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Are you prepping for worst-case commission lawsuit outcomes?

The first of the lawsuits was scheduled to go to trial in February but has been postponed.

Real estate commissions are under the microscope. With the scrutiny of The Department of Justice and the Federal Trade Commission and multiple lawsuits concerning how buyers’ brokers get paid, many brokers say it feels like an all-out war on the real estate industry. But, there are steps that both brokers and agents can take to minimize the damage of a worst-case scenario.

Right now, the first suit to go to trial should be the Sitzer lawsuit (named after its lead plaintiff), which was scheduled to begin on February 21, 2023, but at the request of Anywhere (referred to as Realogy in all court filings), it has been postponed indefinitely, as reported by Real Estate Reporter Brooklee Han.

Judge Stephen R. Bough of U.S. District Court in Western Missouri granted Anywhere’s motion to continue on December 13 and said the court would choose a new trial date “in late 2023,” but an exact timeline was not provided, as previously reported by Han.

Unlike Anywhere, NAR is against the trial postponement. The lawsuit, which was originally filed in 2019 and won class-action status in April, alleges that some NAR rules, including one that requires listing brokers to offer buyer brokers a commission to list a property in a Realtor-affiliated MLS, violate the Sherman Antitrust Act by inflating seller costs.

Through the class certification, hundreds of thousands of home sellers in four MLS markets in Missouri can ask the defendants, which include Keller WilliamsRE/MAXHomeServices of America and its subsidiaries BHH Affiliates and HSF Affiliates, as well as Realogy/Anywhere and NAR, to be reimbursed for the $1.3 billion in commissions they paid to buyers’ agents in the past eight years. However, potential treble damages could put the total damages in the case at around $4 billion.

Other threats

Another lawsuit filed by REX in March 2021 against the trade group and Zillow, alleges anti-trust violations related to an NAR rule, known as the no-commingling rule, that prompted Zillow to separate non-MLS listings from MLS listings on its website, including listings from REX.

The Moehrl antitrust class action was filed in 2019 in the U.S. District Court, Northern District of Illinois on behalf of home sellers who paid a broker commission in the last four years in connection with the sale of residential real estate listed on one of 20 Multiple Listing Services (“MLSs”), covering several major metropolitan areas in the Mid-Atlantic, Mid-West, South-West, Mountain-West, and Southeast regions, according to the plaintiff’s attorneys, Cohen Milstein.

Both the Moehrl and the Sitzer cases deal with what REX refers to as the Realtor association’s “buyer broker commission rule.” REX argues that this rule, which requires listing brokers to offer buyer brokers a commission to list a property in a Realtor-affiliated MLS, and NAR’s no-commingling rule both aim to maintain artificially high real estate commissions.

“The thing is,” says Rob Hahn, managing partner of 7DS Associates, “if the Sitzer case goes the way I think it will, brokers won’t even need to wait for Moehrl [to be tried]. It will be a disaster.” However, it’s likely that no immediate action will be necessary. “The case will go through appeals and unless there is an injunction requiring immediate action, it will be awhile before the ruling is final,” says Steve Murray, senior advisor for RealTrends.

Should you be concerned?

“If you’re not deep into planning on this, you are irresponsible. Worst case, cooperation and compensation goes away.” If it does, he says, “It becomes about who has the best marketplace. And, the MLS will still have it in many regards because they are the only ones who do any reasonable job of policing the data. Because the larger brokerage firms, historically, tend to represent more buy side than sell side, they “may be looking at a big loss of revenue,” says Murray.

However, in a recent RealTrends BrokerPulse Q1 2023 survey, a mere 3.45% of brokers surveyed felt like the “outcome of commission lawsuits” were a challenge or concern. When asked what they are doing to prep for a worst-case outcome, some 60% answered, “Nothing.” Other popular answers included, ‘implementing buyer representation agreements,” “full disclosure of client options,” and “more training on our value proposition.”

And, there are a lot of different outcomes that may happen when all is said and done. “We may eventually have it where buyer commissions can be rolled into the mortgage. I mean, they kind of are today,” says Hahn. “So, the question is, ‘What do the powers that be want?’ And, that may be real estate commissions closer to 2% rather than 6%. That may determine the direction many brokers go.”

The biggest question remains: What will buyers do? How you prepare hinges on how they will act if cooperation and compensation goes away. Will they still use a buyers’ agent to find a house? “All our our consumer research points to yes,” says Murray.

Here are a couple things brokers may want to consider implementing:

Buyer representation agreements

Murray and Hahn recommend that brokers shore up buy-side presentations and buyer representation agreements. “You must train all of your agents as to how you’re going to get compensated,” said Murray. And, he notes, brokers should figure out how buyers’ agents are going to represent real value to home buyers. “Otherwise, the industry is looking at losing anywhere between 20% to 25% of the total gross revenues of the industry.”

This concept of buyer representation agreements isn’t new. Merle Whitehead, who in 2016 sold his brokerage RealtyUSA to Howard Hanna Real Estate Services, “years ago, worked diligently to increase the share of buyers who were under contract to work with his agents,” says Murray. “He got up to 20% to 30%, as I recall.”

Manage away from sales offices

An obvious thing to do is shore up core services; however, Murray says, “You can’t lose a lot of money in the brokerage business with the hopes that core services will subsidize it.” So, he recommends brokerages “manage their companies away from a sales office-based culture.” That means cutting occupancy and operating costs. “I suggest they ask the questions, ‘What do top producers actually use at a brokerage company?’ That will help you decide what can go,” he says.

In our research, RealTrends interviewed top producers from RealTrends 500 firms and many didn’t bring up marketing, technology or office space as the top reasons they’re at their firm. They did mention good branding and the people.

If it doesn’t seem there’s much you can do to prepare, it’s because there isn’t. “There are so many unknowns that it’s hard to plan for every scenario, but brokers can make changes today that can give them an edge,” says Murray. “And, their leadership teams should be brainstorming.”

Alternative business models

One broker who says he is prepared is Scott Brady, owner of Progressive Property Management Inc. in California. “I ran a Coldwell Banker franchise and life was great. Then, the Great Recession hit, and I didn’t see it coming. I was just too busy building the company, selling real estate and developing properties.”

Brady had already been through three recessions. “Every time, my family was in the construction lending business, and they’d lose homes and file bankruptsy. So, I had some scar tissue from that,” he said. So, in 2012, he decided to start a property management company rather another traditional real estate brokerage. “Fast forward to 2022, and we manage 1,200 properties through Southern California. Our property managers are real estate agents and we run association management, as well,” he said. He said they run 80 associations with 4,000 owners.

Building a property and association management company isn’t everyone’s cup of tea. But, you can be sure that with change comes innovation. Today’s slow real estate market and potential lawsuit outcomes will mean new business models for real estate.

What those new models are remains to be seen. The one certain is that the industry will evolve and it’s vital that you evolve with it.

Comments

  1. Unless underwriting guidelines and compliance regulations change, rolling the compensation into the mortgage is unrealistic. Currently, agency and government underwriting guidelines do not allow for this. Additionally, Qualified Mortgage compliance would also need an overhaul to allow the compensation to be rolled into the mortgage.

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