NAR: Commission lawsuits could be ‘disastrous’ for both buyers and sellers

How should the industry make agent commission structures more transparent before angry consumers and the Justice Department forces it to do so in ways that might be harmful?

Bierig, of Chicago-based law firm Schiff Hardin, spoke on a panel called “The Lawsuit Showdown” at ICLV about two federal lawsuits challenging the sharing of commissions between listing brokers and buyer brokers. The plaintiffs want buyers to pay their brokers directly.

“If you were to require buyers to bear that additional cost, you have to realize you are harming low-income people, often minorities. You’re going contrary to fair housing [and] first-time homebuyers who aren’t going to have a lot of money,” Bierig said.

“All these things are going to be discouraging sales of homes by people who are barely able to afford a home now. The system as it works, the buyer in some ways is paying for it as we know through the cost of the home.

“But the system is actually encouraging homeownership by people who might otherwise not be able to afford it, if they had to also bear the commission directly out of pocket,” he continued, prompting clapping from the audience.

Of course, NAR is a defendant in the suits — along with RealogyKeller WilliamsRE/MAXHomeServices of America and some of its subsidiaries — and Bierig’s assertions appear to assume that if sellers were no longer paying buyer’s agents that buyers would continue to hire them at the same rate, and that their commissions would remain the same.

Brown also said that the effect could be that home prices overall could go down, which would be good for buyers, but that sellers would no longer have to pay buyer broker commissions and therefore end up with more money in their pocket even if home prices decrease.

The real estate industry may also change itself to foster commission competition in new ways before the lawsuits are resolved. Already, one large multiple listing service, Northwest MLS, has decided to break from tradition and allow public display of buyer broker commissions, partly in response to the lawsuits.

And there are likely to be more changes before the lawsuits wrap up, which Brown said would most likely be years from now. Russ Cofano, who also spoke on the panel and is a former lawyer and a broker at The Cofano Group, has advocated that NAR should create a mandatory MLS rule that would make buyer broker commissions publicly available to all consumers when they view a listing.

At ICLV, Cofano suggested the lawsuits could provide “a moment of introspection” for the industry to consider what might have triggered them.

“I don’t believe that it’s beneficial for our industry to have our rules dictated by either the government or the court system. So I think this provides a great opportunity for us to look inside the way we do this business, and see if we can improve,” he said.

He acknowledged that the plaintiffs’ allegations include “some things that we know are true to a certain degree in this business.”

For instance, that some listings agents tell sellers how much they offer the buyer broker is up to them, “‘but if you don’t offer X, your property’s not going to be shown.’ We know that happens,” Cofano said.

“We also know that there are some agents in this business who choose not to show properties based on the offer of compensation,” he added.

“We know that happens. What we don’t know is the prevalence and the rate of that happening.”

He noted that buyers don’t currently know in advance what the offered commission is on the buy side.

“There are some things that we could fix that would be more pro-consumer, and give buyers more opportunity to know what they’re paying, versus the current sort of cloak of … non-transparency in the transaction,” he said.

Bierig replied: “I agree with a lot of what you’re saying; I think NAR would agree with a lot. And look, we believe the system is very good, that doesn’t mean it can’t be improved.”

He urged Cofano and any attendees with ideas for improvement to bring them to NAR’s committees.

Cofano said he also thought it should be clear to buyers that, even if it’s funneled through sellers, that they are ultimately the ones paying for buyer broker fees through their home purchase and thereby encourage them to negotiate.

He recounted how he went to a listing a month ago and a buyer’s agent had placed a placard at the home stating that the no. 1 reason to hire a buyer’s agent was “I’m free.”

“We can’t allow that anymore. Those things need to change because the services of a buyer’s agent aren’t free,” Cofano said.

“[Buyers are] being led to believe that they are free. There’s just no place to negotiate from if you’re being told that the services are free.”

Bierig responded that NAR rules say that a buyer’s agent can say that his or her services are free, “but only if they disclose all the conditions that are attached to that. The rule is that you can’t just say ‘I’m free.’ But you make a good point, Russ.”

