Keep Calm and Keep Doing What You Do

BY CHUCK KASKY

CEO of Maryland REALTORS® and host of the Association’s podcast, “Get Real Estate,” which is available through any podcast app.

By now, you have likely heard about the verdict in the Sitzer/Burnett case, in which the jury in Kansas City, Mo., found NAR and other corporate defendants liable in the federal antitrust class action case. The jury awarded the plaintiffs ~$1.8 billion in damages, which will be automatically tripled to ~$5.4 billion.

Where we are.

Let’s be clear: this matter is not close to being final. NAR will appeal the liability finding because it stands by the fact that NAR rules serve the best interests of consumers, support market-driven pricing, and advance business competition. NAR remains optimistic that they will ultimately prevail. In the interim, they will ask the court to reduce the damages awarded by the jury. Also, we don’t know at this time what, if any, business practices the judge might order changed through issuing what known as “injunctive relief.”

Before the trial verdict described above, Anywhere Advisors—the parent company to Coldwell Banker Realty, Corcoran, and Sotheby’s International Realty— entered into a proposed settlement, which included payment of $83.5 million and injunctive relief, requiring practice changes in its brokerage operations for a period of five years following final court approval, which should come early in 2024. Anywhere has also agreed to recommend and encourage these same practice changes to its independently owned and operated franchise network. Also, RE/MAX entered into a substantially similar agreement, which included a $55 million payment.

These practice changes include:

• Prohibiting company-owned brokerages and their affiliated agents from claiming buyer agent services are free.
• Requiring company-owned brokerages and their affiliated agents to include the listing broker’s offer of compensation for prospective buyers’ agents as soon as possible in each active listing.
• Prohibiting company-owned brokerages and their affiliated agents from using any technology (or manual methods) to sort listings by offers of compensation.

Further, the companies agreed to advise and remind company-owned brokerages, franchisees, and affiliated agents that the company has no rule requiring offers of compensation.

Finally, both firms will also not require company-owned brokerages, franchisees, or affiliated agents to belong to the NAR or follow the NAR Code of Ethics or MLS Handbook. They will require company-owned brokerages and their agents to clearly disclose to clients that commissions are not set by law and are fully negotiable.

So, in the words of the immortal baseball legend Yogi Berra “It ain’t over till it’s over.” Telling people X is X provides no real information. But it does remind us that there is still hope. There is something about the never-say-die, no-matter-the-odds-we-can-do-this spirit of “It ain’t over...” that finds a place to inspire. It tells us to wait, don’t rush to judgement because things might turn around.

Now might be a good time to take a step back and take a broader, longer look at the state of the real estate profession. While it only involves home sellers in Missouri, the trial has led to a national conversation on whether sellers should have to pay buyer agent commissions. Indeed, just minutes after the verdict, the attorney filed a new class action lawsuit against another group of real estate industry entities, including NAR.

Our members have many questions and we have compiled what we know so far and the most common questions, with answers.

That’s a lot of money. Where will it come from?

According to NAR, an appeal will be filed, and they have the funds to post bond, which allows them to proceed with the appeals and defer potential payment of damages. While appeals will take years, NAR reports they are financially prepared for any final judgment.

Alleged co-conspirators found liable for an antitrust violation are joint and severally liable, and there is no right of contribution among the defendants. Joint and several liability is a legal rule under which, when someone is partly responsible for causing harm, they may be required to fully compensate the victim, even if others share blame.

Successful claimants can choose to pursue the entire award from one of several defendants. However, that defendant does not have the right to compel its alleged co-conspirators to contribute, even if they are found liable to the claimant, and even if the co-defendant paid an amount lower than its pro rata share of liability (either through settlement or a judgment).

To address joint and several liability, co-defendants in some antitrust cases will enter into judgment sharing agreements, in which they agree to pay their pro rata share of any judgment or, if they settle, include a provision in the settlement agreement that the claimant will not pursue that share against the non-settling defendants.

In other words, NAR is potentially liable for the entire $5.4 billion judgment, although that’s unlikely.

Where Might We Go from Here? Chapter 1— Maryland-Specific Lawsuits

We’re not immune from getting caught up in some form of copycat lawsuit because the focus was more on the mandatory nature of the offer, not whether it can be minimal or even zero.

Although this verdict only applies in Missouri, and given Bright MLS’s large footprint, we should actually expect it.

The Future of Cooperation and Compensation

Two things many people are struggling with:

• The difference between cooperation and compensation
• Who actually pays the buyer’s broker and what happens to cooperation if there is no offer of compensation.

As you know, cooperation is simply sharing information about a broker’s listings.

In November 2019, the NAR Board of Directors adopted the Clear Cooperation Policy in response to concerns about the use of pocket listings, and other tactics to keep properties off the MLS. According to NAR, pocket listings operate to the disadvantage of homebuyers and sellers. Effective January 1, 2020, with local implementation required by May 1, 2020, the policy requires listing brokers to submit property listings to the MLS for cooperation within one business day of publicly marketing a property.

Compensation, on the other hand, is the offer to pay the buyer’s broker from the commission paid by the seller to the listing broker. What connects these two distinct functions is another policy, which states that in filing property with the MLS, participants must make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. While technically still mandatory, according to Bright MLS policy, in Maryland, compensation to the buyer’s broker or subagent can be $0.

The mandatory nature of the offer of compensation to the buyer’s broker, not the practical effect of allowing $0, is at the heart of these lawsuits. According to the complaints, NAR’s requirement that offers of compensation be expressed in specific dollar or percentage terms enables buyer-agents to easily compare the financial compensation offered to them by home sellers and steer their clients to higher commission homes.

