People are asking about the NAR lawsuits – hat tip to Susie, Gerry, and Carl!

The lawsuit that began this week contends that realtors force sellers to pay a commission to the buyer’s agent. Two defendants, ReMax and Anywhere (Coldwell Banker, Sotheby’s, etc.) have already come to settlement agreements, though they haven’t been approved by the judge yet. The other two brokerages, Keller Williams and Berkshire Hathaway, plus the National Association of Realtors are the remaining defendants. Their attorney started the proceedings by declaring that the plaintiffs have the burden of proof, and the defense may not call a witness. It is that type of arrogance that got them into this mess!

A summary:

In their trial brief, the plaintiffs in the suit allege that NAR’s Participation Rule, which they refer to as the Mandatory Offer of Compensation Rule, is “a market-shaping and distorting rule” that stifles innovation and competition.

“The Rule requires every home seller to offer payment to the broker representing their adversary, the buyer, even though the buyer’s broker is retained by and owes a fiduciary obligation to the buyer (who may be told, falsely, that the services of the buyer broker are “free”),” the brief said.

They argue that the current practice of the seller’s agent splitting their commission with the buyer’s agent, who typically negotiates for a lower selling price for their client, works against the seller’s interest and only exists due to the alleged anticompetitive rules. The plaintiffs also note that the NAR rule in question requires a blanket offer of compensation for the buyer’s broker regardless of their experience or the level of service they provide the buyers with, and that the compensation offer was only visible to the buyer’s agent and not their clients, until very recently.

“This artificial and severed market structure created by Defendants’ conduct deters price-cutting competition and innovation, resulting in inflated commissions,” the brief states. “The Mandatory NAR Rules impede the ability of a free market to function in the residential real estate industry, and the plain purpose and/or effect of the Rules is to raise, inflate, or stabilize commission rates.”

In the brief, the plaintiffs claim that the other defendants in the suit colluded with NAR to enforce this and other NAR and MLS policies.

“The Corporate Defendants compel compliance in multiple ways, including by requiring their franchisees, subsidiaries, brokers, and agents become members of NAR; writing the NAR Rules into their own corporate documents; and requiring that their franchisees, subsidiaries, brokers, and agents become members of and participants in the Subject MLSs — entities that compel NAR membership and adopt the mandatory NAR Rules,” the brief reads.

The brief notes that Craig Schulman, the director of Berkeley Research Group and professor of economic data analytics at Texas A&M University, will be an expert witness for the plaintiffs at trial. In studying transaction data from NAR and other parties, the brief states the Schulman has concluded that “(a) the NAR Rules have anticompetitive effects; (b) the NAR Rules caused a seller to pay his adversary (buyer broker) and that, but for the conspiracy, a seller would not pay the buyer broker; and (c) all class members were impacted.”

The brief also notes that Schulman will testify that NAR’s rules have stabilized commission rates at an “anticompetitive level,” noting that commissions have remained at 6% for several years.

Unfortunately, none of the reality of what happens on the street will get introduced during the trial. Instead, it will be ivory-tower guys hoping to persuade the judge and jury (one of which has to breast-feed her infant every 1.5 hours) that the whole commission thing is out of control and someone is to blame.

But the defendants have a good point:

NAR also argued that the plaintiffs do not have the ability to sue for damages —which some believe could reach as much as $4 billion in this case — because under federal and Missouri antitrust law, only “direct purchasers” can be allowed to sue and the plaintiffs have not bought anything directly from NAR or the other defendants.

“And, according to those same Model Rules and listing agreements, Plaintiffs did not directly pay cooperating agents, NAR, or the other Defendants; sellers only directly pay their listing agents and only directly receive services from their own agents,” the brief states. “Therefore, at best, Plaintiffs might claim that they paid their listing agents (who are not parties to this case) who, only then, paid Defendants. But such an indirect claim is prohibited by Supreme Court case law.”

Home sellers pay the full commission to the listing brokerage.  It is the listing agent who declares in the original listing agreement of how much of the full commission they are willing to pay the buyer’s agent. None of this will be discussed during this trial, but it’s the most important part!

The plaintiffs should be suing the individual listing agents – good luck with that!

In the end, the defendants might be found guilty, and they will appeal for years – the American way! Or it’s more likely that they will settle in the next couple of weeks because the ReMax and Anywhere settlements were only $55 million and $85 million, which is pennies.

Part of the settlement package will be that the MLS will no longer be obligated to display ANY commission to be paid to the buyer’s agent. It will cause two things to happen:

  1. MORE steering by the buyer-agents to the homes that are paying a healthy commission (bounty).
  2. Buyer-agents trying to convince their buyers to pay them the buyer-side commission.

Kayla is faced with this dilemma in New York City. Did you know that 2/3’s of the population in Manhattan are renters? It’s a big business! But the listing agents don’t offer a tenant-agent commission, which means Kayla has to get paid by her tenants upon finding them new home to rent.

The results:

  1. She has had the landlord’s listing agent pull aside her potential tenant and tell her to ditch Kayla and save the money, and go through him directly. Apparently they aren’t concerned with their reputations!
  2. She has also had her potential tenants be reluctant to sign an tenant-agent agreement because they see apartments being advertised by the listing agents. They want to reserve the right to go direct to the listing agent, and usually they do. As a result, Kayla only works with those who appreciate her advice.

The idea that home buyers will hire and pay their own buyer-agents is a great idea… theory.

The reality is that buyers will go direct to the listing agents when they see an interesting new home for sale. Those listing agents will be advertising to those buyers directly, and flat-out encourage them to get a better deal by going through them.

The buyer-agent is a dead man walking.

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