Two years ago I wrote an article called The End Of Real Estate.
It was a month after two of America’s most aggressive law firms filed a class action lawsuit against the National Association of Realtors and the nation’s largest MLS systems (including Phoenix) on behalf of Chicago home seller Christopher Moehrl.
Side Note: The MLS (Multiple Listing Service) is a database for buyer agents to find homes for their clients. It also protects them as to the amount of commission they’ll earn from the listing broker when they represent a buyer in the purchase of a home.
This lawsuit alleges that it’s unfair to make home sellers pay a buyer agent’s commission when buyer agents work for buyers, not sellers. It argues that the MLS is the foundation of this unfair and costly practice, resulting in sellers paying twice the commission they should, often 3% to the list agent and 3% to the buyer agent (although those fees are often negotiated).
How does the MLS make sellers compensate buyer agents? It requires listing agents to make a “non-negotiable” offer of compensation to agents who represent buyers.
As a seller, wouldn’t you consider it more fair to pay your agent and the buyer to pay their agent? So what’s the problem?
Simple – No showings.
The lawsuit uncovered substantial evidence that buyer agents have grown so accustomed to being paid by sellers that they may not show homes when they aren’t offered the commission they expect to see in MLS (typically 2.5%-3%).
The lawsuit also produced evidence in the form of videos and training manuals teaching listing agents to warn sellers that if they didn’t offer a buyer agent commission in MLS, their home would get fewer showings.
It’s been two years since that first lawsuit was filed. Since then a lot has happened.
First, NAR moved to get the lawsuit dismissed. Federal Judge Andrea Wood denied the motion, saying “the buyer-broker commission rules prevent effective negotiation over commission rates and cause an artificial inflation of buyer broker commission rates.”
Since the first lawsuit, several others have been filed, including a reverse claim on behalf of buyers who allege they are harmed because the buyer agent commission paid by sellers inflates the price they pay for homes.
Last November the Department of Justice filed a lawsuit against the NAR, ultimately forcing its MLS systems to disclose the buyer agent commission in Zillow, Realtor.com and other public websites so buyers know what their buyer agent is being paid by the seller. Previously, this information was hidden from buyers and accessible only to Realtors in MLS.
Imagine you are one of 12 people on a federal jury. If you find for the Plaintiffs, you will likely save half the real estate commission when it comes time to sell your home.
It only takes 7 out of 12 votes for the plaintiffs to win. My guess is the decision will be to eliminate the MLS required offer of buyer agent compensation. This will force buyers to negotiate with and pay their own agents, or buy directly from the listing agent.
So what would be the fallout? The same thing I predicted two years ago in my End of Real Estate article:
Remember what I said at the beginning of this article about the two things the MLS does? It’s a database of available homes for sale and a “commission guarantor” for buyer agents.
When the court rules that the MLS can’t require sellers to offer buyer agent compensation, then it becomes just a database of homes for sale.
15 years ago that would have been ok because the MLS would still have the monopoly in that space…but not today.
Ever heard of Zillow? Of course…it’s become the “go to” source for buyers to find homes.
So regardless of what the MLS does, it won’t be able to compete with Zillow’s established brand, leaving the MLS without a purpose.
Here’s the likely domino effect:
Buyers will resist paying 2.5%-3% directly out of their pocket to buyer agents, opting to work with listing agents instead.
The number of buyer agents will decline (they may eventually become obsolete).
Real estate firms with a lot of buyer agents will struggle.
Listing agents will drop their MLS and NAR memberships, and upload their homes directly to Zillow and Realtor.com.
Expedia replaced the travel agencies. Amazon eliminated bookstores. Uber decimated the taxi business.
This series of lawsuits could reduce the cost of selling a home to half, cut the number of Realtors in half, and change the way buyers buy homes.
As George Carlin once said, “Some people see the glass half full. Others see it half empty. I see a glass that’s twice as big as it needs to be.”
Will the real estate glass get cut in half?
What do you think?