[NOTE: This is a VIP post, for subscribers only. However, given the importance of the topic, I’m going to make it open to all for a couple of weeks. Dumbass comments will be deleted since that’s one major benefit of VIP.]
As promised, I thought I would recap and summarize my thoughts on what the impact of the various lawsuits against NAR, brokerages, Zillow, and MLSs likely would be. These date back as far as March of 2019, when I wrote the first post about the first class action lawsuit, Moehrl v. NAR, which has now been certified as a class action. Over the years, I’ve written about Moehrl, Burnett, PLS v. NAR, Rex v. Zillow, and other lawsuits confronting the industry.
Things have evolved since then, of course, but on the whole, most of my thinking about the impact remains more or less the same. I’m going to limit my thinking to the two big commission lawsuits: Burnett and Moehrl. The others are important as well, but less impactful and dramatic than these two.
What is honestly puzzling is why the industry and its leadership has seemingly been on vacation for the last four years while all of these issues were developing. With the idea that it isn’t too late, let me lay out as briefly as possible what comes next. I will structure this in terms of Most Likely to Least Likely outcomes.
Most Likely Outcomes
The most likely outcomes from these various lawsuits and related developments are as follows:
- Extended period of chaos
- Increased legal costs for everybody in real estate
- Increased (and new) regulations for real estate
- No real changes for agents on the ground
Fundamentally, I believe NAR and the Corporate Defendants will lose at trial on all of the cases known today. You can go back and re-read all of my posts on legal topics for my reasoning, but at base, I believe that the elite opinion in the U.S. and the policymakers who follow it have turned against the fundamental structure of how the real estate industry works. Most important of those is the fact that transaction costs in the U.S. are far higher than in other developed nations, which leads our Elites to want to reduce those.
But losing at trial does not mean the end. As I have written and spoken about repeatedly, whoever wins at trial, the decision will be appealed by the loser. There is simply too much money at stake and too much how-business-is-done at risk for anything other than an appeal. And whoever loses on appeal will appeal again to the highest court in the land. So this fight will not end for years. I have long estimated seven years from the start, but COVID intervened, which means we likely have some five or six years from today for resolution through the courts.
That gives us the extended period of chaos. Despite results from the trial courts, NAR and the MLSs are unlikely to immediately give in and change course. They will get a stay on enforcement against cooperation and compensation, get a stay on paying damages, and pursue appeals. Brokers and agents will be left in a bit of a limbo, doing what they’ve always done but with an eye towards a massive change right around the corner.
At the same time, copycat lawsuits are all but inevitable. I wrote at length about that here. The Moehrl lawsuit names twenty MLSs as “Covered MLSs” and any result from the trial will be limited to those markets. Which means there is a giant hole outside of those twenty that lawyers will rush to fill if not today then after the verdict in Moehrl and Burnett:
Step two would be to look for states and areas not named in the Moehrl list. California really stands out. Almost the entire Northeast is absent from the Moehrl list, so look at NY/NJ/CT. Look at New England. Metropolitan areas not named above — think Chicago, Atlanta, Miami — look like fertile ground for plowing. (If suing in states/areas that Moehrl does not cover, the lawyers might be able to sue the same defendants, since people in those markets would not be covered by the Moehrl ruling. It is also possible that the court would just throw it out as a copycat lawsuit and tell the lawyers to wait for a decision from Moehrl before wasting the court’s time, or just expand the Moehrl lawsuit with additional plaintiffs in additional areas.)
Which means that every local REALTOR Association and every local/regional MLS has to up their legal budgets for 2024. And anyone who has served on a REALTOR Association or MLS Board of Directors since 2015 should free up his or her calendar for depositions and save all of his or her correspondences from 2015 on.
I cannot stress this enough: if you are a small local MLS or a small REALTOR Association, seriously consider joining forces with other small organizations or merging into a larger one. You will need to hire lawyers, and NAR’s legal budget will be stretched thin with its own problems.
The other likely outcome is regulation, particularly by the FTC but could also come from state regulators. I think new regulations are entirely likely, and possibly increased regulation on agent and broker duties as well. That the DOJ and the FTC would like to eliminate the power of NAR over commissions is hardly a secret. That they’ve been wanting to do so since the 1940s is public fact. With trial court decisions providing backup for the idea that the MLS violates antitrust law, and issuing injunctions against cooperation and compensation, the FTC is really freed up to impose new regulations.
