CNN: The Internet Didn't Shrink 6% Real Estate Commissions. But This Lawsuit Might.

May 15, 2019


By Lydia DePllis

After moving eight times as her husband's job transferred them around the world, Lindy Chapman felt she knew a thing or two about selling real estate.

Unlike her first home purchases, by 2015 she could do most of the initial research online, narrowing her home search to a few contenders before even bothering with a Realtor. Plenty of agents, it seemed to her, no longer did enough work to justify the traditional 6% commission: 3% on the seller's side, and another 3% for the buyer's agent.
So by the time Chapman moved to Dallas — a particularly frustrating relocation in which she ditched her agent and bought a home that was for sale by owner — she got her own Realtor's license, thinking she could do a better job and charge less for it.
"It was obvious on this move that the traditional system no longer operates in line with what the consumer needs in the 21st century," Chapman said. "I literally had everything I needed in the palm of my hand to find homes and all the related facts. I just needed someone to open doors, write the contract, and connect me to schools and the community."
But in trying to offer cheaper services to others, Chapman realized just how entrenched the commission structure is. When she listed homes for sale, the system boxed her in: If she didn't offer the standard 3% to buyers' agents, she worried they wouldn't show the home to their clients.
"The client wants Netflix and the technology for Netflix is here," Chapman said. "And it's like Blockbuster saying, 'no, this is the only way to watch videos.'"
A wave of disintermediation has squeezed margins in many sales and advisory professions. Travel agencies have shrunk from 100,000 employees in 2000 to 53,000 in America today, as websites like Expedia, Priceline and Kayak have allowed travelers to book their own itineraries. Financial advisors, who used to charge between one and two percent of the assets they managed for clients, have been shifting to fee-for-service models in order to compete with automated advisers and low-cost index funds.
Real estate agents have been a puzzling exception to that trend. Half of buyersnow find their homes independently online, according to a survey by the National Association of Realtors. Yet 87% of them still end up retaining an agent, and the commissions rates have barely budged. According to data collected by the brokerage consulting firm T3 Sixty, the average commission has declined from 6.1% in 1991 to 5.1% in 2016, but most of the drop came in luxury homes. On a $310,000 house — the median home price in America — a 6% commission comes to $18,600, and it's usually baked into the price of the home.
The ability to make a decent living has kept drawing people to the profession. The National Association of Realtors now has 1.36 million members, surpassing the previous height reached during the the housing boom.
It's not always a full-time gig. About 6 million homes are sold in the US per year — amounting to just a few transactions per agent on average — but the median annual income for real estate agents is still $50,300, according to the Bureau of Labor Statistics. For decades, Realtors' earnings have been maintained through an opaque structure that allows home shoppers to believe that the seller covers the agents' costs, and that the consumer has little choice in the matter.
That entire system could crumble, if a trio of recently-filed lawsuits are successful.
In a complaint filed in early March in the Northern District of Illinois, five law firms teamed up to allege that high commissions were a result of collusion by the National Association of Realtors and the nation's largest brokerage franchises in violation of federal antitrust laws. The firms include heavy hitters like Hagens Berman, which boasts work on cases including the state tobacco lawsuits that led to a $206 billion settlement, as well as Cohen Milstein, which co-led a case against Apple for monopolizing the market for e-books.
The class so far consists of just one person — a home buyer in Minneapolis. But the lawyers are currently recruiting more plaintiffs, and stand to gain millions in attorneys' fees if a jury awards damages. In April, two nearly identical lawsuits were filed, one by two home sellers in Missouri and one by a Minnesota corporation.
On the other side of the suits, the National Association of Realtors is a powerhouse trade group organized in active chapters across all 50 states. It spent about $150 million on federal lobbying and elections in the 2018 cycle, according to the Center for Responsive Politics. More importantly, it also controls access to the Multiple Listing Services that Realtors need in order to list and show homes.
A NAR spokesman responded that the suit is "utterly without merit," and that the current system "promotes efficiency and helps advance the best interests of all clients." The association also distributed an FAQ for its members on what they should know about the case, saying that the complaint is "wrong on the facts, wrong on the law, and wrong on the economics."
But it's still sending shivers through brokerage offices, which have a lot invested in the status quo. Without it, the United States could end up looking more like Australia and the United Kingdom, where buyers' agents are rare. In most developed countries, according to a survey by the discount brokerage Surefield, commissions range between 1% and 4%; buyers depend much more on online portals to find their desired home and seller's agents can represent both parties.
"It kills the industry," said Rob Hahn, a real estate marketing consultant with the firm 7DS Associates, who predicts the number of people in the profession would drop to just 200,000 if the lawsuit is successful. "A lot of things that we as consumers value go away."

Why the 6% model has endured

The current way in which Americans buy homes is a combination of intentional design, historical accident and litigation.
It all started in the late 1800s, when boards of local brokers convened at their meeting halls to swap information about properties their clients had for sale, hoping to find a buyer at the highest price.
In 1908, the predecessor to today's National Association of Realtors officially created the "Multiple Listing Service," a corporation owned by local agents, who contributed listings to a shared repository of available houses in a given market. As hundreds of MLSes sprung up across the country, listings were usually published in the form of a book, to which only licensed realtors had access.
Controlling information about properties for sale allowed the Realtors' association to set rules for how the market functioned. It also allowed them to set up a way to get paid: The listing agent would stipulate to buyers' agents what their cut would be if their client bought the house.
It's not clear exactly how the rate came to be set at 6%, but the commissions were laid out in a schedule by local boards of realtors, whose codes of ethics forbade undercutting the prevailing rate. In 1950, the Supreme Court ruled that constituted an illegal price-fixing conspiracy. After that, there was no official rate, but 6% commissions lived on through unspoken rules.
Now, here's why listing agents set the fees for buyer's agents in the first place. Originally, the same brokerage usually represented both buyer and seller, so commissions went to the same place and were higher if the house sold for more money. In the 1990s, lawsuits mostly put an end to that practice, and buyers' agents are now often assumed to represent their clients' best interests. However, seller's agents still set the commission rates, and the incentive structure remains in place: The higher the sale price, the more buyers' agents get paid.
Other factors have pushed the industry to create this system and then maintain it. Brokerages that list homes usually also have buyers' agents, and seller's agents themselves often serve househunters, so they have an incentive to offer high commissions to the buy side as well. And, crucially, brokers know that buyers' agents might skip showing a house if the listing doesn't offer a full 3% commission.
"I've been in traditional offices, watching someone go through listings," said Tom Wemett, a buyers' agent in Western Massachusetts. "He immediately checks to see what they're offered, and threw away two or three listings that might have been perfect for their client. The buyer doesn't know any different, unless they're searching on Zillow or Trulia and says 'why didn't you show me this one?'"

