This is the first part in a week-long series examining the high stakes and potential impact of two closely watched federal lawsuits — the so-called Moehrl and Sitzer cases — taking direct aim at how homebuyers pay commissions. Check back on Wednesday for the plaintiffs’ case for class-action status in the far larger Moehrl lawsuit, and on Thursday, Inman dives into the real-world impact these cases could have on millions of real estate agents.
Every residential real estate transaction is unique and therefore a federal court should not wrap up the claims of millions of homesellers into a class action, according to defendants in one of two bombshell commission lawsuits that could rock the real estate industry.
In June, the U.S. District Court for the Northern District of Illinois posted an unsealed, partially redacted version of a motion for class certification in a federal antitrust case brought in March 2019 by homeseller Christopher Moehrl against the National Association of Realtors and real estate franchisors Realogy, HomeServices of America, RE/MAX and Keller Williams. Other homesellers subsequently joined as plaintiffs.
If granted, the plaintiffs’ motion would allow potentially millions of homesellers across the country to seek billions in damages for commissions they paid to buyer agents between 2015 and 2020.
The suit alleges that some NAR policies — including one requiring listing brokers to offer buyer brokers a commission in order to list a property in a Realtor-affiliated multiple listing service — violate the Sherman Antitrust Act by inflating seller costs. NAR has 1.5 million members nationwide; the vast majority are residential real estate agents and brokers.
The suit, like a smaller federal case in Missouri known as Sitzer/Burnett, seeks to have homebuyers pay their brokers directly, rather than having listing brokers pay buyer brokers from what the seller pays the listing broker. Sitzer/Burnett recently won class certification for homesellers in four MLS markets in Missouri and survived an appeals court challenge from the defendants.
The defendants made clear they did not think the fact that Sitzer/Burnett got class-action status should have any influence on the court’s evaluation of Moehrl.
“While that case addresses the same Cooperative Compensation Rules in four Missouri MLSs, the decision is not persuasive, is based on different and in fact wildly inconsistent expert opinions and conclusions, and cannot be used to patch over the many holes in Plaintiffs’ motion,” the filing said.
By contrast, Moehrl is seeking class certification for homesellers in 20 MLS markets nationwide, and therefore has the potential to make an even bigger splash if plaintiffs have their way.
Last month, the real estate establishment pushed back, filing a sprawling legal document that runs more than 3,000 pages and argues that the case shouldn’t become a class action suit. Among other things, the lawyers for NAR and the other defendants make the case that there’s no proof sellers would have saved money in a world where they didn’t cover the costs of buyers agents.
It’s a big document, but the basic argument lawyers are making is simple: Don’t blow up real estate’s compensation model because there’s no proof it isn’t working.
‘Radical’ and ‘doomed’
The Moehrl case has been a bombshell since day one, but in the years since it began it has also become part of a broader set of forces putting pressure on the way agents — particularly those who work with buyers — get paid.
In addition to the Moehrl case, there’s another similar lawsuit that was also filed in 2019. Then there’s an ongoing legal battle between NAR and the U.S. Department of Justice. And there are a smattering of other lawsuits, such as those filed by discount brokerage REX Real Estate, that attack the real estate establishment, raise antitrust issues and take issue with compensation models.
None of these cases are exactly the same, but they all raise at least some overlapping issues. And taken together, it’s clear that the pressure on real estate’s dominant compensation models is immense. A lot of people are trying to shake things up all at once.
The story of these many different legal fights is not over. But at this point what’s clear is that if even some of them ultimately succeed, it could slash the status quo in two.
This week, Inman is diving into what that could mean to members of the industry. Part of that means digging into the legal status of the flagship Moehrl case. But in this series, Inman is trying to understand what the world might look like when all the dust settles. It’s a speculative project, but the hope is to tease out some scenarios that could become reality in the future by exploring different models that are a reality today. Because no matter what happens, there’s a very good chance that the future of real estate isn’t going to look like the present.
In Moehrl, the defendants took aim at the plaintiffs’ comparisons of the U.S. real estate market to the markets of Australia, the Netherlands, and the United Kingdom and said it was “radical” to suggest that homes would and should be sold in the U.S. as they are in those countries, absent the NAR rules at issue in the case.
“If Plaintiffs’ hypothesis was correct, the practices prevailing in those countries would replace the manner in which residential real estate has been sold in the United States for more than 100 years, a system that aligns the interests of home sellers and home buyers alike, helps cash-constrained and first-time buyers achieve the dream of home ownership, and is supported by sound economic principles,” the defendants’ attorneys wrote.
