Class-Action Lawsuit vs. Realtors

by Jim the Realtor | May 31, 2019 | Jim's Take on the Market, Realtor, Realtor Training, Realtors Talking Shop | 6 comments

I haven’t seen an article yet where the reporter gets the other side of the story, so I’ll address these fallacies below at green paragraphs. Hat tip to all who have sent in this story!

Why should a home seller have to pay for the buyer’s side of the transaction, especially when the buyer’s expenses include negotiating against the seller?

That apparent conflict of interest is at the heart of an escalating legal battle that pits the National Association of Realtors (NAR) against a group of law firms that filed a class-action lawsuit on behalf of home sellers against the NAR and four large national real estate brokers: Realogy, HomeServices of America, RE/MAX and Keller Williams Realty. As of May 22, the Department of Justice joined the fray when it demanded information about residential estate commissions from CoreLogic, a California-based data analysis firm.

JtR – Why? Because it is in the seller’s best interest to offer a bounty/bribe to the buyer agents.

The fight is forcing into the open many of the hidden factors that dictate how realty agents are paid and common practices that make it difficult for home sellers to effectively negotiate the commissions they pay.

It is standard for multiple listing services — data bases owned by realty agents — to require that the entire commission be paid by the home seller. Typically, the commission is 5% to 6% of the sale price of the property. Then, the commission usually is evenly split between the broker representing the seller and the broker representing the buyer.

That means that the seller directly pays for the transaction costs for the other side — even when, as is common, the other side negotiates for a better deal. The net result is that the seller is forced to pay for those working against him or her. The core of the lawsuit is that “the rules are, in effect, anti-competitive,” said Brown. “It’s a very strange way to run a market.”

JtR – The MLS does not require that the entire commission be paid by the home seller. They require that the listing broker offers compensation to the buyer’s agent, and it can be any amount.

The NAR filed to dismiss the lawsuit, partly based on the fact that it supports many types of business models for its members, said Rene Galicia, director of MLS engagement for the NAR. “The MLS doesn’t set commission rates. That’s left up to individual brokers and consumers, depending on the transaction,” he said. “Consumers should look at their level of comfort with real estate and what they want to accomplish. It’s highly competitive right now. Lay out your goals and find which broker will meet your needs.”

The actual commission structure has not been tackled head-on until now, say real estate experts.

JtR – The commission structure gets tackled every day on the street – without pads and helmets!  We should do a better job of disclosing how much commission, and why, to all parties.

The split-commission structure causes confusion when sellers try to negotiate how much they will pay, because any reduction must be negotiated with everybody involved, explained Gary Lucido, president of Lucid Realty Inc., a Chicago broker that offers rebates on commissions. For instance, if the seller’s agent agrees to take less money, the buyer’s agent might not agree to a discount.

JtR – The commission isn’t negotiated with everyone involved.  The listing agents decide how much they are willing to pay buyer-agents, and then present the commission package to the seller for approval or negotiation.  The buyer-side cut comes out of the total commission negotiated between listing agent and seller – the only choice the buyer-agent has is whether they will show the house.

Also, the baseline costs of selling are not always obvious to consumers, said Lucido, which means that home sellers often don’t have the information they need to effectively negotiate. The cost of listing a house in the MLS, which feeds national listing sites such as Trulia and Zillow, is the same regardless of the asking price. A higher-end property might require additional marketing services and associated costs, such as a drone video or a fancy broker’s open house.

But usually, said Lucido, the additional cost of marketing does not justify the richer commission on a higher-end property. That is why, he said, agents are more willing to reduce their commissions on more expensive properties than on those under $200,000: Once the fixed costs are covered, it doesn’t take that much more work to sell an expensive property than a moderately priced property.

JtR – This is the common ploy by discount agents – that it doesn’t cost that much more to sell the higher-end properties. It suggests that all agents offer the same skill set, which is the true issue that needs to be examined – and maybe in court.  Because the supply-and-demand of higher-priced homes is in the buyers’ favor, the sellers should hire agents with advanced sales skills and resources.

The class-action lawsuit and DOJ involvement might be enough to bring Americans in line with the rest of the world in terms of how real estate fees are calculated and paid for, said Timothy S. Becker, director of the Kelley A. Bergstrom Real Estate Center at the University of Florida in Gainesville. “The 6% model is ridiculous compared to how real estate is bought and sold in the rest of the world,” said Becker. “The agencies are set up to work for the transaction and for the agents’ own interests, not for consumers.” Real estate commissions around the world vary, but often are as low as 1.5%.

JtR – The media insists on quoting outsiders incessantly on this topic, but never explores further. You pay peanuts, you get monkeys.

It is significant that the class-action lawsuit is brought on behalf of property sellers, because they are the ones who pay the entire cost of the transaction. “The buyers currently don’t pay anything,” said Becker, “There should be a correlation between what you get and what you pay for.”

JtR – If buyers don’t pay anything and, as a result, can choose any agent to represent them, you’d think they would search out the very best. Why don’t they? The internet has made the homes for sale more available to consumers, but has it educated them on the nuances? No, and the industry is to blame.  This lawsuit won’t change it, either.