[REN #708] Explosive Lawsuit Against NAR

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Picture of man buttoning suit on stairs for Real Estate News for Investors Podcast Episode #708

It could be a do or die lawsuit for the real estate industry. A home seller in Minnesota filed a class action lawsuit against the National Association of Realtors for anti-competitive behavior. If he prevails, the business of buying and selling homes in the United States could be vastly different than it is now. Inman contributor, Robert Hahn, says, Realtor associations would disappear, the MLS might die off, and the entire infrastructure of the residential real estate business would have to be reinvented. (1)
 

NAR Accused of Price-Fixing

The lawsuit was filed on behalf all home sellers who paid a broker commission as far back as March 6th, 2015. It names NAR as a defendant along with four of the nation’s largest brokerages and franchise companies including Realogy, HomeServices, RE/MAX, and Keller Williams. The primary complaint — that the defendants violated antitrust laws. It accuses the Realtors of conspiracy because of a requirement that sellers pay the commission for the buyer’s agent commission, and that it’s higher than it should be and basically non-negotiable.

The complaint reads, in part, “The conspiracy has saddled home sellers with a cost that would be borne by the buyer in a competitive market.” It also claims that the role of the buyer’s agent has diminished and those agent don’t deserve a full commission. It says, “a majority of homebuyers no longer locate prospective homes with the assistance of a broker, but rather independently through online services.”

The complaint also names 20 major MLS’s as co-conspirators. The Inman blog comments, “These are some of the largest MLSs in the country with hundreds of thousands of agents and millions of consumers and transactions over the past four years.” (2)
 

Plaintiffs Want Damages, Injunction

What do the plaintiffs want out of the court case? In addition to damages, they want the court to issue a permanent injunction against NAR’s “Buyer Broker Commission Rule” which requires sellers to pay for the commission on the buyer’s side and prevents competition and negotiated commissions among buyer brokers.

Inman’s commentator, Hahn, feels it’s a real threat to the industry. He says of the plaintiffs, “Their facts are hard to dispute. NAR does have these policies. The MLS does have the unilateral offer of compensation. The brokers and franchises do require their agents to become Realtors and join the local MLS. The MLS is an essential utility to be in business. None of that is really all that disputable.”

He also feels that the plaintiff’s legal team will present a difficult challenge for the defense. He calls them “seriously scary dudes.” There are six law firms involved. Here’s how he describes the two lead law firms:

“These are two of the most successful class action plaintiffs law firms in the country. They both appear on the list of Law 360’s ‘Most Feared Plaintiffs Firms’ with some significant victories over really significant companies.” One of them, prevailed in an antitrust lawsuit against Apple. The other won a $1.6 billion judgement against Toyota for a sudden acceleration problem.
 

Impossible to Settle Lawsuit

Hahn says, the lawsuit is pretty much impossible to settle because of its scope. It covers some of the biggest metros in the nation, including Washington D.C., Orlando, Tampa, Dallas, Houston, Austin, San Antonio, Phoenix, Chicago, and more. He says, there are “hundreds of thousands, potentially millions of transactions.”

As an example of the kind of damages this case could potentially generate, Hahn uses an average sales price of $300,000. Using 3% as your typical commission for the buyer’s agent, you get $9,000 per home sale. Damage awards are usually triple the amount in dispute, so that’s $27,000 multiplied by all the people who sign up for the class action lawsuit — which could be as many as, or even more than 2 million people. That’s a lot of dough — about $54 billion. NAR and its four co-defendants wouldn’t be able to cough that up, or even a quarter of that amount, according to the Inman article.
 

Realtor’s MLS Under Attack

So, in this view of the lawsuit, Realtor associations and the MLS system is under attack, and could disappear if the plaintiffs win their case. But some people in the industry feel the lawsuit “might be a dud.” According to Bernice Ross, who wrote a two-part series for Inman, there are plenty of “holes” in the arguments of all those high-powered attorneys. (3)

She lists several issues that weaken the argument for the plaintiffs, starting with the fact that every one of the 16 attorneys on the plaintiffs side lacks in-depth knowledge of the real estate industry. She offered examples of flaws in their complaint that demonstrate this lack of knowledge, including the legal standing of the Buyer Broker Commission Rule. She explains, it’s an agreement between the seller and the listing broker, with a blanket unilateral commission offer to the buyer’s agent.

She points out other incorrect statements such as “brokers license individual agents” and that “brokers are required to list all properties on the MLS” if they are members. She says MLSs have a provision for exempt listings if sellers don’t want their homes on the MLS. She goes into much greater depth about the case and the benefit of the current system.

It’s a debate that’s been going on for years, with some critics describing the real estate industry as a cartel and comparing it to more competitive systems in other countries. But, one of the major differences between the system here in the U.S. and other places, is the MLS. Most countries don’t have an MLS, so it’s much more difficult to market homes as a seller, and much more difficult to find them as a buyer. The MLS also provides an exclusive right to sell, where in other countries you may have a seller and several agents all doing the same thing with inconsistent information about each property.
 

Benefits of the MLS

The MLS provides a great degree of convenience for consumers. The biggest benefit is being able to find out within minutes which homes are on the market in a certain area, and at what price. You can’t do that in most other countries.

NAR’s vice president of public relations and communications strategies said of the lawsuit, “The complaint is baseless and contains an abundance of false claims. The U.S. Courts have routinely found that multiple listing services are pro-competitive and benefit consumers by creating great efficiencies in the home-buying and selling process.”

This will not be a quick court case, but one that we’ll keep tabs on.
 
Links:

(1) How Lawsuit Could Affect Realtors

(2) Realtor Commissions Anti-Trust

(3) Lawsuit Might Be a Dud

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