What Happens to NAR and the Industry If They Lose the Bombshell Lawsuits? (Part 1)

by | Aug 16, 2023 | Clear Cooperation Policy | 0 comments

 

The recent ruling by U.S. District Court Judge Patti Saris in the Nosalek case against MLS Pin put the real estate industry on notice that the clear cooperation rule needs to go. The most explosive damage to NAR and the overall industry would be if the defendants (NAR, Anywhere, Home Services of America, Keller Williams, and RE/MAX) were to lose one or both so-called bombshell lawsuits (Burnett/Spitzer and Moerhl).

I recently interviewed the CEO and co-founder of Next Home, James Dwiggins, whose company did over $12 billion in sales in 2022. To be prepared for the worst-case scenario, Dwiggins put together a comprehensive risk assessment examining potential outcomes from the current litigation as well as what their impact might be.

Nosalek—the canary in the coalmine
In terms of the Nosalek settlement, which was pegged at $3 million, Saris was unhappy that the attorneys would be getting the bulk of the money with the members of the class getting less than $5.00 per person.

Nevertheless, Saris was clear about her feelings about the clear cooperation rule, saying she “loves” the proposed rule changes in the settlement that would make offering compensation to buyer brokers optional.

Saris also said. “I had problems with that [rule], so I denied the motion to dismiss, and I think two other courts did as well.”

A quick overview of Burnett/Sitzer and Moerhl
Both suits allege that NAR conspired with Anywhere, Home Services of America, Keller Williams, and RE/MAX to inflate commissions through the Buyer Broker Commission Rule, a term that doesn’t exist in any NAR documentation and that the Moerhl attorneys made up.

The reference is to the guidelines in MLS Policy Statement 7.23 and the Code of Ethics that govern commission sharing on the MLS. The complaint alleges that these policies have resulted in price competition among brokers being restrained and seeks damages:

The Buyer-Broker Commission Rule ensures that price competition among buyer brokers is restrained because the person retaining the buyer broker, the buyer, does not negotiate or pay his or her broker’s commission. In addition, the seller’s inflated commission offer cannot be reduced by buyers or their brokers, as Defendants also prohibit buyer brokers from making home purchase offers contingent on the reduction of the buyer broker commission.

Burnett/Spitzer claims that defendants conspired to inflate commissions by requiring all seller brokers to “make a blanket, unilateral and effectively non-negotiable offer of buyer broker compensation.”

Burnett/Sitzer is set for trial on October 16, 2023. Moerhl’s deadline for discovery is set for September, with the trial date expected to be set in late October 2023.

Key issues in the litigation
The most important point to note about this litigation is that these are anti-trust lawsuits. Consequently, treble damages can be applied. These can be in the billions of dollars. The end game is that buyers will pay their own commissions. The industry experts I have spoken with are all in agreement that this not a battle NAR is going to win—it’s coming.

According to Dwiggins other key issues in the litigation include the fact that:

NAR is represented by its membership, its directors, which are in many cases represented by the defendants. So, the largest real estate companies in the US, (the defendants) have people that are part of these committees that make decisions on how any governance occurs over the multiple listing service.

Number two, the requirement of offering cooperation in the MLS; if you put a listing in the MLS, you have to offer cooperation on the other side of the deal.

These requirements are what the plaintiffs claim to be a “conspiracy” to fix prices.

Dwiggins went on to explain that NAR’s “clear cooperation policy” is where the DOJ has been focused, especially on having to post a new listing on the MLS within 24 hours. According to the plaintiffs, this benefits the large brokerages:

If you are a member of the MLS, you have to put the listing in the MLS within 24 hours, thereby guaranteeing compensation on the other side of the deal, which benefits the large real estate companies (i.e., the defendants) a majority of the time because they have the most agents.

Best possible outcomes?
The best possible outcome would be if NAR and the other named defendants win the lawsuit and cooperation in the MLS becomes optional. Dwiggins went on to say:

At a minimum, this is going to happen one way or the other. Cooperation in the MLS becomes optional. You have a use case of Northwest MLS that enacted this (policy) last year in October (and it) hasn’t really changed much. It just hasn’t affected the business the way people thought it would actually occur. I think that’s a minimum that occurs.

Other potential outcomes?
Based upon his conversations with attorneys and industry leaders, Dwiggins outlined the following list of other potential outcomes.

  1. NAR and other defendants settle. They open the class further to bring everyone into the settlement, but “there’s only so much money in that pot.” 
    So, it makes sense to come up with some type of settlement structure that gives everybody a little bit of cash. And essentially, we move on and what I call “remove chess pieces from the table.”
    Let’s hypothetically say the settlement was $2 billion. Everybody’s going to throw some money in. NAR comes in and they do an assessment. I hate to say it, some of the math I’ve heard is if a $2 billion settlement (were) paid out over four years, every member pays $400 a year.
    In my opinion, if NAR were to assess members $400 more a year in dues for four years to pay for this type of settlement, that would be the death knell for the organization.
  2. Cooperation in the MLS becomes optional nationally. Dwiggins believes there is 50 percent chance it may be completely banned.
  3. NAR passes a mandatory rule to its MLS policy and Code of Ethics that requires buyer’s brokers to have signed buyer broker agreements that clearly spell out compensation terms signed before showing MLS-listed properties. Some dual agency states have hurdles to get past in order to do this.
  4. NAR lobbies legislative policy changes so buyers’ agent compensation can be financed in the loan.
  5. There’s 50 percent chance that the clear cooperation policy is rescinded, and off-market listings become normal.
  6. Brokerages, as well as local MLS’s and Realtor Associations will consolidate, reducing costs and relying more on virtual operations.
  7. There will be a 25 – 50 percent reduction in buyers’ agents.
  8. Unless dual agency is banned at the state level (which is currently that’s the case in nine states), more double-ended deals will occur.
  9. Flat fee and hourly service models gain traction.
  10. There’s a 100 percent guarantee that pressure on buy side commissions will occur.
  11. Buyer agents are either paid by the buyer (directly or financed) or paid by the seller through the purchase agreement.

Stock prices for publicly traded companies and real estate portals could take a major hit if there is an unfavorable outcome.

A major wildcard
The federal judge presiding over these matters could ban cooperation on the MLS. This is not only within the judge’s purview, it could happen as soon as October 2023. This would be a huge blow to industry, but most notably, to first time buyers who cannot afford to pay the commission and may decide to transact without representation.

Everyone keeps saying this is going to take five to seven years to play out. That is partially true in the sense of the damages portion of this case. The key use cases will take time because whoever loses is going to appeal guaranteed. That might take five to seven years.

But what if the judge says that while the appeals are going on, there’s an injunction in place where cooperation is no longer allowed in the multiple listing services?

Stay tuned for Part 2 on August 18, 2023!

 

 

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *