Regulation requires real estate brokers to disclose commissions

The National Association of Realtors is revamping its rules on commissions to comply with a settlement reached with the Department of Justice. (IL Photo/Olivia Covington)

On the home page of the National Association of Realtors website is the link to the spotlight.

The tab takes visitors to information about a settlement reached last fall with the U.S. Department of Justice regarding association practices, which the federal government says have reduced competition among real estate brokers and resulted in a lower quality of service for buyers and sellers of residential homes.

Essentially, the amount of commission the buyer’s real estate broker would earn was not disclosed to homebuyers. Buyer’s brokers are generally compensated for their work by dividing the commission that sellers pay their real estate brokers.

However, according to the Department of Justice, buyer brokers may have misled buyers into believing that their services were free. Concealment allowed buyer’s brokers to avoid showing homes with lower commissions, which hurt buyers by reducing the likelihood of them being matched to the home that best suited their needs and deterred sellers from reduce the amount they paid their brokers.

As a result, the DOJ viewed this practice as raising the prices of buyer’s broker services while reducing the quality of those services.

The NAR has not admitted any liability, wrongdoing or the veracity of the Justice Department’s allegations. But as part of the settlement, the association has the details of the agreement readily available on its website and is changing its rules so that the compensation offered to buyers’ agents for each MLS listing is made public.

Apline

Real estate attorney Robert Aplin of Scott & Aplin LLC in Fort Wayne hasn’t had clients contact him with concerns about their realtors’ commissions, but he isn’t surprised by the settlement between the Association of Realtors and the Federal Government. The issue raged in state and federal courts until the DOJ finally got involved.

Aplin expects the deal to bring transparency to the process of buying and selling a home, but the changes won’t happen overnight.

“I think it’s the buyer’s responsibility to make sure that the big brokers are strongly encouraged to show all the homes, … not just the MLS ones or the ones offered by the other big brokerages in town,” he said. Aplin said. “(Consumer demand) is the only way it’s really turning.”

Market forces

One thing that could stand in the way of the demand for transparency is the demand for single-family homes.

The residential real estate market continues to sizzle. Data from the Indiana Association of Realtors highlighted that in the state of Hoosier, 96,028 homes were sold in 2020, an increase of 6.4% from 2019. The median sale price was 185,000 $ in 2020, an increase of 9.5% over the previous year.

The market does not seem to be cooling down. Although, as IAR noted, January is generally a slow month for real estate, gated home sales jumped 9.9% in the first month of 2021 compared to the same period in 2020. The median selling price skyrocketed 15%.

Aplin has witnessed the hyperactivity in his community. Sellers get the asking price within 24 hours of the home going on the market, and bidding wars offering more than the home’s value break out 48 hours later.

In addition to sales of existing homes, the construction of new homes is flourishing on former farmland. Aplin said people are leaving their “affordable and moderately priced” homes for new homes that may be priced above their value due to the “incredibly high” cost of building materials.

Aplin pointed out that in this market, real estate brokers don’t have to accept lower commissions and sellers trust their agents to offer a very competitive rate. Still, a slowdown in demand could invite consumer scrutiny.

Families trying to sell their homes in a bear market might look for ways to cut costs, including limiting the commission paid to their real estate brokers, he said. The transparency that comes with the DOJ rule would allow consumers to potentially negotiate with their agents or find a broker who will take a lower commission.

This, in turn, could bring market forces into play and make real estate brokers more responsive to economic conditions.

“With this industry when the market is bad, they want 6% (commission),” Aplin said. “When the market is good, they want 6%. It looks like their commissions are expected to change as the market changes.

Honest Earnings

In addition to the Justice Department’s action, a few lawsuits regarding NAR’s practices are pending in federal courts, including one in the Northern District of Illinois, Eastern Division.

Illinois antitrust action, Christopher Moehrl et al. v. The National Association of Realtors, et al., 19-cv-01610, echoes the allegations in the DOJ complaint but focuses on door-to-door sellers. The plaintiffs describe the NAR as engaging in a conspiracy with the other defendants to charge the sellers with all the costs when some of it should be paid by the buyers.

“It’s a bit like lawyers working for one party in a transaction paying lawyers working for the other party,” the complaint said, citing a 2006 article in “Inman,” a publication covering the real estate industry.

Like the DOJ complaint, the Illinois lawsuit claims that the defendants violated Section 1 of the Sherman Act. Both motions to dismiss filed by the defendants were dismissed in October 2020. Citing Agnew v. Nat’l Collegiate Athletic Ass’n, 683 F.3d 328, 335 (7th Cir. 2012), Judge Andrea Wood found that the plaintiffs had cleared all three hurdles required to bring a claim under section 1, including an unreasonable restraint of trade.

“Further evidence of the anti-competitive effect of buyer-broker commission rules is the stability of commission rates over the years. Indeed, between 2000 and 2017, total commission rates remained within the range of 5.0 to 5.4%. … Phone ‘[u]usual and sustained price stability is not expected in a competitive market,” Wood wrote, citing In re Dairy Farmers of Am., Inc., Cheese Antitrust Litigation., MDL 2031, 2013 WL 212908 at *5 (ND Ill. 18 Jan 2013).

About a month after Wood issued the order in Moehrl, Judge Timothy Kelly of the United States District Court for the District of Columbia signed the proposed stipulation and order that was submitted as part of the settlement reached by the Department of Justice and the National Association of Realtors.

The agreement requires the NAR to make changes to its code of ethics and MLS policies. In a video statement posted on the association’s website, 2021 NAR President Charlies Oppler discussed the settlement and stressed that the organization disagrees with the Justice Department’s allegations. .

“While our rules and policies have created a competitive and efficient marketplace that benefits home buyers and sellers, we occasionally engage with government entities to ensure NAR’s rules are up to date and promote these goals,” said Opple. “Rooted in our commitment to act in the best interests of buyers and sellers, we regularly update our rules and policies to protect consumers and ensure transparency.”

Aplin thinks changes to NAR practices could have a positive impact. In particular, the revised rules could increase competition by opening the door for discount real estate brokers to enter the market, giving consumers another option.

“I’m a capitalist,” Aplin said. “Everyone deserves to make money. It’s just that money should be honestly made through transparency.”

Kristan F. Talley