Make no mistake about it — the real estate industry’s cooperative sharing of listing information and commissions through the MLS is under siege by the Department of Justice as well as two different bombshell lawsuits, Moehrl and Burnett. While the certification of the class in Burnett is only an initial procedural step in the litigation and there are serious issues with the plaintiff’s complaint, the industry still needs to proactively address the underlying issues regarding agent compensation.
Certification of class is only procedural; it doesn’t address the merits of the case
Before a class action lawsuit can proceed, the class must be certified. The process ensures that the plaintiffs have enough similarities to proceed with the litigation against the named defendant as part of one larger case.
In other words, this is not a victory for the plaintiffs. It is a procedural matter that simply allows others who have been impacted by this litigation to join as plaintiffs.
The order granting class certification in Burnett vs. the National Association of Realtors sums up the plaintiff’s primary allegations:
Plaintiffs allege that certain rules in both the NAR Handbook and Code of Ethics (the “Challenged Rules”) require sellers to make a blanket unilateral offer of compensation to any broker representing potential buyers as a condition of listing their home on a Subject MLS. Plaintiffs allege the enforcement of the Challenged Rules results in price-fixing which artificially inflates residential real estate broker commissions paid by home sellers because, without these mandatory rules, sellers would not compensate the broker representing their adversary (the buyer) in the transaction.
For the Burnett class action lawsuit to prevail, the plaintiffs must show that sellers would not compensate a buyer’s broker in a transaction. The examples below show why that is simply not the case:
- Builders have a long history of paying commissions to buyer’s agents whether they have listed the property with an agent or not.
- Many For-Sale-by-Owners will compensate a buyer’s agent who brings them an offer on their property.
- In the four previous downturns I have experienced, sellers not only paid commissions as high as 10 percent, but they also threw in cars, trips to Hawaii, televisions and other kinds of perks.
Factual problems with the complaint
In 2019, I wrote a two-article series about the reasons the Moehrl lawsuit might be a dud. The Burnett action shares many of the same issues.
Here are four examples that illustrate how the complaints misstate the facts as well as how the trial attorneys lack knowledge about the laws governing real estate.
Under “Factual Obligations” both complaints state:
- There are two licensee categories: (1) the real estate broker (also known as a “brokerage firm”), and (2) the individual real estate licensee or agent. Brokerage firms license individual real estate agents and are legally responsible for the actions of their licensed agents.
- Brokers, if they are members of an MLS, are required to list all properties on the MLS.
Multiple Listing Services have had policies for Exempt Listings for decades.
- The Burnett complaint argues that:
Seller brokers would set a commission to pay themselves alone and would likely begin to engage in more vigorous competition with one another to lower their rates and/or provide additional services to justify their newly transparent rates.
The claim that listing agents’ commission rates are not transparent is false. The commission rate appears on every listing agreement, on the MLS, and on every offer. Moreover, the assertion that agents will engage in more vigorous competition given today’s shortage of listings is absurd.
As Mantill Williams, NAR’s vice president of public relations and communication strategy, observed in reference to the Moehrl litigation (and that can also be applied to Burnett):
The complaint is baseless and contains an abundance of false claims. The U.S. Courts have routinely found that Multiple Listing Services are pro-competitive and benefit consumers by creating great efficiencies in the homebuying and selling process. NAR looks forward to obtaining a similar precedent regarding this filing.
The Burnett matter mirrors the language of the Moehrl complaint in other areas, as well. The attorneys for Moehrl coined a term called “The Buyer Broker Commission Rule.” In Burnett, the attorneys made up a different term, “The Adversary Commission Rule.”
In the certification of the class, the court used the term “the challenged rules” to reference the plaintiff’s allegations regarding NAR’s Code of Ethics and the NAR Handbook on Multiple Listing Policy.
The Moehrl complaint alleges that the following provision from the NAR Handbook on Multiple Listing policy has resulted in price competition among buyer brokers being restrained:
The Buyer Broker Commission Rule ensures that price competition among buyer brokers is restrained because the person retaining the buyer broker, the buyer, does not negotiate or pay his or her broker’s commission. In addition, the seller’s inflated commission offer cannot be reduced by buyers or their brokers, as Defendants also prohibit buyer brokers from making home purchase offers contingent on the reduction of the buyer broker commission.
The Burnett complaint takes the argument above one step further:
Deepening the anticompetitive effects of the Adversary Commission Rule, NAR rules also prohibit buyer brokers from making home purchase offers contingent on the reduction of the buyer broker commission.
Both the statements above are factually incorrect. The Exclusive Right to Sell is a binding contract between the seller and the listing agent. A buyer’s agent who submits an offer that doesn’t mirror the exact terms of what is in the listing agreement and the MLS is engaging in tortious interference. This a matter of contract law, not something that is at the discretion of the defendants as both sets of plaintiffs claim.
The plaintiff’s attorneys are ill-informed when it comes to international markets
The complaint states the following:
In competitive foreign markets, home buyers pay their brokers, if they choose to use one, and they pay less than half the rate paid to buyer brokers in the United States. These international markets include United Kingdom, Germany, Israel, Australia, and New Zealand. In these markets, which are not affected by any policy like the Adversary Commission Rule, buyer brokers are paid by home buyers, rather than home sellers.
According to the Executive Director of the Consumer Federation of America, total commission rates in “a number of developed countries” range “between 1% and 4%” whereas in the United States the average total commission rates continue to remain between 5% and 6%, which is “no lower than it was in 2001” despite significant advances in technology.
