Thursday, July 7, 2022 / by Dave Magua
What happens to buyers' agents if the bombshell lawsuit explodes?
The word “conspiracy” pops up more than 50 times. There’s talk of “anti-competitive” practices and “inflated” prices. Big and famous companies are described as “co-conspirators.”
But this isn’t some history book about the swashbuckling golden days of trust busting. And it isn’t a hard-boiled gangster story about the likes of Al Capone.
No. Instead, it’s a lawsuit about real estate, and specifically about how homebuyers’ agents get paid.
The lawsuit, popularly known as the Moehrl case, began in 2019 and pits real estate consumer Christopher Moehrl against big names including the National Association of Realtors (NAR), Anywhere (formerly Realogy), Keller Williams and others. The gist of the suit is that Moehrl believes the real estate industry essentially conspires to force homesellers to pay for homebuyers’ agents.
The Moehrl case has been a bombshell since day one, but in the years since it began it has also become part of a broader set of forces putting pressure on the way agents — particularly those who work with buyers — get paid. In addition to the Moehrl case, there’s the similar Sitzer/Burnett lawsuit that was also filed in 2019. Then there’s an ongoing legal battle between NAR and the U.S. Department of Justice (DOJ). And there are a smattering of other lawsuits, such as those filed by discount brokerage REX Real Estate, that attack the real estate establishment, raise antitrust issues, and take issue with compensation models, among other things.
None of these cases are exactly the same, but they generally raise at least some overlapping issues. And taken together, it’s clear that a lot of people are trying to shake things up all at once.
The story of these many different legal fights is not over. But this week, Inman is diving into what they could mean to members of the industry. Part of that means exploring the legal nuts and bolts of the cases. But for this story, Inman set out to understand what the world might look like when the dust settles. It’s a speculative project, but what’s clear after talking to industry experts is that there’s a good chance the future of real estate will look very different from the present.
When the dam breaks
The Moehrl and Sitzer/Burnett suits are still being litigated. But Mark Nadel, an attorney who has researched and published on real estate commissions, told Inman that the lawsuits — as well as the DOJ case — could ultimately lead to a more diverse compensation landscape.
“Once the dam breaks, in my view, then you’ll have different models,” he said.
A 2021 paper Nadel published in the Berkeley Business Law Journal found that commissions ultimately generate around $90 billion per year. While speaking to Inman, he said that number has since climbed and is now closer to $100 billion. Nadel expects the industry to consequently resist change, though he thinks it’s coming anyway.
“I’m going to bet that it will break,” he said, referring to the dam metaphor and the pressure building thanks to current litigation.
Other experts agreed that change is likely.
Steve Brobeck, executive director of the Consumer Federation of America, pointed to the erosion of agents’ fiduciary roles in places such as Florida and said “the future of buyer agents does not look promising.”
“If Moehrl succeeds in effectively prohibiting sellers from compensating buyer brokers, these brokers would face significant challenges,” Brobeck told Inman.
A la carte, dual agency and MLSs
The sky is the limit when it comes to what might happen as a result in the future. But one possible outcome that Nadel envisions is that buyers agents may begin offering more a la carte services. In other words, buyers would just pay for the specific tasks that they want completed, but the agents would no longer collect a percentage-based commission.
“We should still have all these services,” Nadel suggested, pointing to the various tasks buyers’ agents already do. “But we should sell them a la carte. I would like to see companies offering that.”
Then there’s the potential growth of dual agency.
Brobeck told Inman that “if buyers have to explicitly compensate buyer brokers, they are more likely to contact listing agents.” That would also likely make sellers less willing to pay out the standard 5 to 6 percent commission, thus driving down agent compensation. Brobeck envisions the “dual agent/transaction broker commissions” falling into the 3 to 4 percent range, while buyers’ brokers who remain in such a world might start charging 2 percent.
“Over time, I think most consumers would consider that 2 percent to be a reasonable rate, though uncoupling is also likely to increase discussion of different agent compensation models,” Brobeck said.
The commission lawsuits could also force changes at multiple listing services (MLSs). Victor Lund, founding partner of consulting firm the WAV Group, said that “if the offer of compensation gets changed, I guess that the MLS will need to prop up a ‘find a buyer’s agent’ agent directory to syndicate via IDX.”
“Agents might be searchable by broker brand, years of experience, production in different geographies or by price point,” Lund also speculated.
Lund added that he believes the current system works well, but if it changes he too could see a la carte and flat rate options emerging.
But whatever happens, the takeaway is that a post-Moehrl, post-Sitzer world might push new ideas into the mainstream. Commissions might dip. But the flip side is that buyers agents, in some form or another, are still likely to exist.
A case study: Foreign markets
Another possible outcome is that the current legal cases could gradually make the U.S. real estate market resemble what goes on in other countries. The U.S. of course is unique right now for its seller-funded buyers’ agent commissions, and for the fact that most buyers do ultimately work with an agent.
But that’s not the case in many other countries. Take, for instance, France.
Marc Jelensperger is a director at Paris-based real estate firm Bientot Vendu. He told Inman that in his region, “99 percent of agents are seller agents, only 1 percent are buyers’ agents.”
“At the end of the day,” Jelensperger said, “most buyers in France do not get the help of an agent. Buyers, most of the time, are on their own.”
The resulting system is fairly different from what exists in the U.S. Among other things, Jelensperger said there is no significant multiple listing service in France. And real estate agents typically don’t collaborate with each other.
