The Real Estate Industry is About to Be Changed Forever - What Every Agent Needs to Know
KEY POINTS
Major developments in two class action lawsuits, Moerhrl v. NAR, et. al. and Sitzer/Burnett, v. NAR, et. al., have taken place in recent weeks, with two defendants agreeing to settlement terms with the plaintiffs.
These settlements have vastly increased the likelihood that the longstanding Clear Cooperation Rule will be abolished in the near future whereby sellers will no longer be obligated by NAR® and MLS rules to offer a buyer agent commission when selling their home.
This change would require buyer agents to negotiate their compensation directly with buyers and will spell the end for the many agents who are unable to successfully negotiate their compensation with their clients, a prospect which will create massive opportunity for agents savvy enough to adapt to this new environment.
There are three crucial steps that every agent should be taking today to capitalize on this coming shift and ensure they are able to thrive in the years ahead.
Unless you’ve been living under a rock for the past four years, you’re no doubt at least subtly aware of the two class action lawsuits which have been making their way through the courts since March 2019 challenging a principal tenet of how the real estate industry works in the U.S. as well as one of the main reasons behind the existence of multiple listing services: the sharing of sales commissions between listing brokers and buyer’s brokers.
If these lawsuits and the potential impact that they could have on the industry are news to you, you would be wise to take some time to familiarize yourself with them. For one thing, these suits stand to drastically alter how you’ll need to run your business in the future if you want to have any hope of surviving. Secondly, as these suits progress and garner more attention in the mainstream media, it’s important that you’re prepared to speak intelligently about them with your sphere of influence. Third, and most important of all, these lawsuits are going to create massive opportunity for those of us who prepare effectively for their ramifications.
The Lawsuits In Brief
These suits have been explored in excellent detail by others, so I won’t be doing that here. However, if you’re looking for a deep dive into these lawsuits, the news team at Inman has done an excellent job. If you’re not an Inman Select subscriber, I highly encourage you to rectify that.
While there have been several suits filed in recent years, the two that really matter for the moment are Moerhrl v. NAR, et. al. and Sitzer/Burnett, v. NAR, et. al. While both suits make similar claims, the former stands to be the most impactful as the latter is limited to home sellers in Missouri.
These class-action lawsuits were brought by home sellers against the National Association of REATORS® and several major real estate brokerage companies, including Anywhere, HomeServices of America, RE/MAX and Keller Williams. In addition to the NAR® and the named brokerage companies, 20 Multiple Listing Services are identified as "co-conspirators."
The lawsuits claim that the NAR® and others participated in anticompetitive practices by forcing sellers into a system where sellers pay a commission that is split between buyer and seller agents. The plaintiffs allege that this system has led to inflated buyer agent fees to the detriment of home sellers, and they argue that homebuyers should pay for their own agents. The NAR® and the other defendants have countered that the current system “provides transparency and market-driven pricing options for home buyers and sellers.”
In a nutshell, these lawsuits allege that cooperation and compensation is an anti-trust violation that results in consumer harm, and seeks an injunction against forcing home sellers to pay the commissions of the buyer agent.
Should the plaintiffs prevail, agent compensation stands to fundamentally change in the United States. What’s more, in Moerhrl v. NAR alone, total damages could exceed $13 Billion according to most conservative estimates.
THE CLAIMS
At the heart of both of these lawsuits is the basic claim that the industry rules promulgated by the NAR® and enforced by the MLSs requiring a unilateral offer of compensation by home sellers is a violation of the Sherman Antitrust Act. From the Complaint:
Defendants’ conspiracy has centered around NAR’s adoption and implementation of a rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation (the “Buyer Broker Commission Rule”) when listing a property on a Multiple Listing Service (“MLS”).
The theory goes something like this:
The MLS is a required utility for any brokerage who wants to be in business;
The MLS is controlled by local Associations, who have to abide by NAR® rules and policies, including the Buyer Broker Commission Rule;
The named brokerages/franchise companies require that their agents and franchisees belong to NAR®;
The Buyer Broker Commission Rule forces sellers to pay for the buyer broker’s commissions;
The interaction between NAR®, the local Associations, the local MLSs, and the defendant brokerages/franchises constitute a conspiracy in deeds and words;
That conspiracy keeps brokerage commissions artificially high — between 5 and 6% — which harms home sellers.