The internet changed everything — and nothing

Multiple Listing Services first went online starting in the 1990s. Within a decade, some brokers were allowing their clients to browse the listings on their own in exchange for lower fees, because they didn't have to do as much work.
The National Association of Realtors didn't take kindly to the practice, and allowed brokers to withhold their listings from the data feeds that supplied those websites. In 2005, the Department of Justice sued the NAR, on the grounds that the policy suppressed competition from new business models that would provide consumers with a better deal.
Three years later, the Justice Department and NAR entered into a settlement that would require all MLSes to provide listings to online brokerages. That allowed sites like Zillow and Redfin to flourish. The consumer now has access to most of what Realtors used to monopolize, and 44% of them now go to the internet as their first place to search for a home, according to NAR's own surveys.
Although the feeds on consumer-facing real estate websites include more information than ever before, from interactive maps and historical tax information to local school ratings and commute times, they lack one important detail: How much the buyers' agent is going to get paid.
That information is often disclosed in the contract that the buyer signs with his or her agent. But it's not something agents usually dwell on — and even if it comes up, buyers are simply told that the seller pays the fee.
The question of who pays the buyer's agent is an almost existential one in the debate over commissions. Technically, the seller pays the listing agent out of the proceeds from the sale, and the listing agent then gives the buyer's agent her cut. Of course, sellers wouldn't have the money in the first place if buyers hadn't paid it to them. And commissions are reflected in the asking price for the home — driving up the amount buyers pay.
Some companies have tried to raise awareness about the prevailing fee structure and compete on price. Khalil El-Ghoul runs a brokerage in Washington, DC, called Glass House Real Estate that rebates part of the buying agent's commission back to the homebuyer. He has to fight the perception that offering a lower-priced service means buyers won't have access to all the properties that a full-service agent might show them.
"The way the industry says commissions work is that the buyer pays nothing and our services are free," El-Ghoul says. "I'm saying 'no, this is actually costing you money.' I do the exact same thing, I just charge less, and try to be transparent about it."
Over the years, plenty of companies like El-Ghoul's have tried to offer lower-cost services, but few have gained significant scale. A Denver-based company called TRELORA charges $4,000 to list a home and tried to offer flat fees to buyers' agents, but stopped after their listings got way less interest and switched back to the standard 3%, the company's CEO Brady Miller told CNN Business. Others offer a la carte services that "unbundle" the job of an agent, charging flat fees for functions like showing a house or writing a contract, but their use remains fairly rare.
Even Redfin, which early on, refunded two-thirds of the typical 3% buyer's agent commission to buyers, backed off that model and now only refunds a smaller amount of the money. (Such refunds also remain illegal in ten states.) It also just rolled out a feature that allows unrepresented buyers to easily bid on homes, saving the seller from having to pay anything to the buyer's side.
Traditional agents see the continued prevalence of high buyers-side commissions as evidence that consumers prefer the full package, even at a hefty price.
"Why is this traditional method by and large the most popular one?" asked Craig Cheatham, CEO of an association of brokerages called the Realty Alliance, noting that plenty of startups have failed trying to disrupt the industry. "Why do they seem to all be in the trash heap within five years? People want to do it the way things have been set up."
But those who are still trying say lack of information about how buyers' agents get paid and what they actually do makes it incredibly difficult to use lower rates to attract clients.
Three and a half years ago, Alex Doubet founded a company in Dallas called Door that charges sellers a flat fee of $5,000 and rebates about half of the standard commission back to buyers. Door makes up for the lower revenue per customer by offering mortgage and title services and handling more clients, which Doubet says the company's salaried agents can do because they're more efficient and specialized. That's prompted a steady stream of hostile comments from the rest of the industry, Doubet said.
"We receive a bunch of pushback from traditional agents," Doubet said. "They badmouth us. The classic refrain is, 'you get what you pay for,'" Doubet said.
Despite Door's presence, Doubet said, about 86% of the listings on the North Texas MLS are offering at least 3% commissions to the buyer's agent. Door itself still requires sellers to offer other buyers' agents a 3% commission in order to attract bids. Economic research backs this up: A 2015 study found that homes offering a commission of less than 2.5% to the buyers' agents took 12% longer to sell and were 5% less likely to sell at all.
"It's really hard to educate consumers that their broker is making 3%," said Paul French, Door's chief marketing officer. "Today there's an artificial barrier around the old way that's being defended to the death."

