Changes are coming, but real estate commissions may stay the same

When we last examined this topic, multiple billion-dollar cases were being filed across the country after the Missouri federal jury in Burnett v. National Association of Realtors issued a $1.8 billion verdict against the National Association of Realtors (NAR) and its members for violating antitrust laws. Due to these various matters, experts predicted that the industry was facing annual liability reaching over $30 billion.

The central issue in these matters was whether the NAR’s rules and its members’ agreement to abide by those rules unfairly restrain trade in the residential real estate industry. At issue was NAR’s requirement that all NAR members agree, as a condition of becoming a NAR member, that real property purchase contracts contain a unilateral offer to a NAR-affiliated buyer’s broker for a commission amounting to a percentage of the property’s sales price (usually 6%, split equally between the NAR-affiliated seller’s and buyer’s broker) in exchange for access to the NAR’s multiple listing services. These listing services advertise various properties in geographic areas throughout the United States to NAR members representing buyers and sellers, and NAR’s practice of mandating the use of the databases to make offers of commission allegedly artificially raised home prices and thus constituted an unlawful conspiracy to restrain trade.

The NAR steadfastly maintains that its prior practices were lawful. The NAR contends the practice of making a unilateral offer of compensation to a buyer’s broker in exchange for access to the multiple listing services benefits consumers, homeowners and homebuyers, and the overall real estate market because it allows buyers to hire experienced and qualified NAR-affiliated buyer’s brokers. NAR-affiliated brokers then guide consumers quickly and accurately to homes listed by other experienced NAR-affiliated seller’s brokers in accordance with accepted industry standards designed to protect consumers and ensure professional integrity. Thus, the net effect of the practice on the real estate industry is to encourage, not stifle, competition.

Rather than litigate these issues through appeal, the NAR recently entered into a proposed settlement on March 15. The proposed settlement is between several classes in the various matters filed in Missouri, Illinois, and other Southern/Eastern States, which are broadly defined to include almost all parties transacting in homes sold since Oct. 31, 2019, in those states, and NAR and its member brokerages who meet certain conditions.

In exchange for certain “practice changes” to be implemented “as soon as practicable” and $418 million payable in installments over three years, the various classes released NAR and its members from antitrust liability totaling hundreds of billions of dollars. In some respects, the “practice changes” are sweeping and rewrite current industry rules.

For example, NAR and its members agree to the following:

· To eliminate and prohibit the unilateral offer of compensation to buyer brokers or other buyer representatives;

· To eliminate and prohibit unilateral offers of compensation from being made or referred to in NAR-affiliated multiple listing services;

· To prohibit and eliminate any requirements conditioning participation of membership in a NAR-affiliated multiple listing service on offering or accepting offers of compensation to buyer brokers or other representatives;

· To not create, facilitate, or support any “non-MLS mechanism” for listing brokers or sellers to make offers of compensation to buyer brokers or other buyer representatives, subject to certain conditions;

· To enter into a “written agreement before the buyer tours any home” containing certain terms related to the buyer’s broker’s commission;

· To prohibit NAR-affiliated realtors from representing that their services are free unless they actually “receive no financial compensation”;

· To require NAR-affiliated realtors to “conspicuously disclose” in writing to sellers and obtain seller approval for any payment or offer of payment that will be made to another person acting for buyers, which payment must be identified as negotiable; and

· To require NAR-affiliated realtors to not “filter out or restrict MLS listings” on the basis of compensation.

The intent of these changes is to decouple the buyer’s commission payment from the sale of a home listed on an NAR-affiliated multiple listing service. This is intended to allow the market to dictate the commission rate, not contracts entered into by the NAR and its members. This change in the industry is monumental, as before the NAR effectively set commissions through its market power—although the NAR contends the commissions were always negotiable, the classes contend in reality they were not.

Interestingly, however, the practice changes contemplated by the settlement agreement do not “prevent offers of compensation to buyer brokers or other buyer representatives off of the multiple listing service.” Thus, there seems to be a “loophole” in these rules given the state of today’s technology: commissions may still be set by way of a bilateral contract entered into via some avenue other than the multiple listing services.

Indeed, as written, the settlement agreement expressly allows entrepreneurs to create a way for a region’s agents to agree to a certain commission rate by some method other than blanket offers made on the multiple listing service. One can envision an electronic mobile application that creates a contract between all agents within a specific region, facilitating the setting of certain commissions on a region-wide basis.

For example, a mobile application may be created and made available for download on Android and Apple devices within the Los Angeles region. Agents operating in Los Angeles County could download the application, and, by way of the application, all could privately agree to the same commission scheme that existed prior—6% commissions on a home sale, split evenly between the brokers for buyer and seller. Because this type of contractual arrangement would not implicate the multiple listing services, it would seem to be permissible under the proposed settlement agreement. Although it may be argued that such an application could be a prohibited “non-MLS mechanism for listing brokers or sellers to make offers of compensation to buyer brokers or other buyer representatives,” if the application facilitates a contract, as opposed to an offer of compensation, it may arguably not be a prohibited “non-MLS mechanism” related to compensation.

The issue, apart from possible antitrust liability, would be getting consumers to agree to these commission splits created by private agreement amongst a region’s agents. Before, the multiple listing service’s operation effectively forced consumers to agree to the commission set out in the multiple listing services due to all brokerages using the services as a general practice. But now consumers will have bargaining power to refuse the commission split, and they will not be bound by the private agreement between agents. Thus, agents will have to use their negotiation skills to explain to consumers that the commissions are now set by private agreement amongst a region’s agents, and that such commission is the standard rate for competent representation in the region.

Whatever innovations occur as a result of the practice changes set out in the proposed settlement agreement, one thing is clear: change in the real estate industry is coming.