Disclaimer: I am the CEO of Warburg Realty and an active broker within the residential New York City real estate market.
Last week, a lawsuit was filed by nationally-known class action attorneys Hagens Berman (representing plaintiff Christopher Moehrl of Minnesota) against the National Association of Realtors and the Big Four of the American real estate brokerage scene: Realogy, Home Services of America, RE/MAX and Keller Williams.
The suit alleges that “Because most buyer brokers will not show homes to their clients where the seller is offering a lower buyer broker commission, or will show homes with higher commission offers first, sellers are incentivized when making the required blanket, non-negotiable offer to procure the buyer brokers’ cooperation by offering a high commission. Absent this rule, buyer brokers would be paid by their clients and would compete to be retained by offering a lower commission.” In other words, the suit claims that sellers are being illegally held up by being obliged to pay the buyer’s side commission as well as the seller’s side. The suit goes on to claim that this practice creates an anti-competitive atmosphere and thus violates antitrust law.
Does this suit have merit? Although most agents in Manhattan are not National Association of Realtors members and belong to a non- MLS residential listing sharing system, our fundamental practice, that sellers pay the entire commission which is then split between the seller’s and buyer’s agents, remains the same. So, the real question for contemplation, the question lurking behind every question of supposed antitrust abuses, revolves around the issue of consumer harm. Is the consumer actually injured by this practice?
The suit claims that the seller, by being obligated to offer buyer’s agents a commission, is not in a position to determine the overall commission he pays since he doesn’t want to lower his chances of attracting buyers’ agents and, by extension, their buyers. This argument fails to acknowledge a number of realities of the marketplace in 2019. First and most importantly, buyers do their own searches. In my experience, the buyer’s agent who refuses to show a property because it offers a lower commission is likely to lose both the buyer and any future referrals that buyer might have generated. This implies that buyer’s agents feel motivated more so by high commissions than by satisfying their client’s needs. In this era of absolute transparency in listings, woe betide the agent who deploys such a strategy. Not only are the vast majority of agents more ethical than that, it’s also a losing strategy.
Second, the transfer of the obligation to pay the buyer’s agents from seller to buyer doesn’t necessarily put more money into the seller’s pocket. Perhaps even the opposite. The buyers, newly conscious of the amount they are paying their agent (whatever the commission rate) will lower the amount of their initial offer to reflect this new obligation. The money which pays both the seller and the brokers is all coming from the buyer anyway and checks for the commissions are almost always cut from the proceeds. It’s actually always the buyer who is paying both commissions, but the deals are structured, so it doesn’t feel that way to buyers. Once it DOES feel that way to them, they may bid differently, and not to the seller’s ultimate benefit.
While I think the suit is unlikely to succeed in its present form, the assumption being made already by many reporters and pundits that this would be a disaster for agents seems fallacious to me. If the structure of deals changes to allow each side to hire its own representation, it will cause some chaos in the industry for a while as buyers and sellers get up to speed. New buyer’s agent agreements will need to be drafted, and new norms will be created. Perhaps more buyers will choose not to have an agent once they have to commit to paying them, but most will continue to want representation. No matter which way the suit is resolved, the market will, as it always does, sort it out.