The lawsuits seek damages (of course, because 99% of that will go to the law firms representing the plaintiffs), but more importantly:
That the Court award Plaintiff and the Class a permanent injunction, under Section 16 of the Clayton Act, enjoining Defendants from continuing to require sellers to pay the buyer broker and from continuing to restrict competition among buyer brokers
Ouch.
WHY THIS MATTERS NOW
These suits have spent the better part of the last four years traversing the hallways of various courthouses with most agents blissfully unaware of them. For those who were keeping an eye on them, a majority were doing so for no other reason than to assuage their lingering anxiety that these lawsuits might put them out of a job once faced with the prospect of having to sit a buyer down and convince them that they could bring, real tangible value to the table as a buyer agent and therefore, should be paid a handsome sum by an already cash-strapped buyer amidst the backdrop of the most unaffordable housing market in history. Doing so would be a tall order for most agents, but for the masses of marginal agents who’ve managed to eek out a living doing nothing more than peddling the line, “It costs you nothing to use me to help you buy a house because the seller pays me!” the consequences will be bleak.
True to their form, the NAR® has continued to provide strongly-worded reassurances to their membership regarding their belief that they will prevail in this suits without doing anything to explicitly demonstrate that they are not engaging in anticompetitive practices according to the letter or spirit of the law:
“The complaint is baseless and contains an abundance of false claims. The U.S. courts have routinely found that multiple listing services are pro-competitive and benefit consumers by creating great efficiencies in the home-buying and selling process. The market for the brokerage of real estate is extremely competitive — to the benefit of buyers and sellers alike. As courts have long recognized, the MLS system in our country promotes efficiency and helps to advance the best interests of all the clients served by the Realtors members of NAR. We believe that the lawsuit fomented by several plaintiffs’ class action law firms is completely without merit. We will defend the challenged policies, and we are confident that we will prevail.” -NAR®, April 2019
These reassurances, combined with the disruptions and chaos of the last few years, meant that most agents weren’t really thinking about these lawsuits much at all anymore.
Until…
When Anywhere Real Estate reached an $83.5M settlement with plaintiffs in both cases on September 5th, the real estate industry was suddenly jarred back to the reality of the impacts that these suits might have. Many were quick to point out that this settlement would be incredibly detrimental to the remaining defendants, but so long as no one else caved, there might still be hope.
With a trial date in the Sitzer v. NAR case just weeks away, it became imperative that the remaining defendants hold the line. But on September 18th the news broke that RE/MAX had thrown in the towel too.
And with that, everyone started paying attention again, and with good reason, because these two class action lawsuits have now reached a point where they stand to instigate a true paradigm shift in the industry that most agents cannot even fathom.
And to be blunt, most of you will not survive what is to come.
For the few that do, careful planning and an intentional business strategy will be critical to your ability to thrive in the days ahead.
UNDERSTANDING THE POTENTIAL OUTCOMES
Cooperation in MLS becomes optional nationally. At this point, the best possible outcome is that cooperation becomes optional for sellers. In fact, we’re already seeing it, with some MLSs already proactively removing this requirement.
The NAR® settles or loses at trial. In this case, it’s almost certain that they will open the class to bring every NAR® member into the settlement. If this happens, the parties will have to agree on some sort of settlement structure that gives everyone a cash payment. Conservative estimates put the cost of this settlement for the NAR® at $2 billion. The NAR® certainly doesn’t have that kind of cash on hand, so they’ll immediately begin a campaign to strong arm this out of their members and force them to pay. At $2 billion, that’s $400 per member per year for four years. Absolutely no one is going to pay this assessment, which in turn will spell the end of the NAR®. Whether that’s good or bad is up for debate, but I’m guess a $1600 assessment over four years will go a long way in helping agents decide the answer there.
Buyer agreements listing compensation will become mandatory. The NAR® and other regulating bodies will update their policies to require agents to secure signed buyer agreements before being allowed to show MLS-listed properties.
