lawrence’s $6.7 billion in 2016 sales represents a staggering increase of more than 850 percent,” the complaint said.
“Houlihan Lawrence is particularly dominant in parts of Westchester that are rich with luxury real estate. For example, in recent years Houlihan Lawrence has claimed upwards of 75 percent of the Bronxville market, 53 percent of the Larchmont market, and 47 percent of the Scarsdale-Edgemont market,” the complaint added.
By pursuing dual-agent deals as a “systematic strategy and policy,” Houlihan Lawerence has increased its market share at the expense of its competitors, according to plaintiffs’ attorneys.
“Dual-agency deals are like steroids for a real estate firm’s bottom line: They enable a firm to double its commissions, grow its market share, and choke out competitors,” they said.
Dual-agent deals not only mean more in commissions for the brokerage, but they allow Houlihan Lawrence to direct more business to its affiliated title and mortgage financing companies and give the brokerage “an inside track” to future listings when buyers later decide to sell, according to the complaint. That keeps listings away from rival brokerages and makes dual-agent transactions even more likely down the road, the complaint said.
“Houlihan Lawrence stripped all members of the Class of their right to Houlihan Lawrence’s undivided and undiluted loyalty as part of a centralized scheme to increase the firm’s profitability; to expand its share of the market for real estate brokerage services in the Westchester, Putnam, and Dutchess tri-county area; to fund its recent expansion into Connecticut; and to make it a more attractive and expensive acquisition target,” the complaint said.
The complaint charges Houlihan Lawrence with breach of fiduciary duty; breach of a real property law regarding disclosure of real estate agency relationship; deceptive or unfair sales practices; and unjust enrichment.
Inman has reached out to HomeServices of America for comment and will add to this story when we hear back.
Editor’s note: This story has been updated.