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Real EstateBrokerage

Are U.S. real estate commissions illegal?

The Justice Department and private lawyers are zeroing in on real estate commission rates. But industry leaders are unfazed.

HW+ Jack Ryan, CEO of residential brokerage REX
Jack Ryan, CEO of residential brokerage REX

This is Part Two of Three in HousingWire’s dive into all matters residential real estate commissions. Part one looks at how we got here. Part three looks at what’s next. 

Wearing a rolled up checkered-shirt, gesticulating wildly with one arm, 61-year-old Jack Ryan is an unlikely torchbearer to storm the gates of the residential real estate establishment, and its 5% average real commission on home sales. 

Ryan – who is not to be confused with the fictional Ryanverse created by Tom Clancy – gained fleeting national attention in 2004 when he secured the Republican nomination for a vacant U.S. Senate in Illinois.

He had made millions of dollars as a banker at Goldman Sachs, quit that firm to become a Chicago school teacher, and was set to take on Democratic nominee Barack Obama. But court records from Ryan’s divorce were unsealed in which Ryan’s ex-wife, the actress Geri Ryan, accused him of pressuring her to visit sex clubs. The fallout was enough for Ryan to drop out of the race.

Ryan became an entrepreneur. He started 22nd Century Media, a hyperlocal news company to serve the Chicagoland area that folded last year. But Ryan had already left 22nd Century Media in 2015 to start the Austin, Texas-headquartered residential brokerage Real Estate Exchange, or REX.

Now, the word “disruptor” is cliché in business. But if there ever was a company with a deliberately disruptive business strategy, REX is it. They file lawsuits against the industry’s biggest players – the National Association of Realtors, Zillow – and feed the U.S. Justice Department information, so they can also sue the NAR.

A lawsuit REX filed in March against the NAR and Zillow runs a cool 48 pages, minutely detailing REX’s business strategy, which is a brokerage that does not work under NAR’s commission guidelines, and instead charges on average a 3.3% total commission.

Like REX’s lawsuit, Ryan is also prone to extended flourishes. In a recent Zoom interview, he elaborated upon how, “computers can take the robotic activity away from the humans.” That seems to mean there is less administrative work today for agents.

Surrounded by two white legal pads filled with notes and a Diet Coke can with a straw, Ryan often seemed to be discussing nothing at all, joining words together about Darwinian behavior, and the value of “man bites dog” news.

But at other times, Ryan made the kind of trenchant observations that have gotten the Justice Department’s attention.

“I’ve been surprised by the blatancy of NAR members putting their interests ahead of their consumers,” Ryan said.

The CEO claims that, in putting themselves ahead of their clients, these agents have “breached a moral duty.”

Full-court press

In November, Makan Delrahim, in the twilight of leading the Justice Department’s Antitrust Division, announced a lawsuit and a settlement with the NAR. 

“In several places of NAR’s handbook,” the DOJ noted, NAR tells members to conceal from consumers what commission the listing agent set for the buyer’s agent. This concealment lets buyer’s agents, “Filter MLS listings based on the level of buyer broker commissions offered and to exclude homes from consideration by potential home buyers.”

The Justice Department called for NAR to end the ban on posting buyer’s agent commissions. Some websites including Redfin now publish buyer-side commissions, though many – such as Zillow – do not. 

Similar to the 2008 DOJ-NAR deal, the recent settlement is about consumer information. It is “providing greater transparency to consumers about broker fees,” Delrahim said in November.

But a half-dozen federal lawsuits filed across the country want not just transparency, but to make illegal the NAR guidelines on real estate commissions.

The lawsuit furthest along is filed in federal court in Chicago, home to the NAR’s 12-story headquarters that lights up with a glowing “Realtor Building” sign for Magnificent Mile shoppers at night. 

In this particular case, the plaintiff is not REX, but instead Christopher Moehrl, who in 2017 paid a 6% total real estate commission to buy a home in the Minneapolis metropolitan area.

The lawsuit is a proposed class action, and Moehrl’s lawyers are the well-oiled law firm of Cohen Milstein Sellers & Toll PLLC, whose high-profile cases include taking on an alleged horizontal pricing conspiracy among motion picture studios.

Defendants in the case are the NAR and the four largest residential brokerages – Realogy, Berkshire Hathaway Home Services of America, Keller Williams, and RE/MAX. NAR and the brokerages moved to dismiss the case. But Judge Andrea Wood ruled in October that the case should go forward, and it is now in the evidence-gathering stage.