This assertion that the “Adversary Commission Rule” is the reason that the U.S. is different from the rest of the world is ludicrous. What differentiates the U.S., Canada, and Israel from the rest of the world is Exclusive Right to Sell listing contracts coupled with our MLSs, which simply don’t exist in most places in the world.
The 2016 Swanepoel Trends Report explains:
Without commission sharing, there is no opportunity for an MLS. However, in countries such as France, Greece, Italy, and Spain where approximately 10-15 percent of their listings are exclusive, MLSs have started to spring up … Exclusive listings also translate into more accurate data, better marketing and exposure, and often a better price for the seller.
What happens in countries where there is a no MLS
NAR has published an excellent infographic that summarizes what happens in countries where there is an MLS versus countries without an MLS. In addition to the points noted on the infographic:
- In the parts of the world where there are no Exclusive Listings, sellers can sign listing agreements with multiple real estate agents, and they also have the right to sell the property themselves.
- If there are Exclusive Listings, but no MLS (as in the UK, Germany, Australia and New Zealand), listings are often marketed in the brokerage’s storefront, in print, and online. Buyers either represent themselves or deal directly with the listing agent. Australia has a portal (Realestate.com.au), that thrives with no MLS and few buyer’s agents.
- In Germany where the buyers paid the entire commission prior to December 23, 2021, Everstate reported that commission ranged from 5.95 percent in Hesse and Bremen to 7.14 percent in Berlin and Brandenburg before the change.
In Austria, commissions are 3 percent to 4 percent. In Belgium and Sweden, they range from 3 percent to 5 percent. Everstate goes on to conclude, “As a general rule, in places where the seller pays the broker’s commission (rather than the buyer paying all of it) the rates are lower.”
The truth about commissions in Australia
In Australia, according to Campbell Cooney, director and auctioneer at Hodges, one of Melbourne’s oldest real estate agencies, vendors (sellers) need to be aware of the costs before they put their homes on the market.
In 2022, Cooney estimates that as an industry general rule, the commission in Australia is 1.6 percent to 4 percent, with the percentage increasing as the price increases. Sellers also pay 0.5 percent to 1 percent of their home’s value for marketing.
Depending upon the location in Australia, where up to 50 percent of the sales are conducted as auctions, the auction fees must also be added into the seller’s cost. These range from $6,500 to $8,000 in Melbourne and from $4,500 to $10,000 in in Sydney. This is on top of the commission, marketing fees, conveyance fees and GST.
In addition, bonuses to the selling agent are increasingly being used. Cooney explains:
These are effectively incentive bonuses, where the agent and vendor agree on a percentage-based bonus if the property makes above the agreed reserve. It may be, say, 10 percent of the amount above the reserve.
For example, a property expected to sell for $1 million, being sold by an agent on a 1.5% “percentage of sale” fee and 10 percent ‘bonus’ fee, that goes for $1.1 million, nets the agent $25,000. This is made up of $15,000 for the percentage fee (1.5 percent of $1 million) plus a bonus $10,000 (10 percent of the $100,000 above the reserve).
On a million-dollar listing, assuming an average of $7,500 for the auction fee with total commission of $25,000 due to the bonus, plus a marketing fee of one percent ($10,000), that total compensation to the listing agents is $42,500 or 4.25 percent for the seller’s agent with the buyer having NO representation.
If the plaintiffs were to prevail, two workarounds for the buy-side commission
One solution that is already in place is for buyers to pay their own commissions. In most cases, this simply isn’t feasible due to the tremendous issues with respect to affordability resulting from soaring inflation, increasing interest rates, plus record high prices.
Michael Lissack, managing broker of The Virtual Realty Group, weighed in with a workable solution for the issues in the Moehrl and Burnett litigation.
What does not get addressed, however, is the fiction of these “fixed” buy side commissions. Buyers can negotiate with their agent what the compensation will be and have that built into the closing. Most (buyers) don’t do that because their agents never tell them this is an option. NAR should require such a disclosure and if it did, this case (Burnett) loses its potency.
What are some of the key elements that should be included in that disclosure?
- The commission agreement contained in the Exclusive Right to Sell is a binding contract that contains the exact percentage the buyer’s agent will receive at closing. Requesting or interfering with the agreement between the seller and their listing agent constitutes tortious interference.
- As per current NAR guidelines and industry practice, the buyer’s compensation published in the MLS must be disclosed in writing prior to the buyer submitting an offer.
- The buyers and their agent may agree to share the buyer’s portion of the commission in a separate addendum (contract) at the time they enter an Agency relationship or when they write an offer. That agreement must specify the amount of the buyer’s commission that is being credited at closing to the buyer and the nature of that credit (for repairs, as a rebate, referral fee, etc.)
- Any amounts credited by the buyer’s agent to the buyer must be disclosed to the lender(s) in writing.
Take the next step: move to blockchain and “smart contracts”
In addition to creating this new buyer disclosure, there’s another step that the industry can take. Move as rapidly as possible to using “smart contracts” on blockchain where they can’t be altered.
This move would require any negotiations around the commission to be conducted at the time the listing is taken or when the buyer writes their offer. It’s a pathway that allows buyers to negotiate with their buyer’s agent regarding the commission and to avoid tortious interference on their part in the contract between the seller and the listing agent.
A jury trial is a wild card
Because jury trials can be totally unpredictable, the smart move is for the industry to take the proactive steps noted above to fend off not only these lawsuits but other suits like these in the future.