Buyers will eventually be able to finance buyer agent compensation into their loan. If the industry is to survive as we know it today, a massive lobbying campaign will be required to institute policy changes allowing buyers to finance the cost of using an agent into their home loan. Because of the massive vested interest that all parties involved here have, it is highly likely that this legislation will pass.
Off-market will listings increase. Without a clear cooperation policy in place, MLS-listed properties will decline, making off-market listings more normal. This will massively increase the importance of agents ability to source properties from various listing repositories.
Brokerages and MLSs will consolidate. The reduction in agents will force many brokerages and MLSs to consolidate to reduce costs. They will also begin to rely more on virtual operations.
There will be a 25-50% reduction in buyer agents. Masses of marginal agents will be forced to find another source of income when they are no longer able to pitch their services as cost free to buyers.
Listing agents will regularly double-end deals. Unwilling or unable to pay for an agent out of their own pocket, buyers will default to calling the listing agent when inquiring about homes. Agents that already have a track record of regularly picking up listings stand to gain massively here. In states like Colorado, where dual agency is outlawed, major conflicts of interest will arise, and brokerages will need to be incredibly proactive in developing clear policies surrounding this issue in order to protect themselves while they await guidance from the legislature and other regulatory bodies.
Flat fee models will increase. Just as we’ve seen on the listing side in the past several years, buy side flat fee models will be developed and tried out. If you’ve already found yourself resisting the urge to strangle the part-time buyer agent making 3%, just wait until you meet the part-time buyer agent making $1000.
HOW TO SURVIVE AND THRIVE
With all this in mind, the savvy agents out there are already thinking about what they need to be doing to ensure they can be successful in the days, months and years ahead. While much remains to be seen, there’s three simple steps that you should be taking right now that will vastly improve your odds of survival.
Step #1 - LEVERAGE THE CHOAS YEARS
At this point, it’s wise to assume that the NAR® and other defendants will either settle or loose at trial. While nothing is for certain, now is the time to start thinking about what that means for your business and how you will respond. Hope for peace but prepare for war.
First, remember that a loss at trial for either party will not mean the end. No matter the outcome, the decision will be appealed by the loosing party. 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 looses on appeal with just appeal again until it finally lands at the U.S. Supreme Court. So, this fight will not end for YEARS.
This will inherently lead to an extended period of chaos. No matter the outcome at this point, NAR® and MLS rules are unlikely to immediately change, but make no mistake they will eventually. This is going to leave most brokerages and agents is a state of limbo, doing what they’ve always done with an eye towards a massive change right around the corner.
A loss for the defendants will almost certainly mean that copycat lawsuits will become inevitable. There’s simply too much money at stake for others to not follow suit. This will only increase the chaos. This reality is particularly poignant for local REALTOR® boards and MLSs to be aware of. If you’re an member of one of these boards or MLSs, you’d be wise to start inquiring about the legal budget of your local board. And if you served as a director for a local board or MLS, I hope you’ve saved everything going back to 2015 and that you like depositions. Keep in mind also that neither your personal or your brokerage’s E&O or general liability insurance will cover a single cent of any legal fees when the time comes because these policies almost universally exclude antitrust claims from coverage.
Pile on increased regulation through the state board combined with DOJ and FTC using these lawsuits as a basis to move forward with regulations to remove power over the industry from the NAR® - something they have been trying to do since the 1940s - and you get chaos on top of chaos on top of chaos.
The tripping hazard with this extended period of chaos will be that there probably won’t be many real, tangible changes on the ground for agents on day one. This is going to lull many agents into a false sense of security about things that will cost them dearly when the time comes.
In these intervening years, you must commit to leveraging the chaos to your advantage. This means:
Knowing your worth and not being afraid to ask for it. The vast majority of consumers use a real estate agent to help them navigate buying and selling a home for the simple reason that most consumers find massive value in an agent’s expertise and service. Most agents are worried that buyers won’t pay their fee out of their own pocket because they know that the services they provide aren’t worth the asking price. So, while these same agents spend the chaos years complaining about the fact that someone moved their cheese and finding new ways to complain about it, the agents that survive are going to go and find it by pivoting and changing in ways that continue to bring massive value that consumers will willingly pay for.