Fellow panelist Rebecca Schuetz, a real estate reporter from the Houston Chronicle who has covered the lawsuits, noted that buyer’s agents aren’t paid according to their level of expertise.

Some have spent nearly their entire lives doing the work and offer deep knowledge and go above and beyond while others may have yet to sell their first home, she observed.

“On the MLS the listing agent has to say how much they’re willing to pay a buyer’s agent [and it’s] the same no matter the level of experience,” Schuetz said.

Panel moderator Clelia Peters, president of Warburg Realty, said listing agents likely aren’t considering the expertise of the buyer’s agent when they set the commission, but added, “I think what you’re picking up on is that from the outside of the industry looking in, it almost looks suspicious.”

Schuetz replied, “Perhaps. It’s just that not a lot of other industries are set up that way. [They] definitely reward the level of service.”

She also noted that some consumers may have a fear that if they don’t pay as much as others, that they’ll be discriminated against.

Peters acknowledged that that fear is not necessarily unfounded. “It’s a common threat for developers to use … to up the commission for the buyer’s agents in an attempt to induce more agents to bring their buy pipeline to see a property,” she said.

“So there is a default assumption in the industry, that commission is correlated, in some ways, to the number of people who will come to see the property.”

Schuetz pointed out that some MLSs, including the one in Las Vegas, allow brokers and agents to filter automatic emails sent to client with new listings by commission.

“So it meets their criteria, and it has, you know, 2.5 percent or more for [the agent],” she said.

Bierig replied that “the evidence is that that field is viewed by less than 5 percent of brokers.”

The U.S. Department of Justice, in a  civil investigative demand, ordered MLS system vendor CoreLogic turn over a bevy of information on MLS data in May, 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. The demand specifically mentioned the Las Vegas market.

When a panelist suggested that the ability to filter by commission might disappear as a result of the increased scrutiny, Bierig said it was possible, but “in the real world that would make zero difference.”

That’s because “a Realtor who is following the ethical rules of NAR and of state law has an obligation to show all properties that meet the client’s [criteria],” he said.

That commission field is used for a number of reasons, he added, one of which is for agents “to know what the competition is like out there, so they can determine what kind of commission they can charge given the market forces.”

Bierig said the defendants in the Illinois suit, filed by lead plaintiff Christopher Moerhl, would file a motion to dismiss on August 9.

“We will point out that a listing broker can offer as little as one cent in compensation to a cooperating buyer’s broker and that commission rates are set by market forces by negotiation between sellers and respective listing brokers and between buyers and respective brokers for the buyer,” Bierig said.

“We will also point out that the whole system of offering cooperation and compensation has been repeatedly upheld by the courts and has been found to be both pro-competitive and in the interests of both buyers and sellers.”

Asked about settling the suit, Bierig said it had “less chance for settlement than almost any other” case he’s handled.

He named two reasons. The first: “The plaintiffs’ lawyers want fundamental changes in the MLS system, which NAR and brokers generally regard would be disastrous their clients. We’re not going to change the basic system of offers of cooperation and compensation,” he said.

The second reason was what Bierig alleged was the motivation of the law firms involved.

“They’re in it for one thing: big dollars. They want to have a huge payday at the end,” he said.

“These lawyers aren’t there to protect consumers — they’re there to line their own pockets.”

(Brown told Inman the court would make sure that any amount of attorneys’ fees would not constitute a windfall, however.)

Bierig added: “NAR is not about to pay substantial dollars to settle a case, which would result in a worse situation for buyers.”

Cofano noted that the Moerhl suit would likely at least go through the initial phase of lawsuits, which is the discovery process, and “a lot of practices that are going on in the business are going to be open for the plaintiffs to go and poke at. We also have the DOJ investigation,” he said.

“I think one takeaway here — we have MLS and [Realtor] association people in the audience — they … need to go have a discussion with their board and determine whether they want to make any changes, specifically how broker buyer fees are disclosed and made transparent.”

“Not having those discussions, I think, is not doing your duty for your organization,” he added.