Exploring Realogy’s Stance Against Buyer Agent Compensation

Got a phone call first thing this morning from a good friend of mine, who is one of the smartest people in the industry, who flat out asked me why Realogy was publicly taking a stance against cooperation & compensation in the MLS. He’s usually able to figure stuff out, but this one, he said he was completely stumped.

I thought it might be worth offering my $0.02 on the story, and explore what this means, and why it might be happening now. Because yeah, at first glance, this move is hard to understand.

Longtime readers, especially Red Dot buyers, probably can put the pieces together. But… hey, let me see if I can weave things together for the first real VIP post of 2022.

Realogy Is Against Buyer-Broker Commission Rule

As Inman reports (subscription required), this is getting traction now because some court filings from the Sitzer v. NAR lawsuit have been unsealed and Realogy decided to get ahead of the story by going public:

In the filing, M. Ryan Gorman, president and CEO of Realogy Brokerage Group and CEO of Coldwell Banker, told the court, “[I]t is the position of Realogy that the mandatory nature of the NAR Cooperative Compensation Rule should be rescinded.”

The link in the Inman excerpt will take you to the actual court filings.

Since the deposition in question occurred in November of 2021, one assumes that Realogy has already told its co-defendant NAR that Realogy would like NAR to drop the rule in question and to settle with the DOJ on that issue. But you know what they say about assumptions….

So then Ryan Gorman, CEO of Realogy Brokerage Group, does an interview with Inman to explain the terse statements in the court filings. What comes out is that Realogy believes the MLS should not require compensation, but that compensation will naturally happen anyhow through market forces:

“The best thing for a seller in every case that I can imagine is to offer compensation for the good work that buyers’ agents will do to bring a buyer in to facilitate the transaction,” Gorman said.

“I think that there’s tremendous evidence supporting that and the market will continue to support that. There’s no reason why an offer of compensation needs to be a mandatory requirement for a home to be listed in the MLS. So it’s really just the mandatory component for listing a home in the MLS that we’re saying is unnecessary.”

Inman further reports from an email sent to Realogy franchisee brokers that what Realogy wants is “flexibility”:

“Make no mistake, we wholeheartedly believe in and support the economics that provide for the sharing of the commission with the buyer’s agent; however, we do not believe a listing broker should be required to make an offer of compensation to a buyer broker in order to participate in and list properties on the MLS,” the company said.

“We strongly believe consumers and brokers should be able to exercise their judgment to best serve the needs of the seller and the nature of the transaction, but we anticipate that, frankly, brokers will continue to offer compensation for the high-quality buyer agent work.”

Gorman added, “I personally believe the market is going to continue to prevail and the tremendous value created by buyers agents being brought to the transaction will encourage everyone to continue doing what’s done today, which is offering compensation to the buyers’ agents. But there is at least that flexibility. The thing we stand behind is meeting consumers where they are and meeting their requirements for their listing.”

So in summary, I think it’s fair to characterize Realogy’s position as:

  • Cooperation (aka, making the listing available to all agents in an area) is wonderful and should be required.
  • Compensation is great, but should not be required.
  • The market will naturally offer compensation, because of the value created by buyer agents.
  • Brokers should have the flexibility to offer compensation or not.

Not exactly throwing bombs. And yet, this is significant.

Destroys the MLS

Since the Inman article itself links to an op/ed by yours truly, originally posted here on Notorious, I figure I am as good a spokesman for the proposition that eliminating cooperation & compensation destroys the MLS. Since 2019, more things have happened, and more discussions have been had. So let me reiterate why getting rid of mandatory compensation destroys the MLS as we know it.

First, as the Inman article itself notes, the very definition of Multiple Listing Service is “a means by which authorized participants make blanket unilateral offers of compensation to other participants.” One of the key rules being challenged in Moehrl and Sitzer is Policy Statement 7.23:

Multiple listing services shall not publish listings that do not include an offer of compensation expressed as a percentage of the gross selling price or as a definite dollar amount, nor shall they include general invitations by listing brokers to other participants to discuss terms and conditions of possible cooperative relationships.

NAR’s defense is that these rules do not prohibit listing brokers from putting in $0.01 as the compensation, and that last year, NAR passed rules to make this compensation public, to prohibit filtering by compensation offered, etc.

Let’s roll with some scenario like that. Either NAR listens to Realogy and gets rid of the mandatory unilateral offer of compensation, or listing brokers  everywhere led by Realogy and other big major brands (all being sued, and all under pressure from DOJ and FTC) decide to make $0.01 the default offer of compensation. Effectively, buyer agent compensation is dead. Say that happens.