Developing the power to walk away. The only reason an agent works with a client they can’t stand is because they don’t have enough clients to fire themselves and go work with someone else. The foundation to success is, and will continue to be, client acquisition and conversion. That is, finding buyers and sellers. Period. In the years ahead, as masses of marginal agents jump ship there will be incredible opportunity to grow your sphere of influence with potential new clients willing to compensate you for the value you bring to the table. Having a full pipeline will be crucial to developing the ability to walk away so that you can let someone else work for free.
Never allowing someone to negotiate your commission on your behalf. The reality that most buyer agents fail to recognize in all of this that they have been allowing listing agents to negotiate their commission for all these years. This is absurd when you think about it, but because most agents are terrible negotiators it makes sense that buyer agents have never seen fit to push back on this notion much. No matter what your current comfort level is with negotiating your compensation, the years of chaos ahead will present massive opportunity for you to take total control of how you are compensated if you commit to learning how to negotiate effectively and persuasively.
List to Last. This statement has never been truer then it is now. The vast majority of agents who survive in the future will be masters at securing listing agreements because truth be told, few buyer agents will be successful in their attempts to demonstrate enough value that buyers will be willing to pay them. Instead, most buyers will simply choose to work with the listing agent.
Becoming a Negotiation Ninja. It is imperative that you be polished and practiced in handling commission questions and objections. Become prepared to overcome the objection, “I’ll just call the listing agent.” with proven talk tracks, objection handlers and powerful questions to ask back.
Building your Network Like Crazy. You must become the unquestioned 411 on all things related to real estate and more in your market. This will allow you to provide your clients with an amazing experience that makes all aspects of the process easier and more enjoyable. You must become a true broker of every aspect of the buying and selling journey that provides such a high level of service and expertise your clients couldn’t imagine of doing the deal without you.
STEP #2 - JOIN A BROKERAGE THAT PROVIDES ACTUAL VALUE TO YOU
The traditional brokerage model has been dying for years, but the years ahead will be it’s death knell if for no other reason than brokerages will no longer be able to rely on the “quantity over quality” model to turn a profit. Rather, brokerages will be forced to invest real time, talent and treasure into their agents to ensure every agent in consistently producing business. In order to be successful in the future you need to be aligned with a brokerage with a demonstrated track record of producing top-notch agents.
Regardless of size or prestige, your license should only be hung at a brokerage that has:
A Qualified, Present Managing Broker. You should have access to a managing broker that is readily available to assist you in your day-to-day activities. This person should not only be an unquestioned subject matter expert in real estate, but have a working knowledge of your market. What good is a broker that can’t help you with questions about pricing a listing, zoning, or any other matter that requires local knowledge because they don’t actually live or work in your market? Furthermore, they should answer their phone more often than they don’t when you call; and when they don’t answer your call they should respond to you in a no more than 1-2 hours with rare exceptions.
Useful Education Classes. Too many brokerages rely wholly on other entities to provide crucial continuing education (CE) to their brokers. These entities, especially Title companies, provide excellent CE classes, but these should by no means be the singular education opportunities that a brokerage provides. Depending on its size, your brokerage should be offering no less than 2-4 in person educational sessions per month at a minimum. These should be facilitated by either your managing broker or someone else within your brokerage that is highly skilled.
Access to Legal Expertise. When the legal aspects of a question arise, your managing broker should have the answer 90% of the time. When the don’t they should have unfettered access to highly competent legal counsel. If your brokerage doesn’t have direct access to an attorney that practices real estate law in your market, this should be a huge red flag for you. Lawsuits are surprisingly common in real estate, and should you ever find yourself on the receiving end of a court summons you’re going to be up a creek without a paddle if your brokerage doesn’t have ready access to sound legal advice.
A Proactive not Reactive Approach. Most brokerages do nothing to proactively consider future potentialities. Instead, they are purely reactive to whatever the market brings. This is terrible business policy and one which almost certainly guarantees that sooner or later a brokerage with either be overtaken or outright eliminated by the competition. Case is point, if these lawsuits and their potential impacts have not been openly discussed within your brokerage for the past four years, you should probably start looking at where else you might like to hang your license.