Now… because of the extended chaos, there won’t be real changes on the ground for agents and brokers… yet. There will be an increase in brokers and agents doing things like Exclusive Buyer Agency agreements, but that should be happening today anyhow. More and more consumers will start to realize that they have to pay their buyer agents — and in fact, that they’re the ones paying their buyer agents already since they are the only ones bringing any money to the closing table. But over the next couple of years, I don’t see a huge disruption in how agents get paid, absent new regulations from the FTC or others.
Less Likely Outcomes
Less likely yet entirely possible outcomes from what transpired these past four years are as follows:
- Real consolidation of MLSs
- Divorce from the REALTOR Association
- Auctions take off
- Elimination of independent contractor agents
The initial step of joining forces to fight copycat lawsuits should evolve into actual real consolidation of MLSs. I say “should” because that should have been happening the last ten years, but hasn’t for a variety of reasons. So I’m not entirely certain that this crisis will change things.
Perhaps instead of voluntary consolidation, we’ll see involuntary consolidation: that’s where a local MLS and REALTOR Association goes bankrupt from legal fees and judgments, and all of their agents join a nearby well-funded MLS. Either way, I think we see rapid decline in the number of MLSs from roughly 550 today to perhaps closer to 10 in three to five years. I don’t think the MLSs who survive will be MLSs as we know them today; I think they will be private companies with significantly more funding. Think CoStar or Zillow or something like that. Because the war chest required to deal with all of the copycat litigation and any damages will not be small, which means even the largest of today’s MLS (CRMLS, Bright MLS, etc.) might actually be bankrupt and force agents to find someone else who is not being sued.
Given that the source of the liability for the MLS is the REALTOR Association which enforces NAR’s rules on the MLS, I think it highly possible that we see widespread divorce of the MLS from the REALTOR Association. What I don’t know at this point is the liability that broker-owned non-NAR MLSs such as Northwest MLS will face from copycat lawsuits, so it’s unclear whether divorcing the Association is any kind of protection against liability for commission compensation. Of course, this assumes that local REALTOR Associations survive somehow, because there is little doubt that they are going to get sued into oblivion.
[Disclosure: I want this analysis to be as neutral as possible, but I do have a conflict of interest. I’ve been working on a new project that is directly related to real estate auctions for the past year or so, and obviously did not see this court’s decision coming. Given events, I will put up a full post about that project later to avoid distractions on this post. I’m still offering my straight opinion, and you decide what you think of that opinion on your own.]
Real estate auctions are quite likely to take off, because the order from Judge Woods specifically exempts consumers who used a real estate auction to sell their homes. The rationale is simple: in an auction, the whole cooperation and compensation thing is far less of an issue. Very often, the auction seller doesn’t pay a commission, and the buyer doesn’t either; the buyer might pay a fee to the auction house, but the whole “NAR Rules and Conspiracy” thing is entirely missing. So in copycat lawsuits, other judges are likely to follow suit. Not only will auction consumers be left out of any class action, they likely don’t have much of a claim.
Going forward, if you are a brokerage that hasn’t been sued out of existence as Realogy (now Anywhere), HomeServices of America, RE/MAX and Keller Williams are about to be, you are going to want to think real hard about moving transactions to auctions just in case.
Speaking of brokerages, a final less-likely-yet-possible outcome is the elimination of 1099 independent contractor agents. The reason is broker liability. This lawsuit is quite likely to bankrupt four of the biggest real estate brokerages/franchises in the industry. Some of it is from their own doing: participating in NAR rulemaking, creating and promulgating training materials talking about compensation, etc. But some of it is from agents not following directives, because they’re independent contractors and you can’t tell them what to do and how to do it.
Even if regulations do not eliminate the 1099 exemption for real estate agents, quite a few brokerages might look at future liability exposure and decide they can’t take the chance of having agents who won’t follow company policy or orders from the manager. Respondeat superior (where employers are liable for actions of employees) is settled law, but at least the superior can manage the worker to do what he or she is supposed to do. If you’re going to be liable for actions of your non-employee contractors, might as well make them employees and get the power to actually manage them.