That still leaves cooperation — aka, all listings are in the MLS — as a core value of the MLS. As Gorman says in the Inman article, “cooperation is extremely beneficial.” But that just leads to another question: What is cooperation without compensation?

Cooperation Without Compensation

As far as I can make out, cooperation without compensation simply means, “all of the listing information is here” along with “I will help you show the home to your buyer.” If you have a different idea of what cooperation means, let me know in the comments.

The issue here is this: if the MLS is still valuable for “all the listing info” and “help you show the home” then why is the current MLS the ideal vehicle for doing that?

Off the top of my head, wouldn’t Zillow be the better vehicle for “all the listings here” and “help you show the home”? If you hate Zillow, wouldn’t CoStar be a better vehicle for that too? If you hate both, wouldn’t you just pick some other company/portal and make that the One Ring MLS?

Play this out in a small local area. Say you’re a broker in some area with one major metro MLS with 15,000 members, and a half dozen small local MLSs with 2-300 members each. Without mandatory compensation, why wouldn’t you just move everything and everybody to the Big Metro MLS? All of the small MLS listings will end up on Zillow, and buyers will contact their agents who will then reach out to the listing agent.

Without Compensation, the MLS is Data and Technology

The larger point is that without the mandatory unilateral offer of compensation, the value of the MLS is in listing data and in enabling technology. When it comes to data, bigger and more is always better than smaller and fewer. When it comes to technology, bigger budgets always leads to better technology.

So… without mandatory compensation, the small MLS is worth less… and possibly worthless. Because the small MLS by definition won’t have the money to buy the latest and best technology tools, and won’t have the scale to monetize the data effectively.

The MLS optimistic view then is that the world will eventually consolidate down to a half dozen or so large super-regional MLSs.

The MLS pessimistic view becomes that one of the big tech companies will take over and become the de facto national MLS.

My take is that both happen, in sequence: the super-regionals happen first, then eventually, one of the two big portal tech companies take over by acquiring the super regionals. The politics of MLS consolidation make that far more likely. Neither Zillow nor CoStar has any interest whatsoever in dealing with the nastiness that is REALTOR politics, especially around the MLS. They’ll just stand by and watch the big MLSs go through machinations to gobble up the smaller MLSs.

Once the MLS industry gets consolidated down to say a half dozen super regionals, that’s when the big boys can come in and offer a few billion dollars to buy out an existing super regional.

Why Would Realogy Want This?

The big question, of course, is why in the world Realogy would want this. After all, most of their hundreds of thousands of agents across the Brokerage division and the Franchise division are buyer agents entirely reliant on the Buyer-Broker Commission Rule to make a living. Isn’t Realogy cutting off its nose to spite the face? Isn’t Realogy making a gigantic mistake and pissing off most of its agents by coming out against mandatory compensation?

The short answer is, Realogy would benefit immensely if the MLS were to go away.

The longer answer comes from my Red Dot on CoStar. Go buy the report and read it in full if you want, but here’s the short version.

Without the MLS, without mandatory offer of compensation, residential real estate looks like commercial real estate.

Pocket Listings are the Norm:

Unlike residential real estate, pocket listings are the norm in commercial real estate. There is a saying I learned from my mentor, who was a top broker at Studley in NYC: “If it’s on the internet, it’s got hair on it.”

Without an MLS, commercial brokers and agents form private networks and engage in horse-trading within that network first, before taking the property public.

The Brokerage Firm Matters

The fact that pocket listings are the norm means there is a huge advantage to belonging to a large firm. The sharing starts with the office after all, then the brokerage. It is much easier to get the listing agent to share the commission if your buyer/tenant is not willing to pay you, if you work for the same company as the company might have a sharing policy internally.

The larger companies can negotiate volume discounts with CoStar/LoopNet — and they do. That gives them a competitive advantage in much the same way that Realogy used to have a competitive advantage on newspaper advertising over small independents.

Of critical importance to commercial practitioners is the size, extent and quality of internal research and data. Every large commercial firm has its own research department and its own proprietary database of listings, comps, and transactions. Small firms, not so much; they rely on CoStar and LoopNet.

All of these advantages taken together means that in commercial real estate, the brokerage brand means something. Calling on a prospect from CBRE or JLL is a different experience than calling on a prospect from a local boutique or a lesser-known brand. The service delivery that an agent can provide is different if he is with a large multinational company with resources versus being with a smaller firm without them.

