The Stage:

As reported, a recent settlement agreement in Burnett et al. v. The National Association of Realtors et al. (4:19-cv-00332); Moehrl v. National Association of Realtors (1:19-cv-01610)’ and analogous lawsuits, aims not only to resolve longstanding litigation but also to provide a clearer, more competitive path forward for the real estate industry. By apparently altering how broker compensation is negotiated and communicated, the settlement seeks to increase transparency, enhance competition, and potentially lower costs to consumers. It reflects the National Association of Realtors’ (NAR) effort to address industry practices that have come under scrutiny while emphasizing its commitment to preserving consumer choice and ensuring the accessibility of professional representation in the real estate market.

The settlement’s impact on the industry can be summarized as follows:

• Increased Transparency: Clearer communication about broker compensation.
• Enhanced Competition: More competitive practices in broker services.
• Potential Cost Savings for Consumers: Lower brokerage fees as a result of heightened competition and transparency.

This agreement marks a significant moment in the real estate industry, offering insights into future directions for antitrust enforcement and the ongoing evolution of market practices.

The Genesis of Antitrust Law: A Prelude to Change

Spanning roughly two decades (beginning in the late 1970s) the political landscape and with it antitrust practices began to shift, and quickly (break up of AT&T). Prior to this shift United States was far more likely to engage in “trust busting.” The judiciary exercised a comparatively broad interpretation of the Sherman Act. That era was marked by a strong governmental inclination to regulate and dismantle monopolies that threatened the competitive market. Enforcement actions were not solely confined to the protection of consumers but extended to preserving competition itself, under the philosophy that a free yet diverse marketplace was inherently beneficial to society at large.

The Bork Transformation: A New Orthodoxy

Enter Robert Bork, whose “lively” work “The Antitrust Paradox” became the highly influential for a reevaluation of antitrust policy. Bork posited that the original intent of antitrust laws was the maximization of consumer welfare, primarily interpreted as keeping prices low, rather than maintaining competition for its own sake. This interpretation pivoted the focus of antitrust enforcement towards economic efficiency and away from its earlier, broader concerns, effectively narrowing the criteria for regulatory intervention. Bork’s influence ushered in an era where the aggressive pursuit of market share was often given free rein unless direct harm to consumers could be demonstrated. Therein set the stage for the consolidation (reformation of AT&T) of industries and the emergence of dominant players.

The Subject:

The NAR’s Century-Long Grip on Real Estate

Well over 100 years ago the National Association of Realtors (NAR), by a different name, was founded. NAR arose at a time when many of its contemporaries were busted Northern Securities Co. v. United States, 193 U.S. 197 (1904); Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1910)); United States v. American Tobacco Company, 221 U.S. 106 (1911), with few exceptions United States v. United States Steel Corp., 251 U.S. 417 (1920).

Over the century following its formation NAR’s lobby dollars grew, its influence and  power grew. And, whether by design or by coincidence, the appearance is that those lobby dollars were well spent. The government has made only minor pushes into antitrust litigation against NAR. Meaningful change required a private lawyer to take antitrust enforcement into plaintiff’s litigation.

Some of the ways that NAR exerted its influence led to a practical requirement that every real estate agent must become a member: member lockboxes  (SentriLock), automatic split commissions, opaque MLS, and various contract provisions in purchase agreements that give special privilege to members. Indeed DocuSign too, which NAR owns a controlling share of, became the de facto method of selling a home. By instituting these policies, some have argued NAR dictated the terms of competition and entry into the market. And, It appears as though, in the past potential competitors such as upstart tech companies, were quickly sued by NAR in what could be interpreted as anti-competitive and unfair market dominance. There are certain policies like “the 6% commission” that NAR disputes as “negotiable,” the openness about the negotiability historically hasn’t been expressed by an influential portion members of NAR. Even still in the month of March 2024, agents at brokerages have refused to negotiate (naturally the lawyer’s advice is to find another broker). A single seller’s broker who refuses to negotiate, affects at least two parties in the sale.

The commission the seller’s agent obtained from the seller, is transparent to the buyer’s agent. But that same commission is opaque to the buyer.

Skewed: Imagine two similar homes: Home Blue, priced at $100,000 with a 4% commission ($4,000), and Home Red, priced at $90,000 with a 6% commission ($5,400). Both homes are in similar neighborhoods, of similar age, and of similar quality. When a buyer asks their agent—”which home should I choose?”—it’s not hard to imagine that many buyers’ agents might lean towards recommending the home that offers a $5,400 commission over the one that offers $4,000. What if they were both priced at $100,000? Would these agents change their recommendation if they were aware of significant advantages that made Home Blue a far better option, such as its being significantly closer to the buyer’s place of work, family, and schools? What if the buyers’ agents were hired for different purposes and paid on a different model of motivation?

The Cost of Influence: Market Saturation and the Consumer Dilemma

The policies and practices endorsed by NAR arguably  stifled competition and may have also led to an oversaturation of realtors, keeping membership fees high, but wages low. So while the industry was insulated from competition, the saturation became a cost on the real estate profession: some could argue, the dilution of expertise and the perpetuation of a system that benefitted the institution over the individual. In the aggregate, sellers and buyers were pushed into a market that offered little practical flexibility. In Michigan, like other States, NAR’s influence reached into the legislative arena, such as the removal of certain real estate education and oversight requirements.

