Real estate agents perform a critical function in the American housing landscape, bringing buyers and sellers together and making certain each side is responsibly represented. Recently, however, a number of class-action lawsuits and a Department of Justice (DOJ) investigation have been initiated against all the largest national real estate brokerages. These attacks contend that, because commissions are typically paid by a seller to both buyers’ and sellers’ agents in a transaction, a lack of transparency and a restraint of trade exist. These contentions have been exacerbated by a Texas-based discount commission service called REX, which claims the National Association of Realtors (NAR) discriminates against them by not including their listings on NAR-related Multiple Listing Service (MLS) websites, and that NAR illegally fixes commissions by not carrying REX’s lower-commission listings. (In fact, REX is not an MLS member, and Multiple Listing Services are membership organizations.)
The DOJ had arrived at a settlement with NAR regarding these issues: NAR agreed to create more transparency around who pays commissions, how much they pay, and to whom, on all its affiliated MLS sites. In an unprecedented move, the DOJ then withdrew from the agreement, which had been approved by its own anti-trust division, claiming that the settlement did not leave the DOJ enough leeway with which to pursue possible future claims against NAR and the real estate brokerage industry. This entire brouhaha is calibrated to solve a problem that barely exists, except as a prospect for making class-action lawyers rich. Here’s why:
- The receiving party pays: Historically, one brokerage commission has been paid, typically by the seller of a property, to compensate both the buyer’s and seller’s agents. This commission typically, though not necessarily, is split between the agents. Buyers have historically accepted this methodology, although recent class-action suits suggest that they would prefer to negotiate their own commission payments directly with buyer’s agents. While the industry certainly has no issue with greater transparency about buyer commissions, there is a certain logic to the practice that the party receiving the money (the seller) pays the agents, rather than the party paying the money (the buyer).
- Buyers without representation: REX and other discount agents insist that a change of this nature will save both buyers and sellers money. There remains no proof of that. Sellers who pay only their own agent can reasonably expect that buyers who are paying THEIR own agent will offer less for the property to make up the difference. Many buyers will then almost certainly decide to represent themselves. And ordinarily, those buyers either lose out on purchasing because they lack expertise in the bidding process, or they overpay without an expert negotiating on their behalf. It tends to be a false economy.
- A dangerous end to co-brokering? A more serious issue, however, is that such a move will essentially dismantle the co-brokerage system which has made buying in the United States a far more successful experience than buying in Europe. In England, with few buyers’ agents, every office has its own listings. A buyer must contact numerous agencies in order to make sure they see an adequate sampling of what’s available on the market. There is no guarantee that a seller’s property will be exposed to the full marketplace (in fact it almost certainly will not) and no guarantee that the buyer will have seen the best home for them to buy. Commissions are lower, it’s true. But for this country, the dismantling of the MLS system would be a grave throwback to a time in which neither buyers nor sellers could feel confident that they had gotten the full benefit of the market.
What seems to be a good idea isn’t always actually a good idea. There are different ways for the DOJ to protect the consumer. One is, of course, to try to create a transparent marketplace to guarantee that each party to a transaction knows exactly what they are buying, and for how much. But there are other forms of necessary consumer protection. To encourage the real estate brokerage industry to revert to a time before co-brokerage, as the Europeans have it, benefits no one except the agent, who typically pockets a larger fee as the only professional in the transaction. The buyer is left not knowing if they got the best price OR the most appropriate property, while the seller will never know if there was another buyer out there who did not hear about his property but might have paid more for it. The DOJ should always protect consumers and minimize monopolistic activity. But they need to make sure that the cure isn’t worse than the disease!