Bombshell lawsuit could wreak havoc for buyers

If a significant portion of first-time homebuyers choose to delay their purchase to accumulate extra cash to pay for their agent, sales would slow, but there's another way

This article has been reposted with permission from Russ Cofano.

If you’ve been paying attention, you now know that the National Association of Realtors (NAR) and select national brokerage and franchise organizations are being sued in a potential class-action lawsuit revolving around MLS commission sharing.

Either here on Inman, on blogs and on social media, it seems like everyone and their dog has an opinion on whether the case has merits — there’s no sense in adding to that here. But because the case is a big deal and could fundamentally change our industry, there is a bit to add in that department.

For those who don’t want to read the full 30-page complaint, the plaintiffs (I use the plural because this is intended to be a class-action) believe that homebuyers should negotiate and pay directly for the services of their agents when they purchase a house.

They claim that the current system, where the listing commission is split between the listing (seller’s) agent and the buyer’s agent, requires sellers to overpay for brokerage services that don’t benefit them (since the buyer’s agent typically owes legal duties to represent the buyer, not the seller) and that this system artificially inflates buyer’s agents’ fees.

Their solution is for the buyer, not the seller, to pay their agent separate from the funds they use to purchase the home. That’s 30 pages culled down to three sentences, but basically, that’s the gist of it.

Although I’m a former lawyer, antitrust litigation is extremely complex, and I have no intent to forecast whether the plaintiffs will or won’t be successful. That said, I studied the complaint, and there are some allegations that I believe to be completely true, and some completely false. I don’t know how either of those facts might impact the case, but the allegations do provide some insight on how the industry could use this litigation to spur positive change.

Antitrust litigation is many times used to benefit consumers. On the face of this lawsuit, the plaintiffs seek to do just that. And yet, much of what I’ve read and heard from the industry to date in response to this case seems to be more about defending historical industry practice versus benefiting consumers.

People who know me know that I believe strongly in the value that good agents provide to their clients. I believe that despite all of the consumer facing technology that has been developed or may be developed in the future, well-trained professionals are indispensable in the low-frequency, highly emotional and large-stakes event we call a home purchase.

But this case is not about the industry. It is, ostensibly, about consumers. And with that in mind, if the plaintiffs were to win this case, the potential impact to consumers could be devastating.

Here’s why.

The buyers and the market would suffer

Many buyers, especially first-timers and millennials are already saddled with massive student loan debt, can barely scrape up enough cash for a down payment, let alone the potential costs for their agent. Because a buyer’s agent’s fee is not presently something that can be financed (like that of a mortgage broker), plaintiffs’ desired result would cause many buyers onto the horns of a dilemma.

Either delay their purchase until they can afford to pay for a buyer’s agent or choose to go without the services of someone in their corner.

First-time homebuyers drive the housing market, and the housing market is a critical driver of our overall economy. If a significant portion of first-time homebuyers choose to delay their purchase to accumulate extra cash to pay for their agent, sales would slow. The cascading economic ripple could be enormous.

On the flip side, in support of their argument that commissions are artificially inflated in the U.S., plaintiffs cite the low commission rates of other countries (Great Britain) where normally only one agent is involved in a home sale transaction. While I’m not an antitrust legal expert, I did spend considerable time involved with real estate transaction litigation, and in my view, we don’t want anything close to the “one-agent” Great Britain system.

U.S. homebuyers benefit greatly by having a trained professional on their side with legally defined agency obligations. State legislatures enacted real estate agency laws over the past three decades designed in large part to ensure buyers have independent representation. If the result of this case is that buyers must go it alone because they cannot afford to pay their agent, it would undermine this decades-long approach to ensure consumer protection.

So, if the plaintiffs win, prospective homebuyers are forced to either delay their purchase or they go it alone. Either scenario would be disastrous to consumers, and for that reason, this case needs to be defeated.

That said, the current MLS-based system for agent compensation is not perfect, and the industry would be wise to use this litigation as impetus to look at ways to improve the system to be more beneficial to consumers.

The plaintiffs argue that if the buyer was to pay for their agent (separate from the purchase funds), the buyer would be more likely to negotiate those fees to a lower amount, thereby creating a consumer benefit. Of course, this is conjecture as we don’t really know what U.S. buyers would do under that type of system. There is, however, at least one way that could shed some light on this argument.

Make the selling office commission amount (the buyer’s agent’s compensation) publicly available to all consumers when they view a listing. Make it a NAR-mandatory MLS rule, and do it now.

Displaying buyer’s agents compensation

Why? I believe that if a consumer is purchasing valuable services, they should know how much they are paying for those services. And they should know that amount before they receive the services. Seem reasonable?

When it comes to buyer agency commissions, we hear the industry chorus that “all commissions are negotiable” today, and therefore, nothing needs to change. The truth is that an individual agent is never compelled to “negotiate” their fee and more importantly, if the buyer does not know the fee amount when they engage the agent, or at the very least when they make an offer on a property, there can’t be a “negotiation.”

There are many great agents who provide very valuable services to their buyers and, drumroll please, they don’t work for free, nor would they ever tell their client that they work for free. Many of those great agents require the buyer to sign a buyer agency agreement before they provide services, have in-depth conversations with their buyers about the value they provide and discuss how they get paid and how that amount might vary on different properties.

Unfortunately, there are many other agents who fail to do any of the above, believing that the disclosure of the buyer’s agents’ fee on the closing statement is sufficient. They rationalize that because the buyer is not paying directly for their services, there is no need to discuss it.

Let’s be clear about one very important thing: The fact that the selling office commission is not publicly available today is not evidence of some intentional conspiracy by the industry, concocted in smoke-filled rooms, designed to dupe sellers and buyers. It is purely and simply a vestige of a system of sub agency that existed decades ago when all agents worked for the seller. That system is thankfully no longer our reality, and in a world of ever-increasing consumer transparency, it’s time to eliminate that vestige.

So if MLSs flipped the switch and made this information available today, what would be the result on buyer’s agent commission rates? The plaintiffs might argue that with more transparency, buyers would actually negotiate with their agents more frequently, and the average buyer agent commission rates would go down.

Others would challenge that and forecast that the current rates reflect market equilibrium, and they won’t change much.

Here’s my guess: Experienced buyer’s agents who provide great value will get paid just as much as they get paid today, maybe more. They will defend their value proposition just like great listing agents do with sellers. Those agents with lesser experience or a lesser value proposition might make less.

And in a world dominated by those who deliver the most consumer value, that’s OK.

So yes, a plaintiffs’ win will mean consumers lose. Maybe in a big way. At the same time, the industry must remember that one of its core functions is to protect consumer interests. And with that in mind, it cannot afford to continue practices that were created in times past only because it has always been done that way.

Consumers deserve better.

Russ Cofano has more than 25 years of executive-level experience in real estate brokerage, technology, association, MLS and law. You can find him on LinkedIn.