They also maintained that the main NAR rule at issue in the case doesn’t require listing brokers to make any specific offer of compensation and therefore “has nothing whatsoever to do” with how much listing brokers charge.
“Not only do Plaintiffs demand a wholesale change to the United States residential real estate system because of a rule that does not require any specific level of compensation, they also seek to certify a massive class covering perhaps millions of home sellers and seek to recover upwards of $40 billion,” the filing said. “Plaintiffs’ class action gambit is doomed.”
The defendants used the same point to push back against the plaintiffs’ price-fixing allegations.
“Given the ability of listing brokers to offer whatever amount of cooperative compensation they each deem to be in the best interest of their seller clients, the notion that the Rule fixes prices is unfounded,” the filing said.
Every transaction is ‘unique’
The defendants argued that the plaintiffs were attempting to “characterize a highly localized and individualized process implemented by hundreds of thousands of independent contractor real estate agents as a supposedly common, uniform course of conduct, in which all agents and consumers make precisely the same decisions and evaluate homes, pricing, contract terms, and service offerings in the same way.”
No two real estate deals are the same, according to the defendants.
“Every buyer and seller are unique, every property is unique, every home is unique, and every transaction (including the negotiation over commission amount) is unique,” the filing said.
In order to prove their case, each individual plaintiff would have to show that, for each deal, the rule affected the behavior of the seller, the listing broker, the buyer, and the buyer broker, and would need to show that, without the cooperative compensation rule, each would have acted differently.
“Each Plaintiff would need to show that, absent the Rule, he or she would have demanded that the listing broker accept a smaller commission than what the plaintiff actually agreed to pay, and that each Plaintiff’s listing broker would have acceded to that demand,” the filing said.
“Each Plaintiff would also need to show that, absent the Rule, his or her listing broker would have agreed to list the house for sale without an offer of cooperative compensation to the buyer broker; that the purchaser of each of their homes would have agreed to compensate his or her buyer broker out of the buyer’s own pocket (or would have forgone using a buyer broker entirely); and that each purchaser had the means to do so and complete the purchase at the same ultimate purchase price.”
Moreover, because the plaintiffs’ experts acknowledged that absent the rule some sellers would still compensate the buyer broker, “there is no way of figuring out whether any given seller in the proposed class would have done so” without holding a series of “mini-trials.”
“Most critically, how will Plaintiffs establish that, in the absence of the Cooperative Compensation Rule, sellers in the putative class would have acted differently?” the filing said. “In other words, how will Plaintiffs prove at a class trial that class members would not have offered the same cooperative compensation to the buyer’s broker short of a mini-trial with questions posed to each seller?”
No evidence most buyers wouldn’t use buyer agents and sellers wouldn’t pay for them
The defendants’ attorneys asserted that the plaintiffs lacked evidence to show that, as argued by the plaintiffs’ experts, most buyers would no longer use buyer agents and most sellers would no longer pay for them if the main NAR rule at issue in the case were rescinded.
The defendants noted that the benefits of buyer agents to buyers did not depend on the rules at issue in the case.
“Even with increasing technological resources, buyers still report that buyer brokers provide valuable services, including guidance on houses and neighborhoods, purchase offer and closing contract negotiation, and referrals to service providers such as mortgage providers and home inspectors that are helpful (and sometimes necessary) to facilitating a successful home purchase,” the filing said.
“Indeed, 51 percent of buyers stated that what they wanted most from a real estate agent was help finding the right home to purchase.”
The question of whether a buyer would choose to use a buyer agent would depend on individual circumstances, including the buyer’s familiarity with real estate transactions and the local real estate market, according to the defendants. In legal parlance, that’s called the “but-for world,” or a world in which the challenged rules don’t exist.
“Plaintiffs have failed to demonstrate that they can prove, on a class-wide basis, which of their but-for sales transactions would have included a buyer broker, and which would not,” the filing said.
“The question whether any particular class member might have sold to a buyer using a buyer broker in the but-for world is an inherently individualized one and cannot be resolved in a class action.”
The defendants also argued that even absent the cooperative compensation rule, sellers have “a strong incentive” to offer to pay buyer brokers.
“Home purchases typically require a buyer to save a significant sum of money to use as a down payment, and at least some buyers would not be able to come up with additional funds to cover the expense of a buyer broker,” the filing said.