Least Likely Outcomes
The least likely outcomes, as of today, are as follows:
- NAR wins all of the lawsuits
- NAR successfully lobbies for protection
- All of the bad things come to pass, but nothing changes
It is possible, though I think highly unlikely, that NAR will simply win all of the lawsuits. Nothing in the trial record so far, nothing in the courts’ decisions on motions, and nothing about the plaintiffs lawyers makes me think that NAR will win… but you never know. As the saying goes, “That’s why you play on Sunday.” Plus, I believe all of the major cases are jury trials, and juries are unpredictable. So NAR could win every case.
Another possibility is that NAR leverages its lobbying prowess and successfully gets Congress to pass legislation protecting NAR and the MLSs and various brokerages from liability. I think this is highly unlikely for a three main reasons. One, the Federal Government does not like NAR right now. It is, in fact, in the middles of a lawsuit with NAR. Congress is different from DOJ and FTC and the Executive Branch, but… I dislike NAR’s chances given the past couple of years. Two, we in the industry recognize NAR as important and powerful… but NAR is not the NFL or the MLB. It is not “organized labor” under the Clayton Act. Third, the primary way to get an antitrust exemption is to become a “regulated industry” such as banking or transportation; would NAR want real estate to become a regulated industry under HUD? Doesn’t that kind of defeat the whole purpose of fighting DOJ and FTC and all that?
Finally, I can’t overlook the fact that maybe NAR loses all of the cases, the FTC promulgates regulations, etc. etc. and all of the bad things come to pass… but nothing changes. It seems really quite unlikely, but who knows? Maybe sellers just voluntarily start paying buyer agents because they want the buyer agents to bring them buyers. Maybe buyers just pay their own agents a commission because they value what the agents do for them. Maybe the MLS doesn’t do cooperation and compensation, but brokers and agents still think of it as a necessary utility and nothing changes.
Unlikely… highly unlikely… but hey, it’s possible.
What YOU Should Be Doing
Let me end with what you should be doing today, as a result of this latest ruling and more generally, as a result of you waking up to this problem. Consider this free consulting that is worth exactly what you paid for it. Also, I am not your lawyer; make sure you speak to your actual attorney about everything.
First, let me address NAR’s leadership. I heard from some of you (most informed readership in real estate) who are in leadership positions in local Associations and local MLSs. The word is that the communication from NAR has been the standard cheerleading we’ve been hearing for four years — you know, the “we’re disappointed in the court’s decision, this is merely a procedural setback, but we’re right on the facts, right on the law, and we will ultimately prevail, blah blah blah, rah rah GOOOOO TEAM!”
Look, that’s completely understandable in terms of communication with the general membership. You don’t want the average REALTOR to panic and get distracted from their day to day struggle, which is hard enough. You don’t want the membership to start freaking out that “OMFG! SKY IS FALLING!” However, you do need the leadership of the local Associations and MLSs to wake the hell up.
It is entirely incomprehensible to me why NAR has not called a special meeting, a special webinar, something that is restricted/limited to CEO’s and Board Presidents, to lay out what the real risks are, what the likelihood of success is at the trial level when the judges are completely hostile, and DOJ has its thumb on the scale; what the legal risks of copycat lawsuits are, what the leadership needs to do in terms of contingency planning, in terms of joint legal defense, in terms of preserving communications, etc. etc. Presumably the CEO and the President of the local Associations are in those positions precisely to do the kind of work you don’t want the membership to be doing.
I would extend this advice to other industry organizations like CMLS, RESO, State REALTOR Associations, Realty Alliance, and so on. There is zero downside to making sure that the leadership of companies and organizations are eyes wide open on what’s happening, what the risks are, and what options there are for the future.
Second, it goes without saying that if you are a local leader, even in the absence of national or state guidance, you need to be doing exactly that kind of thinking and planning. Look at your policies, your legal budget, your possible exposure.
