Life is full of a thousand red herrings, and it takes the history of a civilization to work out which are the red herrings, and which are not. – Peter Greenaway
This is a story about thousands of homeowners who don’t know they’re in a lawsuit, thousands of real estate agents who could lose their way to make a living, and a battle of intelligence involving some of the nation’s smartest attorneys.
If you read my article last week, you know the real estate industry is immersed in multi-billionaire dollar class action lawsuits that could cut the cost of selling a home in half and put more than half of U.S. Realtors out of business. If you missed it, go to the blog at GregHague.com and read, “Want To Sell Your Home At Half The Price?”.
The gist of the lawsuits is whether home sellers should feel obligated to pay the agent who represents the buyer or buyers should pick up the tab and pay their own agent.
The two primary goals of all the lawsuits are:
Get billions in damages for the plaintiffs, consisting of tens of thousands of home sellers who paid buyer agents over the past several years.
Change the longstanding norm of home sellers believing it’s standard or required that they pay a commission to the agent who represents the buyer of their home.
THE BACKSTORY
Most every MLS system across the country mandates that listing agents offer a commission to buyer agents. This is a required fillable field in the MLS when you submit a home for sale. You can offer buyer agents as little as one penny, but you must offer them something.
In one of the smaller lawsuits a preliminary settlement was just reached with one of the defendants, MLS Property Information Network. The settlement requires that this MLS pay damages of $3 million and “eliminate its requirement that listing agents must offer compensation to buyer agents.”
SETTLEMENT TERMS
This settlement mandates that the MLS allow listing agents to offer $0 to buyer agents instead of a penny. It also requires that its member agents advise their sellers that they are not obligated to pay any commission to buyer agents.
Will this achieve the plaintiffs’ goal of eventually having each party (buyer and seller) pay their own agent?
A RED HERRING
You may be familiar with the term “red herring,” especially if you enjoy a good mystery novel. This literary device is deployed by mystery writers to throw you off the scent of the truth.
In the early 1800’s, radical author and political commentator William Cobbett published a fictional tale in which he used a particularly pungent smoked fish (red herring) to try to throw his pack of hunting hounds off the scent of a rabbit trail.
Cobbett’s fictional story was used as an allegory for the media, which he believed was falsely reporting Napoleon’s defeat to distract the public from bigger issues of their time.
Could this MLS settlement be among the most pungent red herrings in legal/business history?
CHANGE THE EXPECTATION
The fact that listing agents would offer $0 instead of $.01 is a technical difference that won’t make a real difference. If the plaintiffs’ goal is to change the system so buyers and sellers each pay their own agent, they will have to change the uniform expectation of buyer agents in each market that they should receive a certain amount of commission from sellers.
Agents who represent buyers in markets across the country typically expect to be paid 2 ½% – 3%, half the typical commission of 5%-6%. If they don’t see their “expected amount” of compensation in MLS, they are unlikely to show the home. That’s a realism that any listing agent would be remiss not to point out to sellers.
Changing the minimum fee a listing agent must offer a buyer agent from one penny to nothing will change nothing. The buyer agent expectation will endure, and listing agents will continue to advise sellers that if they don’t pay the expected amount, their home will receive fewer showings.
DON’T BLAME BUYER AGENTS
Don’t blame buyer agents for expecting to earn half the total commission. If you’ve ever run a buyer around town looking at homes day after day, then negotiated the deal, the inspection, helped with financing, and helped them through closing, you’d know it’s a brutally hard job.
Unfortunately for buyer agents, the issue here isn’t one of fair compensation. It’s really about who pays that compensation – the buyer they represent or the seller they don’t.
IT WON’T GO WELL
Most everybody in our industry knows that buyers are accustomed to having buyer agents help them for free (because the fee is built into the sellers’ commission). If buyer agents suddenly ask their buyers to pay 2 ½% – 3% of the sale price out of pocket, it likely won’t go well. Many buyers will facilitate their purchase directly with the listing agent to save money.
DO THEY CARE ABOUT CHANGE?
So back to the point: How smart are the attorneys?
This MLS PIN lawsuit is a baby. The two mega lawsuits on the same issue are known as Sitzer/Burnett and Moerhl. Between the two, they involve most every home seller in the nation going back for many years. They involve antitrust claims against the major national real estate firms, the National Association of Realtors, and MLS systems throughout the nation. The plaintiffs’ position appears to have Justice Department support and requests tens of billions of dollars in damages.
If the plaintiffs’ attorneys care about change and not just the money, settling these mega-lawsuits by simply requiring listing agents to tell sellers they don’t have to pay a buyer agent and changing the rules so sellers can offer buyer agents $0 instead of $.01 won’t get the job done. Every listing agent will and should still tell their sellers the truth…if you don’t offer what buyer agents expect, they won’t show your home.
WHAT WOULD FACILITATE CHANGE?
In my opinion, the only thing that will get the plaintiffs where they truly want to be is to remove the buyer agent compensation field entirely from the MLS.
Then buyer agents would not see any offer of compensation when considering showing homes to their buyers. This would require that they call each listing agent directly to discuss compensation. That would transform the system to one of individual negotiation instead of today’s uniform expectation.
But even if this happens, sellers paying buyer agents will not go away quickly. It will first become a case-by-case situation in which buyer agents call listing agents to negotiate their commissions.
Listing agents will likely say, “Fine. Just put what you want in the contract and my seller will decide whether your buyer is offering enough for my home to cover your fee.”
This would effectively result in buyer agents covering their own cost, built into the price of the home. It would, over time, make the uniform expectation of a certain amount of compensation fade into history. In many situations, buyers will opt to go directly to listing agents to give their offer a more competitive edge because there will be less cost to the seller.
NOBODY DESERVES TO LOSE
Since my firm, 72SOLD, has a program exclusively for sellers, it won’t be affected regardless of the outcome of the lawsuits. So I have no dog in this fight.
I do feel like this is one of those rare circumstances in which somebody will lose, yet nobody deserves to be the loser.
Buyer agents deserve to be paid, but most buyers won’t pay thousands out of pocket that could otherwise be used for a down payment.
There is an inherent inequity in a structure that effectively forces sellers to pay the buyer agent who doesn’t represent them and who negotiates against them.
Most buyers need competent representation and if they go directly to listing agents to save money, they could end up losing even more money by making a costly mistake.
HOW SMART ARE THE ATTORNEYS?
Could the recent settlement in the small lawsuit with MLS PIN be a brilliant move by this defendant’s attorney to hoodwink the plaintiffs’ attorneys? Is agreeing to reduce the required offer of compensation to buyer agents from $.01 (one penny) to $.00 (nothing) an attempt to disguise the real issue at hand – a uniform expectation of compensation by buyer agents? This will only change if the buyer agent compensation field is removed.
Stick out your nose and take a deep whiff. The scent on this trail is one in which the plaintiffs’ attorneys get a big payday for a nominal song and dance and future home sellers are left holding a bag of expensive red herring while business continues unchanged.
In short…
If the field remains, nothing will change.