Wood’s ruling was too preliminary for her to conclude that price-fixing permeates real estate. But the judge has surmised a few aspects that are fixed.

All parties, the judge noted, see cooperating with the NAR as needed for economic survival. As for the 108-year-old rule tying sales’ agent commissions with those of buyer agents – last tweaked in 1996 – the judge noted it “requires a blanket offer” made “without regard to the buyer-broker’s experience or the value of services the buyer-broker provides the client.”

This guideline, Wood wrote, “By itself raises antitrust concerns.”

The brokerages involved in the pending litigation either did not comment or stated the case is without merit.

The NAR did not make executives available for interviews. It did provide a written statement from Oppler, who is the NAR president and for the past 29 years CEO of Prominent Properties Sotheby’s International Realty, a Realogy affiliate. 

Oppler stated that the present real estate commission structure “makes the dream of home ownership in reach for more Americans,” because costs are borne by sellers instead of homebuyers. 

Further, Oppler asserted that the MLS and NAR guidelines are “designed to incentivize cooperation between brokers who share all their information in one place, providing the best and greatest number of options for buyers as efficiently and transparently as possible.” 

But Oppler’s statement did not raise a defense for the current real estate commission rates, besides noting that amid increased competition they are slightly down. 

There is a high hurdle to showing that consumers are harmed to the point that a court ought to revamp an entire economic sector, legal experts emphasized.

“Most courts are conservative applying antitrust laws,” said Andre Barlow, an antitrust lawyer at Doyle, Barlow & Mazard. Judges give companies and trade groups the floor, Barlow said, to explain “legitimate business justifications” for coordinated agreements among competitors.

But plaintiffs are a step ahead in one respect. The alleged conspiracy to set commission rates, Barlow noted, is based not “speculative allegations there were backroom conversations,” but rather, “written rules that the defendants have all agreed to follow.”

The moment is ripe for litigation due to growing evidence that technology advances have not lowered consumer prices, said Laura Alexander, vice president of policy at the Antitrust Institute in Washington, D.C.

“These are very serious lawsuits,” Alexander said. “There is a good chance something will come out of them.”

Defending an agent’s commission

Steve Murray has seen this before.

The co-founder and president of the 34-year-old RealTrends, which is owned by HW Media, Murray recalls up to half-a-dozen efforts by plaintiff lawyers and the federal Justice Department “to artificially rearrange the industry to force commission rates down.”

“I have been an industry expert witness in several cases at the federal level – had a front-row seat so to speak – and it is amazing to me that all these people don’t get it. Consumers have the right to not use or use an agent. And they know it,” Murray said. “There is no regulation that says a consumer has to use an agent and between 8-to-10% choose not to.”

That up to 90% of home sellers and buyers do use real estate agents is because consumers “are swimming in information but with precious little insight,” said Ryan Gorman, CEO of Realogy-owned Coldwell Banker.

“Virtually everyone starts their home search online now,” Gorman said, “But it is extremely rare for the consumer to end up purchasing their property without the guidance of an agent.”

A good agent, for example, may nudge a client toward a neighborhood they are less familiar with, but might prove a fit, Gorman said.

Oppler made a similar point. “Real estate agents help people navigate complex, data-heavy and voluminous information, details, and decisions,” the NAR President stated. “That includes everything from coordinating with lenders, managing attorney reviews, and advising on zoning to arranging appraisals.” 

Like Oppler, agents also cited the versatility and dynamism they needed to succeed.

“This profession requires dedication and many hours weekly – during the time you may otherwise be with your family,” said Stacey Sauer of Keller Williams in Flower Mound, Texas.

What upset many agents was a sense that critical lawyers, economists, and sociologists did not respect their work as much as other professions. 

 “A surgeon does not get paid $10,000 or $20,000 for five or 10 minutes of work,” said Edward Hru, of eXp realty in Orlando. “He gets paid for all his knowledge and experience behind the operation.”

But commission rate critics do not necessarily say agents lack value. What they do say is that U.S. agents should not make more money than ever. Not when other sales brokers have fallen to the wayside, and other white-collar professions endure profound disorientation in the digital age.

The industry’s response? Consumers have spoken.

“The fact is consumers are neither stupid nor lazy like all those who want to end agents’ role and their income levels want to believe,” Murray said. “Consumers choose an agent to help them through the process, because they actually think the agent is worthwhile and provides service.”

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