Third, brokerage leaders need to do the same as local Association leaders. NAR was not the only entity sued. Four large brokerages and franchise companies were also sued. You need to be aware that you are quite likely to be sued by local/regional plaintiff’s class action lawyers in copycat lawsuits. At a minimum, you need to look at your training materials and coaching to ensure that the whole “if you don’t offer compensation, buyer agents won’t show you house” thing is nowhere to be found. That was what got the four Corporate Defendants on the hook.
Let’s leave things there. I’m sure you have questions. You know where to find me, or just post in the comments.
-rsh
2 thoughts on “Recap and Summary: Likely Impact of the Commission Lawsuits”
A lawsuit like this was bound to come up and I think it’s an important moment for the real estate industry. This lawsuit strikes the heart of how the industry has organized itself and operated for decades – a change to the status quo is very likely to result.
I agree with some of Robs predictions but will go a bit further based not only on my experience at Trulia/Zillow, but also before that as a young broker and founder of AgentLeaf (precursor to HomeLight and AgentAce). Here’s what I think is a likely result of these lawsuits:
1 – End of broker-level dual agency
2 – Increase in regional, independent brokerages
3 – Increase in sell-side commissions
4 – Increase in technology-led auctions
1: End of broker-level dual agency
It’s not the case in every state that dual agency is legal, but in many states it is. Many people think dual agency is when a RE salesperson represents both the buyer and seller – it’s not. The actual dual agency occurs when the salespersons representing the buyer and seller both work for the same broker. This allows 2 Coldwell Banker salespersons to represent both sides of the transaction, but the legal agent is the single broker, in this case Coldwell Banker. More importantly for this case, it’s the hidden but foundational pillar supporting the commission structure in listing contracts. Without dual agency, the incentives to couple the buyer agent commission to the listing contract disappear since the listing broker can no longer benefit from the buy-side of the deal (and do behind the scenes, same office dealing). As a young/new broker, this made it really hard to break through in real estate as I couldn’t go independent and hope to gain credibility but in joining a large brokerage I couldn’t offer a different commission than the older, more seasoned agents in my office – there was no incentive I could offer to sellers/buyers to work with me.
2: Increase in regional, independent brokerages
Should broker-level dual agency disappear and the buy-side commission pulled out of listing contracts, the industry will see the resurgence of the local, independent brokerages and an increase in overall competition. No longer can a salesperson with the same broker represent the buyer in the purchase of a home, so there’s less incentive to be an agent in a huge office. This should scare the major brokerages who thrive off having agents en-masse to collect broker and ancillary fees to operate their business and consolidate transactions in the markets they serve. As an agent friend told me years ago when Compass started rapidly acquiring regional brokers – it’s now an advantage to be with an independent because it’s more likely she’ll get a seat at the table for listings as the seller will talk to one agent from a handful of different companies, not 5 Compass agents.
3: Increase in sell side commissions
If you’ve listed a home for sales, you know that it’s a lot more work than representing buyers. And if you’re doing it right, the sellers will almost always make a comment that the listing agent commission should be higher than the buyer commission. And, let’s be honest, the buyer agent commission has stayed where it is out of an outdated “fear” that the home won’t be shown by buy side agents who (even though it shouldn’t matter since they’re fiduciaries…right?) are driven to show the homes with higher commissions. While to some degree, it’s still true, the fact that there are a million IDX/VOW sites plus Trulia/Zillow out there giving buyers transparency to listing availability, that fear tactic has far less teeth these days. Combine that with the decoupling of the buy side commission in the listing agreement and you’ll see seller’s agents start advocating more for themselves to keep their commission higher and buy side agents get beat up on commissions a lot more.
4: Increase in technology-led auctions (bonus)
This is where companies like Zillow and OpenDoor are very well positioned to help sellers/sell side agents succeed as they have the market power and expertise to build powerful auction systems that have enough participation to drive real outcomes for agents. I still think there’s a huge hurdle to overcome with how consumers are used to shopping for homes in the US (where auctions are seen as a negative rather than standard operating procedure in countries like Australia). But, like Rob says, auctions might start to take off now that the buy side is decoupled and both sellers and sellers agents might see an opportunity to get more rapid results for the sale of their home since they no longer have to cater to buyer agents or risk their professional reputation.
Thanks for sharing Rob! I’ve been out of the game for a while but the RE Industry will always be a passion!
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