Real estate summit: Experts sort out effects of NAR settlement on real-estate commissions

LOVELAND — Brokers for real-estate buyers can still be paid by the listing broker or seller — but not through a multiple listing service or local association.

That was the consensus of a real-estate lawyer and a law professor on Thursday at BizWest’s Northern Colorado Real Estate Summit as they dissected the effects of a class-action settlement against the National Association of Realtors.

Dozens of the lawsuits were filed across the nation, accusing NAR of colluding to inflate brokerage commissions. One of them, known as the Sitzer-Burnett case, was filed in U.S. District Court in the Western District of Missouri and also alleged that real-estate firms were requiring sellers to compensate the buyers’ real estate agent, resulting in “anticompetitive rules that result in damages.”

The perception by the plaintiffs, the Department of Justice and the Federal Trade Commission “was that this inflated commissions,” said John Francis, a University of Colorado Boulder law professor. “If the MLS form has a field for seller and listing agent to offer compensation to a buyer-broker, it tended to do two things: create more jobs for buyer-brokers, and it generally inflated the amount that was offered to buyer-brokers by putting a field in there that said ‘What are you going to offer the buyer-broker for cooperation in procuring a transaction?’

“That required field is what’s at issue here,” he said. “That was perceived as the mechanism used by an MLS either owned by or affiliated with NAR or the local associations to create a price fix. It implied everybody should get a buyer broker and implied that there should be a certain offer made to them. That rule was the crux of the litigation. The reason it violated antitrust laws is that that’s an agreement reached by competing Realtors through their trade organization to encourage the use of buyer brokers and to agree on higher than market rates for compensating them.

“The jury agreed, vehemently, that’s price fixing,” Francis said. “And that’s just Missouri. That’s why that freaked out the industry.”

The jury verdict in October resulted in a finding of damages to home sellers that ran into the billions of dollars.

That “would have bankrupted NAR. They’d be gone,” noted Francis, adding that similar cases in the rest of the nation could push damages past $1 trillion. “There may not be $1 trillion in the residential real estate market. It looked pretty disastrous. So they settled.”

NAR agreed to a $418 million settlement on March 15, and the Department of Justice announced it will change the process so that sellers, buyers and their agents must work outside of the MLS to agree on the commission value.

“Part of the settlement are rule changes for how we compensate or make offers of compensation to buyer brokers,” Francis said. “They will still happen. It will just be handled differently, not through the MLS or associations.

“It’s going to be a free-market discussion between brokers and their buyer-clients to decide what the commission will be, and a free-market discussion with any individual sellers and their listing agents as to what the fee will be.”

Another part of the new rules, said Jon Goodman, a real-estate attorney at Frascona Joiner Goodman and Greenstein PC, is that an agreement on commissions must be reached between a buyer and broker before properties can be shown.

“You have an opportunity to show your stuff, show you bring value by searching properties and providing market stats, providing information on yourself,” Goodman told the real-estate agents. “But before you actually tour a property with the buyer, you have to have this agreement signed.”

But then “what happens if your buyer bargains you down to X, and the listing side is offering you 150% of X? Are you allowed to get the extra amount? No,” Goodman said.

Francis and Goodman were skeptical about how or even whether the new rules would be enforced.
“How much enthusiasm will the Colorado Division of Real Estate have for it? They could have a lot of enthusiasm for it, but they might not,” Goodman said. “This hurts buyers. This hurts first-time buyers who don’t have the liquidity to pay their own broker. This hurts veterans.”

However, Francis noted that “the government’s view is that this will be great for buyers because they won’t be paying buyer brokers as much and, allegedly, that will reduce the cost of housing.”

Francis said there’s still plenty of room for the marketplace to work.

“You may also negotiate, once you have an agreement with your buyer, with the seller, an individual seller. That’s not price fixing. That’s just two parties negotiating what they’re going to pay each other or share compensation. What makes it illegal is if they do it through an MLS, which is a collection of competitors, also known as a ‘cartel’ at the Department of Justice. They can’t do it through NAR or the local associations because they have bargaining power that will skew free-market negotiation.

“People think this is the end of buyer brokerage, and that’s not true,” he said. “It’s the end of automatic offers through the MLS by a seller or listing agent to a broker.”

Francis called NAR “a behemoth organization that has all these relationships with MLSs and affiliated associations on a state and local basis and has imposed these rules. It’s almost like a government entity in how it does business.”

He said the settlement is not legally binding on anyone but NAR, “except to the extent to which NAR so greatly influences and controls how all the rest of us do business, and even less applicable to the Colorado Division of Real Estate. It has no obligation to follow NAR rules.”

Information and Real Estate Services LLC “is the dominant MLS in the Northern Colorado market,” Goodman said, and “IRES must opt in to the settlement if it agrees to implement these rules.”

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