The class action lawsuit that could upend the U.S. real estate industry by effectively forcing changes in how buyer’s agents are traditionally compensated has been amended, adding more plaintiffs and defendants and emphasizing the role commissions play in steering buyers and raising costs for sellers.
On Friday, nine law firms filed an amended complaint consolidating two previous complaints with nearly identical claims: the first filed by homeseller Christopher Moehrl on March 6 and another filed by homeseller Sawbill Strategic Inc. on April 15.
Moehrl and Sawbill Strategic, both of whom sold homes in Minnesota, remain plaintiffs in the amended suit, which adds an additional six homeseller plaintiffs: Michael Cole who sold a home in Colorado, Steve Darnell (Texas), Valerie Nager (Florida), Jack Ramey (Maryland), Jane Ruh (Wisconsin) and Daniel Umpa (Washington D. C.).
The suit names the National Association of Realtors (NAR), Realogy Holdings Corp., Keller Williams Realty, RE/MAX LLC, HomeServices of America Inc. and HomeServices subsidiaries BHH Affiliates LLC, HSF Affiliates LLC, and The Long & Foster Companies Inc. as defendants. The HomeServices subsidiaries were not named in either of the previous complaints. The previous complaints named RE/MAX Holdings as a defendant, but the amended complaint names RE/MAX LLC.
The June 14 amended complaint, which at 72 pages is more than twice as long as the original Moehrl complaint, alleges NAR and the named real estate brokers and franchisors have violated the Sherman Antitrust Act by “agreeing, combining and conspiring to impose, implement and enforce anticompetitive restraints that cause home sellers to pay inflated commissions on the sale of their homes.”
The main restraint the complaint refers to is a NAR rule requiring listing brokers — and their agents who represent homesellers — to make a “blanket unilateral offer of compensation” to buyer brokers when listing a property in a Realtor-affiliated multiple listing service. (Most of the nation’s 535 or so MLSs are Realtor-affiliated.)
That offer of compensation must be made regardless of the fact that buyer brokers represent the buyer, not the seller, and because it is a blanket offer, it cannot vary according to the buyer broker’s experience, the services the buyer broker is offering or the buyer broker’s financial arrangement with the buyer, according to the complaint.
Unlike the original complaints, the amended complaint does not argue that the blanket offer of compensation is non-negotiable. But the amended lawsuit cites NAR’s Standard of Practice 3-2 and Standard of Practice 16-16 as evidence that NAR impedes effective negotiation of the offer of compensation.
The former prohibits listing brokers from modifying an offer of compensation to the buyer broker after the buyer broker has submitted an offer to purchase a property. The latter prohibits buyer brokers from using the terms of a purchase offer to attempt to modify the buyer broker’s compensation from the listing broker.
“As a result, a seller cannot respond to a purchase offer with a counteroffer that is conditional on reducing the buyer-broker commission. Nor can the seller, after receiving purchase offers, decide to unilaterally reduce the buyer-broker commission offered on the MLS,” the complaint said.
In addition, NAR’s Code of Ethics Standard 12-2 allows buyer brokers to represent their services as “free,” which means most buyers think they are not paying for brokerage services and “are effectively told they have no reason to seek a reduction in the buyer-broker commission,” the complaint added.
Because the blanket offer must be made to every buyer broker in a particular MLS and buyer brokers can compare the offers in the MLS, “the [Buyer Broker Commission] Rule creates tremendous pressure on sellers to offer a high commission that has long been maintained in this industry so that buyer-brokers will not ‘steer’ buyers to properties offering higher buyer-broker commissions,” the complaint said.
Moreover, the amended complaint alleged “Defendants’ unlawful conduct” was the subject of an active investigation by the Antitrust Division of the U.S. Department of Justice (DOJ), which has demanded that MLS system vendor CoreLogic turn over a bevy of information on MLS data, including all documents relating to any MLS members’ ability to search based on the amount or type of compensation offered by listing brokers to buyer brokers.
CoreLogic is the largest MLS system vendor in the country and more than 700,000 agents and brokers in North America use its Matrix MLS system. According to the complaint, Matrix allows brokers to set up custom email listing alerts for buyer clients that match their search criteria — but also allows brokers to filter listings according to the value of the buyer broker commission offered.
This feature may explain why the Greater Las Vegas area was specifically mentioned in the DOJ’s civil investigative demand letter to CoreLogic.
“GLVAR [the Greater Las Vegas Association of Realtors] elected to adopt a version of the Matrix software that permitted brokers to exclude properties offering discount buyer-broker commissions from Matrix-generated emails to buyer clients,” the complaint said.
“A not insignificant number of franchisees and brokers of the Corporate Defendants in Greater Las Vegas (and potentially other markets) have trained their realtors to insert 2.5 percent or higher as the minimum permissible buyer-broker commission when using the Matrix system to send property listings to buyer clients.
“As a consequence, unbeknownst to them, buyer clients of those realtors often do not receive Matrix-generated emails that include properties offering a buyer-broker commission of less than 2.5 percent or higher, even if that property perfectly matches the buyers’ search criteria.”
MLSs contain hidden fields that buyers and sellers are not allowed to see, including buyer broker commissions and private remarks that may contain additional financial incentives to buyer brokers, the complaint noted.
“[B]ecause home sellers and homebuyers, unlike brokers, do not have access to the universe of ‘blanket unilateral offers of compensation’ being made to buyer-brokers, their ability to detect steering by buyer-brokers is significantly impeded,” the complaint said.
Perhaps responding to fears that eliminating the sharing of commissions between listing brokers and buyer brokers could lead to the demise of MLSs, the complaint cites a piece earlier this month by Inman contributor Bryn Kaufman.
The piece opined that the idea that buyers paying their agent’s commission directly would lead to the end of the MLS “does not make sense. The MLS’s value is giving buyers and sellers a centralized place to go for listings. Its value is not in artificially keeping buyer’s agents’ commissions high. So, changing the way buyer’s agents are paid does not reduce the value of the MLS at all.”
The complaint also quoted extensively from a series of 2006 Inman columns written by attorney Brian Larson, whose law firm Larson Skinner is outside counsel for the Council of Multiple Listing Services (CMLS), arguing for the end of interbroker compensation. (Larson republished the columns on his own blog in 2010.)
“It does not make sense for listing brokers to pay buyers’ brokers for the services the latter provide to buyers. This is a bit like the lawyers working for one side in a transaction paying the lawyers working for the other side,” Larson wrote.
He also warned that because the competitors are publishing compensation to each other in the MLS that that could enable price-fixing by “a few market-leading brokers” without them “ever speaking directly to each other.”
“Thanks to the MLS offer of compensation, listing brokers effectively are able to fix service prices of buyers’ brokers; many buyers’ brokers are loathe to collect more than what is offered in MLS, even if the broker has a written agreement with the buyer providing for a higher payment,” Larson wrote.
According to the complaint, what has actually happened is that the current system has allowed commission levels to stabilize at an “industry standard” of around 5-6 percent, despite declining costs for brokers and despite home prices rising past the rate of inflation, resulting in higher actual dollar commissions that sellers pay.
RE/MAX and HomeServices of America, on behalf of itself and its subsidiaries, declined to comment for this story. NAR, Realogy and Keller Williams did not respond to requests for comment.
NAR and the four real estate companies named in the Moehrl suit have previously filed motions to dismiss that complaint and will likely file new motions to dismiss in response to the amended complaint.