“Sellers would therefore be incentivized to cover that expense – just as they currently do with many other buyer-side expenses – in order to attract more buyers and help the transaction get finalized.”
No evidence that steering wouldn’t exist without cooperative compensation
Although the plaintiffs point to steering as both evidence of and a reason to end cooperative compensation, they have not offered any evidence to show that eliminating the challenged rules would end steering, according to the filing.
The defendants argued that listing brokers’ offers of cooperative compensation directly benefit their seller clients by incentivizing other brokers to find a buyer for a listing, expanding the pool of buyers able to compete to buy the seller’s property, increasing the number of purchase offers sellers would have otherwise received, and increasing the likelihood that the deal will close because buyer brokers can work with their clients and with listing brokers to resolve unexpected issues.
“These benefits exist independently of the NAR rules challenged in this case,” the filing said. “The incentives that Plaintiffs claim lead to steering will exist as long as any seller in a relevant market is offering cooperative compensation, and cash-constrained buyers will continue to prefer listings that include buyer broker compensation.”
‘Baffling’ and ‘fatal’ damages model
The defendants took issue with the way one of the plaintiffs’ experts calculated damages in the case. According to the expert, the average of the buyer-broker commission rates paid in Australia, the Netherlands, and the United Kingdom is 1.55 percent, and therefore, on the “conservative assumption” that absent the NAR rules all buyers would have retained buyer brokers and all sellers would have paid buyer broker commissions, he compares what sellers actually paid to that 1.55 percent benchmark and calculates that total class damages are $13.7 billion.
If the court awards “treble damages”, the term used to describe an award up to three times actual or compensatory damages, that figure could go up to $41.1 billion.
That analysis is “baffling” and “fatal” to the plaintiffs’ case for class certification, according to the defendants’ filing. That is because one of the plaintiffs’ experts, NYU economics professor Nicholas Economides, said that between 5 and 20 percent of buyers would still use buyer brokers if the challenged NAR rules went away, though those buyer brokers in that “but-for world” would have been paid less than in the actual world.
“None of this has anything to do with Plaintiffs’ liability theory that, in the but-for world, buyer brokers would be largely absent and not paid for by sellers, and not, as his damages model hypothesizes, equally present but just paid less by sellers,” defendants’ attorneys wrote.
“Economides justifies this blatant guesswork … as acceptable because it is, supposedly, ‘conservative,'” the filing said.
Sellers may not be better off if the commission rule went away
The plaintiffs don’t have any common, class-wide proof that sellers would be better off if the challenged rules didn’t exist, defendants’ attorneys wrote.
Because sellers do benefit from higher home prices, proving whether they were injured would require the court to individually analyze each seller, the price of the home and commission paid in the actual world, and the price of the home and commission paid in the but-for world, in order to determine in which world the seller is better off, according to the filing.
“Plaintiffs offer no means of performing that analysis, which would be necessary to establish whether fact of injury can be determined on a class-wide basis,” the filing said.
Rather than offering a way to figure out the net economic impact on sellers of eliminating the rules at issue, the plaintiffs assume that sellers would get the entire benefit of any lower commission and nothing else would have changed, according to the filing.
“This assumption fails to account for, or even consider, how reassigning the cost of buyer broker services from the seller to the buyer would change the dynamics of the home sale transaction,” the filing said.
“Plaintiffs’ overly simplistic models of antitrust impact and damages fail to address the myriad ways individual class members may have benefitted from the Challenged Rules, and would be harmed from their removal in the but-for world.”
For instance, buyers that would have to pay for their broker’s fee out of pocket might delay their home purchase, have less purchasing power, or drop out of the market altogether — all of which would negatively impact homesellers because their homes might not sell at all, or sell for less, or take longer to sell.
“Indeed, one of the key studies on which Economides relies states that housing prices would decrease by 2-3 percent if the financial burden of commissions shifts to buyers,” the filing said.
That would either render the sellers uninjured, if they end up netting the same amount, or worse off, according to the filing.
“Because Plaintiffs do not account for the change in house price to the class members, even though their experts admit such an impact, their model fails,” the filing said.
In addition, the defendants pushed back on the plaintiffs’ and others’ argument that mortgage brokers would be willing to allow buyer broker commissions to be financed.
