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The Sitzer | Moehrl lawsuit settlement and new NAR rules have created confusion, controversy and conflict within both the residential real estate industry and among its critics. All this is not surprising because no one is completely satisfied with the terms of the settlement and because the class action litigation ended up opening a Pandora’s Box of issues that go well beyond the uncoupling of listing agent and buyer agent commissions.
All of these issues are too numerous and complicated to address in a short essay, yet they do reveal tensions that can be discussed.
On both industry and critic sides, some view the changes as an unmitigated disaster. One critic called the settlement just that, “an unmitigated disaster.” On the other side, one industry leader accused class-action lawyers of “creating confusion and chaos while recklessly destroying a tried-and-true [real estate] process.”
However, most industry leaders and industry critics now recognize that the settlement represents a compromise that, along with the litigation itself and its jury decision, have set in motion changes that benefit and challenge both Realtors and consumers.
The benefits to the industry are that, despite exposure of systemic price collusion and an adverse jury decision, Realtor groups are being required to pay a one-time penalty of less than $2 billion when they are collecting nearly $100 billion in commissions each year.
Moreover, the settlement does not prohibit seller offers for payment of buyer agent commissions, an outcome sought by most critics, including the U.S. Department of Justice.
The consumer benefits of the exposure and jury decision, which also represent a challenge to the industry, include:
- The end of mandatory price-setting, which now allows buyers to negotiate the commissions of their agents and reduces pressure on sellers to provide this compensation. In doing so, the settlement effectively negates the anti-rebate statutes that remain in nine states.
- Public exposure of widespread price collusion that will certainly encourage many future buyers and sellers to discuss and negotiate both listing agent and buyer agent commissions.
- More real and perceived sale and purchase alternatives to traditional brokerage. Already there is evidence, according to a RISMedia survey, that inexperienced and part-time agents are less able to charge 2.5 percent to 3 percent commissions. Many industry leaders and critics also believe that alternative brokers have new opportunities to gain market share.
Consumers, however, will also be obligated to be more proactive in selecting an agent and negotiating agent compensation in a less industry-regulated marketplace.
The source of much of the confusion is the new Realtor rule requiring buyers to sign contracts before viewing a home with their agent. These contracts, at least those proposed by state Realtor associations, are so long and legalistic that both agents and consumers are having difficulty understanding them.
Further, most agreements also contain anti-consumer provisions, including the timing of the signing, which does not provide buyers adequate opportunity to evaluate an agent before making a commitment.
“Touring agreements” help but can never adequately address the problems created by this requirement. All of these contracts will increasingly be compared with readable and fairer ones, such as those developed by eXp and by the Northwest MLS.
The litigation and settlement have opened a Pandora’s Box of challenges to the industry that also affect consumers. These issues, which always existed but were never fully unleashed, include fundamental challenges to the role of NAR, the MLSs and the portals.
They include greater opportunity for sellers who wish to sell on their own or purchase limited broker services. And they include emboldened government regulators and private litigators.
The DOJ was encouraged by the litigation and jury decision to be more aggressive and publicly critical. In their recent refusal to approve the settlement, it was obvious that the DOJ believes that the new industry rules may be necessary but not sufficient conditions for adequate price competition.
While their aggressiveness might be muted by the new administration, the DOJ’s 80-plus year commitment to a more competitive industry is unlikely to disappear. Moreover, there is some evidence that state regulators will more proactively address related issues, often on the side of the many industry leaders who believe that some changes are necessary, perhaps even desirable.
There is much talk of private litigators increasingly challenging a wide range of industry practices. Some are challenging the Sitzer | Moehrl settlement itself. I would guess that most of these challenges will be unsuccessful or achieve only marginal results.
The settlement represents, on the one hand, a serious five-year effort by the largest and most successful class action law firms and, on the other, an attempt by most industry leaders to minimize potentially catastrophic damage to the industry.
Moreover, there is every evidence that the Moehrl and Sitzer judges competently handled the two cases. I doubt that a serious legal challenge to the industry will emerge in the future unless many Realtors flout the terms of the agreement.
This industry conduct is one of the two factors that I think will have the greatest impact on the future of the industry. The other factor is the conduct of consumers. The more frequently homebuyers and sellers question and challenge their agents about practices and compensation, the more all consumers will benefit.
I and other critics will be encouraging these questions and challenges and will be offering suggestions about the most productive ways to raise both.
Stephen Brobeck has been researching residential real estate brokerage issues since the early 1990s. Initially he focused on subagency. More recently, he has researched issues related to agency, agent compensation, and state regulation. Brobeck earned a Ph.D. in American Studies from the University of Pennsylvania and has taught at several universities. From 1980 to 2018 he served as executive director and CEO of the Consumer Federation of America. Since then, he has held the position of senior fellow.