In the absence of cooperation and compensation, and the resulting destruction of the MLS as we know it, there is no reason why larger firms like Compass or Realogy or HomeServices of America wouldn’t have proprietary data, research, tools and service offerings that small firms simply cannot match. eXp will have national-scope networks that the local boutique simply can’t match.

So one major change will be that size will matter. Big brokerage firms and national franchises will have a decided advantage over smaller firms and local independents. That ought to sound like music to the ears of the kinds of brokerages who are strong supporters of initiatives like the BPP and Project Upstream.

Pricing Power, Profitability, Market Value

A direct result of the larger firms and national franchises having an advantage is that they will have pricing power again. While the resimercial agents who belong to a primarily residential brokerage, like a RE/MAX or a Keller Williams, might be more used to the residential industry splits, pure commercial agents tend to have far lower splits.

That pricing power translates into profitability for the brokerages. For example, here are the brokerages in the Fortune 500 for the Real Estate industry category for 2020:

Rank Name Revenue ($M) Revenue % Change Profits Profit % Change Profit Margin
128 CBRE $23,894.1 12.0% $1,282.4 20.6% 5.37%
179 JLL $17,983.2 10.2% $535.3 10.5% 2.98%
490 Realogy $5,870.0 -3.4% -$188.0 -237.2% -3.20%

Given that 2020 was a horrible year for commercial real estate, and a record-breaking boom year for residential real estate… these results are eye-opening. It isn’t difficult to see why big brokerages might want to see the CoStar endgame come about.

Not Just Realogy

What should be obvious is that this dynamic is not just in Realogy’s favor. This is in every large brokerage and large national franchise’s favor. Ryan Gorman and Realogy just happen to be taking the lead on this push to eliminate mandatory compensation, thereby weakening and eliminating the MLS.

Ask yourself why eXp, HomeServices of America, Compass, Keller Williams, or RE/MAX would have different calculations from Realogy. They wouldn’t. They want pricing power as much as the next guy. They want to be valued like a top CRE firm than they do a top residential real estate company.

Also Looks Good to Big Daddy

Finally, it should be noted that any stance like this by Realogy makes it look far far better to the overlords in Washington DC. At a time when the DOJ and the FTC have girded up their loins to go after NAR, it makes all the sense in the world for Realogy to signal to regulators and to .GOV that Realogy is on their side.

If housing becomes a major political issue — and it will — then it makes all the sense in the world for Realogy to be able to tell CNN or more importantly, Joe Rogan, that Realogy is against this mandatory compensation system. They and their agents are all about lowering commissions, unlike those other guys who ought to be punished.

By the Way, NAR is Doomed

That last point then is the final big dealness of this big deal.

Moehrl, Sitzer, and other lawsuits named NAR, Realogy, HomeServices of America, RE/MAX, and Keller Williams in their complaints. The Department of Justice did not… but it is clear to anybody with eyes that the DOJ can very easily loop in the big brokerages.

When one of the four defendants has publicly split from NAR like this, the plaintiffs in the private antitrust lawsuits might as well start putting the champagne on ice. The DOJ and the FTC might as well start scheduling a hearing with Ryan Gorman as the key witness, to tell the regulators how NAR’s mandatory rules hurt consumers, hurt brokers and hurt agents.

And to put the nail in that coffin, we find this in the Inman article:

In the legal filing, Gorman said that the only set of NAR rules or guidelines that it requires its company-owned brokerages and franchisees to follow is the NAR Code of Ethics. Gorman told Inman that Realogy does not require its brokerage or franchisees to join Realtor associations and that the code is freely available for anyone to follow. [Emphasis added]

Oh my. I don’t know about you, but this not requiring membership in a REALTOR Association will come as something of a surprise to many thousands of agents with Realogy and Realogy-affiliated franchisees … even my recovering broker wife who worked for a Coldwell Banker franchise – it was a requirement when she worked there.

Assuming that Realogy’s agents take this lack of requirement seriously, then the next step in this journey is pretty obvious: de-linking REALTOR membership with MLS subscription.

This is already an issue in the industry today, has been an issue for decades, and it’s going to get pretty heated in 2022 thanks to the Brandon Huber situation in Montana. Neither Ryan Gorman nor James Dohr, the President of CB Gundaker, whose testimony was also in the unsealed court filings, talked about this little piece… but when the FTC comes calling, I imagine they’ll be volunteering that particular MLS policy. For instance, as far as I know, both Heartland MLS and MARIS require that all Participants to be a REALTOR member of some Board somewhere, preferably one of the shareholder Associations, but a REALTOR nonetheless.