For consumers, it’s common to take a year or more to find a home. And during the search process, a would-be homebuyer might only see one house a day, or even one a week.
“If you are not good at negotiating, you don’t get it,” Jelensperger said of the buying experience. “But if you are good, you can maybe get a good deal.”
Jelensperger said this system persists because homebuyers don’t want to pay out of pocket for the help of a professional.
“I can say to someone, ‘I can help you negotiate and it will cost 5,000 Euros.’ Most people will say, ‘no,'” he explained. “At the end the day, most of them, they don’t want to pay for a service that they don’t value and where it’s not the habit.”
That said, there is still that 1 percent of agents in France who work with buyers. Jelensperger said such agents are colloquially referred to as “hunters.” Such agents typically work with higher end buyers, with some getting paid via commissions and via a flat fee. But Jelensperger said it’s generally more profitable to be a seller’s agent.
“Most of the hunters, at some point, they move to the seller’s side,” he added.
Real estate in Australia functions similarly.
Peter Schravemade — a real estate veteran who today is the managing partner of NAR’s REACH Australia tech accelerator but who in the past has also worked as an agent — said buyers’ brokers in his part of the world are “next to non-existent.”
“They do exist, but they are few and far between,” Schravemade explained. “There are three that I could name. But I could name 3,000 listing agents.”
Much as is the case in France, this puts the onus on buyers themselves to do a lot of the work. And Schravemade said of Australia that “it’d be lovely if there was an advocate system here for buyers.”
Asked about the various commission lawsuits, Schravemade — who thanks to previous jobs is well acquainted with the U.S. housing landscape — was skeptical that American buyers agents will go away.
“I don’t think it’s a case where you can take the buyers agent out of the equation,” he said. “The American public as consumers are too heavily reliant on it.”
Still, there are many countries where buyers agents are comparatively rare, and where they tend to work primarily in a niche, such as with higher end consumers. As Schravemade suggested, the U.S. may never swing fully over to such a system. But if the compensation landscape gets sufficiently shaken up, it could ultimately inch in that direction.
While foreign markets offer one potential permutation of a world in which buyers’ agent compensation changes, there’s also another version of this story happening right here in the U.S.: The New York City rental market.
In most American cities, tenants typically search for apartments on Craigslist, Facebook marketplace, or another portal, then sign a lease directly with the owner or property manager. Real estate agents never enter the equation.
But it’s different in New York, where many owners and management companies use brokers to fill their properties. On top of that, some renters also employ agents to help them search for housing. There are units in New York that get filled up sans brokers, but overall the city’s rental market offers a kind of mirror image of the sales landscape.
But there is a key difference.
“Where New York is very different than pretty much the rest of the world is that tenants typically are paying the brokerage commissions here,” Nicole Beauchamp, an agent with Engel & Völkers who does both sales and rentals in the city, told Inman.
Beauchamp explained that the way rental broker fees work in New York varies widely. In some cases, the broker fees amount to 15 percent of the first year’s rent. In other cases, the fee is one month’s rent. There are other approaches as well, and when both sides of a rental deal are using brokers there are different ways the fee gets split.
But regardless of the specific details, the fact that the home seeker pays the fee makes New York a unique case study in what happens when the burden of real estate commissions is flipped on its head. In other words, what do home shoppers do when they’re more obviously bearing the burden of paying for an agent to help them?
Beauchamp — who noted that the current rental market in New York is “the craziest I’ve ever seen” — said that for many renters “it all comes down to money.”
“I think more and more, people prefer trying not to use brokers because they don’t want to pay,” she said.
The result is something resembling dual agency, with owners’ agents handling the whole deal. Beauchamp said renters often don’t actually end up saving money in such situations, but there are still plenty of renters in the city who opt to look for housing without the help of an agent.
In that way, New York’s rental market could foreshadow what might happen if homebuyers had to foot the bill for their brokers. Which is to say, there are still agents in New York who work with people seeking housing. But there are also a lot of consumers who skip that step.
The other battlefront: Social media
The main battlefront in this story is the courtroom. But it’s also worth noting that it isn’t the only front.
Instead, some people are making a case directly to consumers that the agent compensation model is broken. And one of the most common platforms for this kind of content is social network du jour TikTok.
Late last month, for example, TikToker Mike Balint — who has more than 100,000 followers — posted a video calling agent commissions a “scam.” A day later, he posted another video again referring to commission structures as a scam because buyers’ agents “expect the seller to pay for all the time you wasted that has nothing to do with their property.”
Balint suggested buyers agents instead “charge hourly” — a proposal that is somewhat akin to Nadel’s a la carte suggestion.
Just a few days after Balint’s posts, TikTok account “househack.with.me” posted a video arguing that “the way real estate agents get paid in America is about to go through a huge transformation.” The video went on to refer to aspects of the current system as “nefarious” before mentioning the DOJ’s case against NAR and asking an open ended question about agents accepting flat rates.
The real estate industry has always had detractors, but what’s significant about videos like these — and there are a lot of them out there right now — is that they pop up organically. Unlike platforms such as YouTube and Instagram, TikTok’s algorithm is boosting this type of content into the feeds of millions of people with little or no experience in real estate — turning commission issues into a highly public debate along the way.
It’s difficult to gauge the impact of such social media posts. And TikTok is also filled with agents who post about what exactly they do to earn their incomes. But over time, scores of consumers hearing that commissions are a “scam” could ultimately have an impact on the public’s willingness to pay.
Article BY JIM DALRYMPLE II