A New Horizon: The Settlement’s Promise

The recent settlement against NAR represents a shift, reminiscent of the early days of antitrust’s broad ambitions. By dismantling longstanding real or implied rules the door to competition is opened. The settlement as reported by NAR, challenges the status quo that NAR fought hard to preserve. This change promises to invigorate the real estate market with new models of buying and selling, perhaps mirroring the transformation seen in the travel industry with the advent of the internet.

As we stand on the cusp of this new era, the settlement is not merely a rebuke of past practices but a beacon of future possibilities. It heralds a market where innovation is not stifled by the whims of a dominant player but flourished in a competitive landscape. For agents, it means the dawn of meritocracy over mediocrity; for buyers and sellers, the promise of a market that serves their interests through diversity and choice.

In the aftermath of the settlement, the real estate industry finds itself at a crossroads. One path leads back to the familiar terrain of centralized control and uniformity; the other, into uncharted territory where innovation, competition, and consumer choice reign supreme. The direction we take will not only redefine the business of buying and selling homes but also reflect our collective commitment to the principles of a free and fair marketplace.

Selling a Home is a Valuable Skill

Doug Miller was quoted by NBC News “Now you can hire an attorney for $1,500, instead of paying a $50,000 commission [to a realtor].” It is true that it is exceedingly uncommon for any residential home transaction to reach anywhere near $50,000 in legal fees. And limited engagement have opened the door to even lower legal fees narrowed to specific purposes. But, lawyers are part of an adversarial system. And it’s not controversial to say: lawyers are generally not ‘good’ salespersons. How Much do Real Estate Brokers Add? A Case Study.

Adjusted for inflation since 1940 the median home value has over quadrupled (by a factor of 4.3). The median value of homes in the United States rose from $65,124 in 1940 (approximately $2,938 in 1940’s dollars) to $281,900 in 2022. And across this eight decade space the median home value, at its low still increased beyond 8.2 percent in the 1980s and beyond 43 percent in the 1970s. Adjusted for inflation between 1940 and 2022, 6% commission has grown from $3,907.44 to $16,914. To a person, for comparison that means roughly 14% of the typical annual income would be spent on the sale of a home in 1940, but over 22% in 2022.

Technology, title companies, and specialization have helped keep the costs of lawyers in residential real estate transactions comparatively low. In 1940, the choice between hiring a lawyer hourly or risking it with a broker who receives a commission might have been pretty obvious. One could pay a lawyer roughly $3,500 for each transaction, successful or not, adjusted for inflation, or a broker $4,000 but only if the property sells. Legal fees on average residential real estate transactions have not risen and seem to have fallen when adjusted for inflation. This trend has led some to suggest that lawyers should assume a larger role in real estate transactions. Following this settlement by NAR, a typical buyer might pay a lawyer between $500 and $4,500 to close on a residential home, compared to paying real estate brokers $17,000.

This does not take into account many factors, including suggestions that the commission in 1940s was closer to 2.5% and not 6%.

In what may prove to be a rapidly evolving real estate market, the role of brokers may be undergoing a significant transformation, moving towards a model that places a premium on marketing prowess. The brokers who thrive in this new market may be the most adept at showcasing homes in a trustworthy and fair light. As consumers become weary of hype-marketing, the future of home marketing may require more. The skillful broker can navigate these demands, ensuring that homes do not only reach a wide audience but also appeal to the right demographic.

Brokers: Facilitators of Connection

The core of a broker’s value lies in their ability to bring buyers and sellers together. In a market where consumers are inundated with options and information, the broker’s skill in making a property stand out, in an honest manner, can make all the difference. By understanding the needs and preferences of both parties, brokers can facilitate connections that might not otherwise have been made, ensuring that sellers get the best possible price for their homes while buyers find their ideal property.

Unlike the travel industry, which was eager to eliminate travel agents’ fees from the transactions between airlines and travelers, the real estate sector operates differently. Even though real estate brokers may take a $17,000 haircut as a result of this settlement, selling a home remains the highest-liability and most expensive transaction the average person will ever engage in. Therefore, brokers still possess valuable skills and play a crucial role in selling a home. Lawyers, title companies, and home inspectors should not engage in property marketing. In contrast, platforms like Zillow are not suited to the assembly and marketing of unique and compelling listings; brokers are.

On the litigation front, this new model might change motivations. Making brokers more concerned with quality. Some may be more inclined to require the seller to pay for an inspection prior to listing. Problem areas of a home can be highlighted, improving reputation, and reducing the risk of fraud-based lawsuits. The broker can further reduce their risk by pointing the parties toward a title company to insure title. They may resist allowing a buyer to purchase the house sight-unseen. They may require a seller to hire an inspector/contractor to avoid fraud. And they may point buyers and sellers toward lawyers when making modifications to the contract.

A savvy broker may consider the difference between used car sellers. Caravna that highlights defects versus the typical used-car salesperson to redevelop their image and reputation modeled after Carvana. Where a listing highlights the good, but also identifies the defects. A listing could tell buyer’s something valuable; and, a buyer may be reluctant to buy a home for full price that a seller’s broker won’t list.