The Real Estate Update

March 19, 2024

I am sure that most of you have seen the many articles this past week, concerning the huge settlement, $418 million, that the National Association of Realtors (NAR) made, in a class action law suit filed in Missouri by a group of homesellers.

The original class action lawsuit against the NAR, and a group of large real estate brokerage firms, was filed in 2019. In October 2023, a Federal Civil Jury in Kansas City, MO. found for the plaintiffs, in the amount of $1.8 billion.

The NAR is the largest trade association in the United States with approximately 1.5 million members. To become a member you must hold a valid real estate license, and be actively engaged with a real estate firm in the real estate business or one of its recognized fields .In addition, within the past seven years, one must have no record of a civil judgement involving real estate, civil rights or other unprofessional activities. An applicant may not have a record of a criminal conviction for any crime relating to the real estate business or that puts real estate professionals, clients and customers at risk. Within three years of applying for membership, they must not have been named a debtor in any bankruptcy judgement or pending bankruptcy proceeding.

One of the main missions of the NAR is lobbying. This is a major component of their operation. The NAR also owns most of the MLS organizations, nationally.

Last week, it was announced that the NAR and some of the large brokerage firms named in the lawsuit had reached a settlement agreement. The NAR has agreed to pay $418 million to settle the class action lawsuit. Payment will consist of $5 million being deposited in an escrow account for the benefit of the plaintiffs within 30 days, and then $197 million to be paid within 90 days of approval, by the trial judge, and then $72 million each year, for two years, with the balance in the third year, plus accrued interest.

Additional payments totaling over $270 million has been agreed to by other named defendants, large real estate brokerage organizations with total transactions greater than $2 billion.

Home Services of America, a large brokerage organization owned by Berkshire Hathaway (Warren Buffet) did not agree with the settlement and has appealed the decision to the Supreme Court.

I have not read the lawsuit filing, but it appears that the essence of this lawsuit was that the NAR was forcing homesellers to pay inflated commissions to the real estate brokers, listing and selling, because Multiple Listing Organizations (MLS) were owned by the NAR, and they required the amount of commissions to be paid, listed in the agreement and disclosed.

The settlement agreement has yet to be signed off by the trial judge, but it requires that any offer of commissions to be paid, be removed from the MLS agreement within 150 days. Buyer Agents must be compensated by the buyer or through seller commissions that are separately negotiated with the seller agent outside of MLS.

In addition, the buyer agent cannot receive commissions greater than that agreed upon with the buyer. A buyer agency agreement would now be a requirement.

It was originally reported that this class action lawsuit was filed on behalf of 500,000 home sellers in Missouri. Another report indicated that 50 million homesellers, nationally, would share in the proceeds. Irregardless, there won’t be a huge financial windfall to anyone except the attorneys. If we assume that the total settlement is in the area of $700 million, and that the attorneys receive 20%, then approximately $560 million is available for the class action participants. Assuming the original 500,000 class action members, that would amount to approximately $1,120. spread over at least 5 years. If this settlement is to be applied to 50 million homesellers, nationwide, then each would receive approximately $11.20. Not a financial windfall for the homesellers in the class action lawsuit..

Some of the headlines surrounding this case include; ”Housing Prices are Coming Down,” “Goodby 6% Commissions,” “Buying a House Should Be Cheaper,” “Half of Two Million Agents Will Quit.”

Stephen Brobeck, Senior Fellow at the Consumer Federation of America (CFA) , said, “decoupling commissions from home prices will allow them to be removed and negotiated down, lowering both housing prices and overall consumer costs.” He believes that listing agents will tell sellers that homes will be sold faster if they pay the buyer’s agent fee.

CFA is an umbrella group of non-profit consumer organizations.

Thomas Piskorski, Real estate Professor at Columbia University, is skeptical that this settlement will change home prices.

As I read these articles, I could not help but think that most of the journalists that were writing these articles had no idea how the real estate industry operated.

I decided to express my own opinion concerning these articles. In another life I owned and operated a successful real estate sales operation in North Carolina. We specialized in home sales, recreational property sales on a nearby lake and some commercial transactions.

I originally received my Real Estate Brokers license in Connecticut, after having taken the prescribed courses at the University of Hartford, and passing the State Brokers Examination. I was part of an investment group that had the United States rights to a time sharing community on the Costa Brava in Spain. At this time, early 1970’s, the purchase of a time sharing property was a unique concept that was new to the United States, and not embraced by many. As a result, we were too early to market.

One of our group had to have a Real Estate Broker’s License and I was selected. Although, we weren’t successful, I enjoyed this industry.

In 1973, I was living in North Carolina, and decided to transfer my Real Estate Broker’s license to that state. They accepted my transfer and I was now a licensed Real Estate Broker in North Carolina. I decided to further my education in the field, and decided to attend The Realtor Institute which was held at the University of North Carolina- Chapel Hill. This program was approximately twelve weeks, full time, held over two summers. It consisted of everything you ever wanted to know, and maybe didn’t want to know, about the real estate field. You were required to take an examination at the end of the course, and if you were successful you were granted the designation –GRI-Graduate of the Realtor Institute. The GRI is considered a prestigious accomplishment.