I can already hear some of you screaming, “But what about leads!? And swag!? And tech!?” These are all great, but none of these perks actually matter without everything else mentioned above. Having access to an amazing tech platform is of absolutely no value if you don’t have access to a highly skilled managing broker. I know dozens of agents that constantly brag about the tech their brokerage offers but somehow still call me every time they have a contract question because they can’t get a call back from their managing broker. How sad is that?
If you are serious about wanting to survive in the years ahead, you owe it to yourself to take a long, hard, honest look at what your brokerage is actually doing to help ensure your survival.
STEP #3 - ACT LIKE A PROFESSIONAL
One of the biggest reasons selling real estate is alluring to many people is because there is a general assumption that agents don’t really do much but make a lot of money anyway. And let’s be honest, this assumption is pretty accurate for most agents insomuch as they don’t do much. They also don’t make a lot of money, but the public fails to make that connection. They watch Selling Sunset and then remember they called you last week and woke you up at 10am on a Tuesday and then conflate those two realities to conclude that you are well paid despite not really doing much. The point is, most real estate agents need to seriously get their act together when it comes to acting like true professionals, and the coming years are going to provide ample opportunities for the ones who refuse to act accordingly to go away.
Acting like a professional means:
Answering you damn phone. Seriously people, I know it’s tedious when someone calls your camera but this is mandatory. Do you seriously think it would be acceptable for your doctor, or lawyer, or CPA, or dentist, or barber, or dog walker or literally any other person who claims to be offering a service to just not answer the phone or return a phone call? If the phone rings, answer it. If you can’t, call the person back. It’s not that hard and it’s literally the easiest thing on the list to do that will make you appear instantly more professional to everyone that you interact with.
Stop asking stupid questions on social media. I belong to several real estate agent groups on social media and not a day goes by that I do not see multiple posts from other agents that make me want to hunt them down and slap them. Stupid questions are fine and we all have them from time to time. Even the most brilliant among us are not immune from this phenomena, but for the love of all that is holy you all have to stop posting these questions on Facebook. First of all, nothing is private, so at some point your clients (or worse, the attorney your clients hire to sue you for incompetence) are going to find these very public, stupid questions and they are going to use them to destroy you. Secondly, they make all of us look bad. Our industry desperately needs a makeover when it comes to how the public perceives us and this behavior does not help. Third, if you really feel like Facebook is your best source for information about how to do your job, you definitely need to go reread Step #2 above because you are getting hosed by whatever brokerage you are currently paying.
Never stop learning. No matter what you are in life, be a good one. There will never be a point where you know everything about real estate and can stop learning about it. This is true of every profession. Continual improvement is critical to acting like a professional. If this sounds boring to you because you don’t like real estate enough to find satisfaction in learning something new about it every day, then do us all a favor and pick a new job. There are plenty to choose from, so get on with it already.
Being a Full-Service Agent. Most agents are little more than transaction facilitators. There are few, if any, buyers out there who are going to be shelling out 3% of sales price to these agents in the future. Only true professionals will be making this kind of money. In order to command top prices, buyer agents will need to be legitimate full-service agents, who are also full-time agents. Full-service agents possess an in-depth understanding of the local market, continuously monitor trends, pricing and inventory and can provide accurate and timely information to clients in real time; they are pricing experts and master negotiators; have access to vast networks or lenders, inspectors, contractors, and more; they have highly developed, streamlined transaction process; and have high emotional intelligence that allows them to provide support, quell nerves and help clients with the decision making process.
Treating your business like a business. Do you have a business plan? How many side did you do last year? What is you goal for this year? Can you tell me the average number of leads you have to interact with to sign a new listing agreement? What was the ROI on your last marketing campaign? How much of your net commission income did you reinvest in your business last year? Do you use an LLC that has elected taxation as an S-corp to defer your tax liability? What is your average engagement rate on your Instagram posts? Can you afford to hire an assistant? What CRM do you use? How much did you spend on closing gifts last year? These answers, and the answers to many other questions should be easy for you to answer. If they are not, then you’re not running your business like a business and you need to change that right now. Hire a CPA, get a business coach, and take the steps that every other entrepreneur who is actually serious about their business takes in order to be successful.
The months and years ahead are filled with uncertainty, but rest assured that for those that come prepared and are willing to rise to occasion, the best years in real estate still lie ahead.