The case that could break the system

That's where the lawsuit comes in.
It begins with a professional land surveyor in Minnesota named Christopher Moehrl who bought a house in 2017, with a combined commission of 6%. The class action case alleges that the NAR, in requiring MLS listings to include a uniform offer of compensation to buyers' agents, is functionally fixing prices. Moehrl did not respond to CNN Business' request for an interview, and the legal teams representing him said he would not grant one.
"If buyer brokers were able to do this job for the same percentage as they did 20 years ago, and the internet has made their jobs a lot easier, and real estate values have appreciated, here is an artificial impediment to competition," said Benjamin Brown, an attorney with Cohen Milstein, one of the five law firms on the case.
If there were no such rule, the complaint argues, agents would be paid in the same way as any service provider: Through a price disclosed at the outset, which would allow the consumer to shop around. The suit seeks damages to be determined at trial, but Brown says they could range into the billions of dollars.
Plenty of buyers and sellers would likely balk at paying tens of thousands of dollars to someone who may have put in very little work on their behalf. That would drive many buyers' agents out of the profession, which some economists have argued would actually be more efficient, since the high commissions have drawn in more agents than are actually needed to keep the market functioning.
Realtors have several responses to this contention.
First they argue that they do lots of work for clients. On the buyer's side, they say, consumers still need help sorting through everything they read on the internet in order to make a wise decision. After all, they argue, buying a home is often the largest purchase a person will make in their lifetime, with potential pitfalls ranging from disputes over repairs to sudden problems with financing.
"Many of them don't know what to look for and are overloaded with information," said Russ Cofano, a consultant who has run a state Realtors association as well as real estate tech companies. "I think if you asked a lot of buyer agents today, they would say their job is harder. Even though they're engaging with buyers later in the process, they're having to do a lot of course correction."
On top of that, since traditional agents don't get paid unless their client goes through with a purchase, they have to offset all the work they do for clients who never end up buying.
Plus, closing costs are high enough already, with fees for the title company, appraisals, inspections, etc. Having the seller technically pay for the commission allows it to be tacked on to the mortgage and paid over time rather than all at once like a regular fee.
"It's tough to shoulder that cost out of pocket," said Austin Guy, who runs a real estate software company called Homebloq. "If we're going to put all that on buyers, they're sort of screwed here. The risk is, what you think is going to work out better for consumers from a competitive standpoint might end up hurting them." (Guy does think there should be more transparency, however.)
And finally, defenders of the current system argue that consumers do bargain over fees. It may happen up front when the buyer contracts with an agent, or at closing, when both agents will cover any number of expenses — from a new fridge to a thorough cleaning — in order to get the deal done. None of that, they say, is captured by the incomplete, approximate statistics gathered by industry analysts.
"What's offered in the MLS is something that can ultimately be negotiated during the course of the deal," said Rebecca Jensen, CEO of the Chicago-area MLS. "At the end of the day, the check that goes to the buyer's agent is less than that."
It's difficult to tell how widespread negotiation is. One 2009 study paid for by NARfound that commission rates do tend to vary with housing prices, which would suggest that Realtors relax their fees on very expensive homes, and charge more in down markets when homes are harder to sell.

An industry under pressure

Whether or not the lawsuits succeed, traditional brokers and the MLSes they depend on are facing challenges from all sides.
One is a crop of startups offering private listings, off the MLS, to high-net-worth clients who might pay a premium to avoid a bidding war. That allows the property to sell more quickly, even if agents take a higher cut. Then there are a group of companies known as iBuyers, like OpenDoor, which will buy homes sight unseen and hold them only as long as it takes to sell them again, which allows sellers to skip the MLS and attendant commissions altogether.
Billions of dollars of investor capital have been flowing into these startups, allowing them to gain market share without necessarily turning a profit. Some of the more established online listing portals, like Zillow, have launched their own iBuyer platforms as well. Keller Williams, the nation's largest brokerage franchise, just got into the iBuyer game, too.
Even companies that have tried to make the real estate industry more competitive worry that will end up fragmenting the MLS, undermining a system that — while flawed in some ways — at least allowed all listings to be broadly available. Glenn Kelman, the CEO of Redfin, describes himself as "completely unreconstructed in my ambition to make real estate better for consumers." But he fears that if real estate agents aren't incentivized to contribute to the MLS, the whole network could break down.
After all, the National Association of Realtors' firm rules have created an economic contract — the prospect of earning commissions — that gives market participants a reason to collaborate and create an information commons. If that financial motivation goes away, the real estate market may turn into a collection of well-capitalized tech fiefdoms that hoard information, allowing few consumers to access all of it.
"What I feel almost protective about, in this really sad elegiac way, is the MLS," Kelman said. "Scientists believe that the dinosaurs were living a very marginal existence when the asteroid hit. I think the ecosystem in real estate is already just extremely vulnerable."

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