The rule, therefore, is designed to create tremendous pressure on sellers to offer a high, standard commission and to act as a powerful deterrent to anyone who may attempt to offer lower compensation.

There is a notion that somehow, if the listing broker is not required to compensate the buyer’s broker, the purchase price will be reduced by that amount, which we know won’t happen. The result would be a windfall for the seller and more out-of-pocket expense for the buyer.

If the seller is opposed to having the listing broker compensate the buyer’s broker, the seller needs to understand that the pool of prospective buyers will be diminished to the extent that some buyers will be unable to come up with the additional closing costs. This, in turn, assumes lenders will continue to resist including brokerage fees into the buyer’s costs of purchasing the home.

Also, sellers should be told to expect that, notwithstanding there is no offer of compensation in the MLS, buyers may include in the offer a request that the seller directly compensate the buyer’s broker (similar to what sometimes happens in the FSBO situation) or contribute more to the buyer’s closing costs to help offset the commission.

The Future of Buyer Representation

NAR President Tracy Kasper said that NAR still believes in its cooperative compensation rule (read more from Kasper here), which requires listing brokers to make an offer of compensation to buyer brokers in order to submit a listing to a REALTOR®- affiliated MLS. However, she said REALTORS® should be transparent with consumers about the negotiable nature of the rule, which allows listing brokers to continue to make an offer of compensation to buyer’s brokers or allows buyers to pay their broker directly.

“For buyers, this includes paying for your services directly, plus options to obtain some or all of that fee through other means, such as offers of compensation from a listing broker, all of which would be specified in your buyer representation agreement,” she explained. “For sellers, this includes options to allow offers of compensation to be made by their listing broker to a buyer’s broker, and if so, how much and under what terms, all of which, again, would be specified in your listing agreement.”

She added, “I also encourage everyone to express the incredible value that we as real estate agents who are REALTORS® bring as we guide our consumers through the financial, legal and community complexities of buying and selling a home.”

Where might we go from here? Chapter 2: “Quitting” NAR

Some real estate firms and individual members are expressing their displeasure at NAR as an organization and have considered “quitting” NAR and perhaps state and local associations. This is largely a result of the recent revelations of harassment and perceived lack of response by the organization.

This is one area of confusion, and there are separate issues that need to be reconciled. One is the reason for considering not being a member of NAR. Being part of the settlement described above is being confused with a more specific dissatisfaction with NAR. For example, some real estate firms have indicated that participating in NAR governance or being a member is discouraged. This has nothing to do with the antitrust litigation. Regardless of the reason for not wanting to or not being required to be a member of NAR, this is simply not an option in Maryland at this time because of how the NAR dues formula is constructed.

Brokers and managers comply with the NAR dues formula as the “designated REALTOR®” (DR) in their office or firm. Under NAR’s rules, DRs are assessed dues based on how many agents are affiliated with the DR’s office/company. Even though it is customary for local Boards/Associations to bill agents directly, the DR is ultimately responsible for payment.

All local Boards/Associations in Maryland have adopted this membership formula in their bylaws. Dues are assessed to each principal (DR) in a firm based on the number of real estate licensees employed by or affiliated with the firm or office. The DR receives credit for each agent who is a REALTOR® member.

The bottom line is this: There is currently no process to decouple dues owed to NAR, Maryland REALTORS®, and your local board. To be a member and to receive all the benefits of membership, one needs to be a member of all three organizations. I can’t speculate on the future of this “three-way agreement” but whatever happens, we will let you know and adjust as needed.

Suppose people simply leave real estate in large numbers. What then?

This is a major topic of conversation, often revolving around the low barriers to entry for this industry. Historically, agents come and go quickly, and we see roughly 30% churn annually, meaning that fully a third of agents come and go every year. Over time, you have seen that the top agents do most of the work. Interestingly, even with the ups and downs of the real estate market, the average earnings of a REALTOR® has been about $50,000 for a very long time, reflecting the degree of turnover. That number doesn’t change even as the number of agents fluctuates. In that regard, it’s a pretty efficient marketplace: people come in when there are opportunities and leave when they don’t make it.

But the real point is the level of competence, which is a function of training, which in turn is directly related to how well (or poorly) brokers and managers take on that responsibility.

We know from teaching classes that way too many agents don’t know the contract, so it’s no wonder we’re sinking in the estimation of consumers.

While I completely agree that changes are coming, I disagree that forcing buyers to pay their brokers won’t have a significant impact.

As you certainly know, buyers are struggling already. To make them come up with an additional X% of the purchase price to pay the buyer’s broker would price even more out of market.

My biggest frustration is the banks’ unwillingness to finance the commission. I think they already do because they finance the purchase price, which the seller only gets once costs, including commissions, are taken out of the gross proceeds So, what’s the difference between the reduction in the seller’s net or just financing it on the front end. As long as the property appraises, who cares?

We’re working on legislation and education to enhance our ability to explain compensation to buyers and we’re well aware that it’s a weakness in the industry.

If cooperative compensation survives (an open question) we need to do better.

I think it would be a shame if we find ourselves leaving buyers without representation. If they had to visit every broker’s website to see what’s listed and had to deal only with listing agents, we will have lost 30 years of progress, and buyers will suffer.

Lastly, I can tell you that we do not discuss or filter our advocacy on any policy through the lens of its effect on membership.

If membership drops, we’ll adjust. This is not a numbers game for us. We’d work just as hard for 15,000 members as we do for the 30,000 we have today.

Please feel free to reach out to me with any questions, comments, or concerns at chuck.kasky@mdrealtor.org.