In 1975, I decided to leave the corporate world, and I started a real estate brokerage business. In real estate, you must have a “Broker’s License” if you want to operate a real estate business as a principal. There are two types of licenses, a Broker’s License and a Salesman’s License. A Salesman must work under a Broker. These licenses are state specific, but the licensing requirements are similar from state to state. The sales force is almost always “independent contractors.”

As I expanded the business, I also received a “Certified Real Estate Instructors” certification from the North Carolina Real Estate Board. This allowed me to teach real estate courses at the college or university level. The local community college wanted to set up a real estate program and I was selected to assist establishing the program and teach the “Basics of Real Estate” and “Real Estate Appraising.”

I also participated as an “Expert” witness in lawsuits concerning real estate affairs.

As you can see, I was enticed to read all the articles concerning this settlement.

Prior to the advent of the “buyer’s agent” in the early 1990’s, the standard real estate fee for selling a property amounted to 6%. However, this wasn’t mandatory, and could vary, depending upon the property and the difficulty in selling. If a property didn’t sell, there was no cost to the seller. The brokerage firm assumed all of the risk, and the cost associated with marketing a property.

The 6% fee was normally split with the selling brokerage firm, 3% listing firm and 3% selling firm. A typical arrangement inside the firm, was that half of their fee would go to the listing agent, or 1 ½ %. However, these splits were sometimes different, depending upon many different circumstances. Prior to the concept of the buyer agent, the sales agent was a sub-agent of the listing agent and as such was a representative of the seller and responsible to the seller not the buyer.

Thus, the concept of a buyer’s agent evolved, where the buyer’s agent was no longer a sub-agent of the seller’s agent, and as such worked for the buyer exclusively. However, the buyer agent’s compensation came from the seller’s agent. Inherently, a “conflict of interest” developed.

This lawsuit was an attempt to finally clarify duties and responsibilities of agents and eliminate the “conflict of interest.” It was only time before this occurred.

Assuming a $400,000. sale, with the commission rate 6%, split evenly between the listing brokerage and the selling brokerage, the listing brokerage firm would receive $12,000. If the listing agent’s fee was half, then the firm would keep $6,000. and the agent would receive $6,000.

The idea that sales prices will come down because of this lawsuit is without merit.

The selling price of a property is normally based upon the market conditions that exist when it is listed for sell, and when it is sold. The proposed selling price is generally determined by the “market” approach to appraising. That means the property is compared to existing properties for sale, and those that have sold recently and a price is derived from that approach.

There are three generally accepted methods for appraising a property. Cost, Market and Income.

The income approach is generally used for income producing property and is determined by a rate of return that a purchaser is looking for. That rate of return determines the maximum that the property would sell for under these conditions.

The market approach is most applicable for residential property, as that method determines what a willing seller is prepared to accept and a willing purchaser is willing to pay. Using property that has recently sold, and is for sale, compared to the proposed property to be sold, determines the value.

The cost approach is generally used to validate what a property could be reproduced for today. This is then used to also validate the market approach.

Normally, selling expenses, including brokerage fees, do not enter into determining a proposed selling price. Brokerage fees are just a part of the selling expenses.

I am in agreement with the Columbia University Professor, I do not see that this settlement agreement will change home selling prices at all. I believe that the thing that has contributed to the current residential selling prices, more than anything, was the low interest rates a few years ago. As a result of the low interest rates, builders could increase their selling prices of new homes, because the buyer’s monthly payment would be no more then what it would have been , assuming a higher interest rate and a lower selling price.

As interest rates have increased in the past year, those who purchased at the lower interest rate, are reluctant to sell, and therefore the supply of homes for sale has gone down, and as a result, the prices of homes have gone up or stayed high. Typical supply and demand, from an economic view point.

Nothing to do with real estate commissions!

As to the expectation of 1.5 million agents leaving the real estate field, well there are only 1.5 million members of the NAR. Many real estate brokers and salespersons are not full time. Many have their licenses but only “dabble” in the business. I don’t know how to determine how many are actually full time. In Virginia there are 38,000 members of the Virginia Realtors Association and I assume that many of those are part-time. I doubt that you will see much of a change in the numbers.

The bottom line is that the MLS organizations cannot include real estate fees in their listings, and there needs to be a formal buyer agent agreement with the proposed purchaser. The seller’s agent can still pay the buyer agent but the negotiations will have to be held separately.

I expect this agreement to have no impact on prices. I do expect the purchaser to have some issues, because they theoretically have to find a way to compensate the buyer agent. This is an out of pocket expense that must be added to their closing costs.

Jess Sweely

Madison, Va.