You’ve likely seen the headlines out of Kansas, which is a statement that no one in Wisconsin had ever uttered before the recent ruling against several large national brokerages and the National Association of Realtors. The damages in this case are around $1,800,000,000, which will apparently be trebled to $5,400,000,000. That’s a lot of money, and that’s only in the state of Kansas. Commentary available in numerous articles suggest that as copycat lawsuits rapidly pop up in other states the total damages in these anti-trust lawsuits may reach or exceed $400,000,000,000. That’s four hundred billion US dollars. The tobacco industry lawsuit in 1998 was for $206B, and tobacco products kill 8M people annually. So let’s talk about how the terrible real estate brokerages and their trade organization are twice as terrible as big tobacco.
I’ve been thinking about writing this for the past two weeks, but have had a hard time working up how to phrase a response without saying “this is really stupid” over and over again. I, as you hopefully know, am not an attorney. I’m not an accountant. I’m not a lobbyist. I’m not a legislator. I’m just a kid from Williams Bay who sells quite a bit of Lake Geneva real estate. My opinions on this recent lawsuit are just that: my opinions. I’ve read all of the articles and watched all of the webinars. If I’m attending Zoom meetings with real estate trade groups, you know I’m trying to learn as much as I can to form a moderately intelligent opinion (I hate real estate trade groups). Those disclosures made, let’s chat.
A Federal jury in Kansas found the National Association of Realtors and a few large brokerages guilty of colluding to inflate real estate commissions. The charge here is that buyers were unaware that the agents they chose to work with were getting paid. And if a seller is paying the buyer’s agent, then the seller is factoring that fee into the pricing of her house. The plaintiff lawyers argued that these buyers were unwittingly paying higher prices on real estate because they didn’t understand that the seller was paying their agents, which, in a twist that should be a surprise to absolutely no one, theoretically increased the cost of the real estate itself. It seems that the cost of a product is impacted by the cost of the goods and services that go into making the product. Pardon me while I go sue a coffee bean farmer in Columbia for inflating the price of my daughter’s Starbucks order.
The argument, as interpret it, is that because of this practice, wherein a seller pays a commission that includes a fee for both the listing agent and an outside buyer’s agent, this amounts to an engineered attempt to keep commissions where they have been for quite a long while. To understand the sensitivity about commissions, you should understand that the Wisconsin Realtors Association spends a considerable amount of time telling agents to never suggest that commissions are a particular set rate. We are never supposed to tell you what a commission would be, because it is, in theory, always negotiable. We aren’t even supposed to allude to the reality that there is such a thing as a “typical” commission, even though commission rates amount to data and data can be organized to show averages… To suggest that commissions are roughly where they have been for the better part of all of our lifetimes is somehow a dangerous move that might result in catastrophe. Perhaps the WRA was right, now that we’re seeing these lawsuits and the incredible level of damages being awarded.
In the Wisconsin listing contract there are all varieties of words written and promises made, but in regards to commissions there is a line for the total fee charged by the listing broker. Let’s say that rate is 8% (because I have to pretend the rate is mysterious and vague). That amount is written onto a line on the front page of the listing contract, and then a bit lower on the page there’s a line that stipulates the amount (paid out of that primary fee) that will be paid to a cooperating broker, be it a dedicated buyer’s agent or an agent working with the buyer as a subagent of the seller. On that line, I would write the rate that will go to that other agent/broker. I could write that fee as any amount that I wish. I could offer the other broker all of my commission, and therefore work for free. I could offer them what the market suggests is a fair rate. Or I could offer another broker a commission of 0.00%, and let them figure out if their buyer will pay their fee directly. I wouldn’t do that though, because I don’t need to be on board with a widespread collusion effort to know that I should offer a fair market rate to the buyer side if I want to encourage their engagement. You can apply this pricing concept to any product or industry. This is remarkably clear and not at all confusing. The seller understands that he or she is paying a set fee for the process. Voila, nothing here is masked, hidden, colluded, or otherwise malevolent.
On the flip side is a buyer agency agreement, which is standard practice in the state of Wisconsin in the event that a broker is representing a buyer. If you’re a buyer and we’re working to find a property, there’s a great chance you’ll end up signing a buyer’s agency agreement prior to the negotiation on a specific property. The document dictates services owed to the buyer by the broker, and outlines the compensation model for the transaction. The document says, in these exact words, the following:
COMPENSATION: The Firm’s compensation for purchase, option, exchange or an effective change in ownership or control shall be:
In the space provided, I will write “whatever is offered by the seller/listing broker”. And in the last two weeks, I’ve added “In light of the terrible lawsuit against the NAR, let me be clear, I AM BEING PAID”, because I’m cheeky like that. Later on the same page, the document clarifies the source of the buyer’s representative’s fee further:
PAYMENT BY OWNER OR OWNER’S AGENT: The Firm is hereby authorized to seek payment of commission from the owner (e.g., seller) or the owner’s agent (e.g., listing firm) provided that all parties to the transaction give prior written consent.
Now, with this compensation discussion in both the listing contract and a buyer’s agency contract, I can’t quite understand how this is a confusing condition. I’ve been told that other states lack our specificity in commissions, and those states may indeed present a confusing situation for those buyers who are somehow assuming they’re receiving a potentially lengthy and involved service for free. I have the television turned to Squawk Box right now. Do I need to know that Joe Kiernan is getting paid to be on my screen, and that CNBC is being paid to produce the program and that DirecTV is charging me for the right to view this program and therefore the cost my DirecTV bill is directly impacted by the salary that Joe Kiernan is receiving?
The question on the minds of everyone in the real estate industry now is what happens next. Will sellers, now that they’re being told they don’t have to pay a buyer’s agent, decide to offer 0.00% to the buyer’s agent? Will buyers agree to write a check to their broker representative? Will commission models change to an hourly rate? I suppose no one knows exactly, but I have my best guess. I do not think the business of real estate will change in any dramatic fashion. I do think this will put further pressure on commission rates, which have already been experiencing compression over the past decade. I’ve adjusted my practice to understand where commissions are heading and I’ve already moved my rates to that expected level (though they’re always negotiable). That’s because I’m not beholden to a corporate brokerage with a shiny headquarters in New York or New Jersey, and I don’t need to fee everyone to death to try to support my bloated infrastructure. Imagine working for a large national brokerage that is already struggling to make money at old timey commission rates and now being faced with an inevitable lowering of rates across the board. This will not go well for these sluggish behemoths, but while they squirm and struggle I’ll just be at the lake, charging fees that reflect where I believe rates are heading, not where they have been.