“Among the issues that such an assumption ignores is (i) whether and to what extent such financing would create mortgage loans with higher Loan to Value ratios (LTVs) and appraisal issues which could often result in buyers not being able to be qualified for such loans; whether if such loans could be made, how they could possibly comply with the Qualified Mortgage safe harbor the CFPB put in place after the last mortgage crisis and be eligible for purchase by Fannie Mae or Freddie Mac; and (iii) how the remaining capital market investors would regard such loans and the premium price (i.e. higher interest rate) if any, they would demand in order to purchase such loans,” the filing said.
The filing further notes that in markets where listing brokers don’t have to offer compensation to buyers’ agents, compensation was still offered by virtually all listing brokers. This includes Northwest MLS, which eliminated the buyer broker commission rule in 2019, as well as West Penn MLS and the Real Estate Board of New York Listing Service (RLS), which permit offers of zero dollars in compensation to buyer brokers.
None of these three multiple listing services are affiliated with NAR.
None of the franchisor defendants are members of NAR
The corporate defendants’ attorneys also reminded the court that none of the franchisors are brokers or agents and therefore none are actually members of NAR or of MLSs and therefore none of them are subject to the NAR rules at issue in the case.
In the filing, some of the defendants denied requiring their franchisees to follow NAR rules while others maintained they did not dictate to their affiliates what commission rates to charge.
For instance, the filing said that neither Homes Services of America or its affiliates requires its franchisee brokerages or those it owns to join NAR, local Realtor associations, or an MLS.
“The brokerages make such determinations on their own,” the filing said.
Keller Williams said it does not require its franchisee brokerages or affiliated agents to comply with NAR’s MLS policy handbook.
“[N]either Keller Williams nor its franchisees dictates how affiliated agents operate their businesses, including the commission rates they charge or cooperative compensation offers they extend through MLSs,” the filing said.
Realogy also said that it does not require its employees, brokers, or independent contractor sales agents affiliated with its company-owned or franchised brokerages to become members of NAR or to become members of any local MLS or to participate in the “governance of NAR, any local realtor association, or any local MLS.”
“Of all of the various NAR rules, guidelines, and handbooks, the only one that Realogy requires its company-owned brokerages and independently owned and operated franchisees that license one of its brands to follow is the NAR Code of Ethics,” the filing said.
“Realogy does not require compliance with NAR’s Handbook on Multiple Listing Policy. Realogy does not control or dictate the commissions that independent contractor sales associates affiliated with company-owned brokerages or independently owned and operated franchisees negotiate and/or charge buyers or sellers.
“Nor does Realogy train its franchisees or its independent contractor sales associates to negotiate and/or charge a specific commission rate.”
RE/MAX said its affiliated brokerages and agents “have discretion” as to the commission rates they charge.
“RMLLC does not require brokerages or agents to charge any specific level of commissions for the sale or purchase of residential real estate,” the filing said.
“Indeed, the only requirement RMLLC imposes with respect to commission rates or fees relates to how they are advertised, requiring that if a brokerage or a real estate agent affiliated with the brokerage elects to advertise commission rates or fees, the advertisement must clearly state that other RE/MAX brokerages or agents may charge different rates or fees, or offer different listing and marketing services.”
Even though some of the franchisors’ executives have participated generally in NAR’s governance, the defendants argued that “mere membership in or attendance at a trade association is insufficient to impose liability” and that the plaintiffs failed to point to any attendance related to a topic relevant to the case.
“Plaintiffs point to no meeting at which the Cooperative Compensation Rule was even discussed,” the filing said.
“Further, Plaintiffs have offered the Court no class-wide means to confirm whether any given actor not directly employed by a Corporate Defendant took action because of any connection to a Corporate Defendant or to the claimed conspiracy.
“The Court may not simply attribute to the Corporate Defendants liability for the conduct of persons who are engaged with independently owned and/or operated real estate brokerages.”
A wholesale change to the system
Defendants in this case ultimately don’t pull any punches. In their latest court documents, they say Moehrl’s case is based on an “unsupported and untested hypothesis.” They say it “suffers from many defects.” And they say the request to let other consumers join the case is an “insurmountable class certification hurdle.”
But most significantly for professionals working in the trenches, they frame the case as an existential moment for real estate, with Moehrl’s attorneys calling for a “wholesale change to the United States residential real estate system.”
Where this story leads remains to be seen, but even now it’s clear that no matter what happens, the impacts will be felt for a long time.
Read the redacted filing opposing class certification (without exhibits):
What do you think of the defendants’ arguments? Let us know in the comments below.