NAR, state associations, and local associations have spent millions over the years defending the proposition that subscription to the MLS can be restricted to REALTOR members only. The Thompson States and California have said Nyet, but other circuits have upheld that REALTOR-only requirement for years.

I think that rule will be going kaput, and with Realogy’s active assistance in the months and years ahead, via FTC action.

That in turn means NAR as we know it today is doomed.

As Realogy’s stance now makes clear, Realogy as a company does and can require that its brokers and agents follow the Code of Ethics without being members of NAR. Presumably, Realogy will take on the responsibility of enforcing compliance to said voluntarily-followed Code of Ethics. Well, with Realogy’s agents saving roughly $185 per year ($150 in dues, and $35 in Special Assessment) from not joining NAR, then an additional few hundred dollars per year in not joining the state REALTOR Association, and the local REALTOR Association, I imagine that Realogy can collect $50 per agent to setup a Code of Ethics compliance office inside its own offices and have its agents still come out ahead.

Now add HomeServices, Howard Hanna, Compass, eXp, RE/MAX and KW to the mix.

Small Story, Big F’ing Deal

Let me wrap up.

This is a small story. Ryan Gorman made written statements back in November of 2021 in a lawsuit. He then went on Inman and explained Realogy’s stance.

That’s not much of a story.

But it’s a big deal for the reasons I’ve laid out above. It signals Realogy’s split from NAR, which more or less dooms NAR’s chances in its various legal fights. It makes Realogy a top get for the DOJ and FTC to bolster their side of things. And it points to a future that looks a lot more like commercial real estate, which disproportionately benefits the larger firms and larger companies. It points to a future where NAR is much smaller, and much less powerful, if not outright dead and buried with individual brokerages and franchises doing all of the enforcement of compliance with the Code of Ethics.

Now, I know that the defenders of the status quo will want to dismiss these thoughts as conspiracy theories and ridiculous nonsense. That’s fine. I’m not all that interested in trying to convince them or you; I am merely offering my thoughts and analysis of the situation based on what we see, read and hear.

Let me know if you have any thoughts or questions, since as VIP members, you all have my contact info. 🙂

-rsh

 

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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6 thoughts on “Exploring Realogy’s Stance Against Buyer Agent Compensation”

  1. I think it’s very important for readers to understand that Realogy is one of the largest operators of real estate brokerages under the company owned divisions of Coldwell Banker and Sotheby’s International Realty, and therefore has the right to declare a position it deems best for its own. However, the approximate 2400 franchisees under one of the brands, some of them among the largest in the country such as mine, are independently owned and operated. Realogy, as a franchisor, does not speak for me or countless other such franchisees who consider such action as cavalier based on what limited justification has been shared. Do not assume we are in alignment here.

    • Good point, Budge. I do not assume that Realogy speaks for its franchisees, especially Ryan Gorman who is over the Brokerage division.

      My other points still stand. Evidence so far from the CRE world suggests that eliminating the MLS results in real competitive advantage for the largest brokerage companies. Realogy is the largest brokerage company. Its stock price and overall valuation is shamefully low compared to CRE peers.

      Doesn’t mean that we’ll see this immediately. But I’d like to hear the argument why Big Brokerages should not pursue this from a self-interested point of view. Every business, after all, is self-interested.

  2. I think you believe Realogy has some grand plan here. I don’t see it other than they think this is a better legal tactic for their current consideration and think of it as good pr. They aren’t thinking in terms of some grand plan as you laid out.

    • I also think it’s more interesting coming from the broker with the most agents. Mediocre and bad buyer agents will think this is an attack on them. How does the mass of Realogy agents think about their own company at this point? Is this a pivot to focusing more on the highly productive agents who know and can demonstrate their value?

    • It’s entirely possible that Realogy executives, and the other executives at the largest companies, are not thinking “grand plans.” That is possible.

      I guess I give them all more credit than that. I imagine that Ryan Schneider didn’t get to where he is without being f’ing brilliant, and something like this is pretty easy to see.

      Plus, even if they don’t think grand plans and can’t see the forest for the trees, and even if we assume that they’re not that strategic… I tend to believe that Andy Florance, CEO of CoStar, *IS* that brilliant and that strategic. It wouldn’t be all that difficult for Florance to sit down with them and explain what’s what.

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