OPINION – Nicholas “Nick” Nowak
New Jersey Licensed Broker-Salesperson, Pennsylvania Licensed Salesperson
I wanted to share my full, unfiltered opinion on the recent real estate lawsuits that have been in the news, to help shed some light from my perspective as a real estate agent and Realtor®.
All opinions here are my own, not those of the National Association of Realtors (NAR) where I am a member, the NJ and PA Associations of Realtors where I am a member, the Gloucester Salem County Board of Realtors (GSCBOR) where I am an active board member, nor any brokerage that I’ve had an Independent Contractor Agreement with, i.e., “employing broker.”
Back to the question - Unfortunately, there is not a simple answer.
The Background
The key lawsuit, and its reiterations, "alleg[ed] the existence of an anticompetitive agreement that resulted in home sellers paying inflated commissions to real estate brokers or agents in violation of antitrust law."
These allegations largely stemmed from the practice where a listing agent, on behalf of their broker, entered into a listing agreement with a seller and negotiated and established compensation. This also included an agreement that the seller and/or listing broker would offer a portion of that commission (aka "split") with the agent/broker who brought the buyer for the transaction.
It is relevant to note that this model of compensation had been in place since at least 1913. This "old model" worked well in many ways, particularly as sellers traditionally have equity in their homes, while home buyers are fronting the bulk of other expenses in a home transaction. It’s also relevant that this model began when real estate agents only represented sellers, working as a seller’s agent or sub-agent of the seller. With that structure, it made sense that sellers would compensate all the agents involved in the transaction—after all, every agent worked for the seller.
This model persisted into and through the 1990s when real estate underwent a shift with the creation of Buyer Agency. Only then did real estate agents officially begin to work on behalf of buyers, not just as seller’s agents.
The Issues
There is no perfect system in anything, and the “old model” did have its issues. For one, as the industry transitioned into a system where buyers and sellers each hired their respective agents, it did not become a required or common practice for buyers and buyer agents to establish clear agreements that covered responsibilities and compensation. In the absence of an agreement, buyers were often unaware of how and how much their agent was compensated—they often just assumed that “the seller covered it.”
Without a clear understanding of buyer agent compensation, this created an opportunity for the seller/listing broker’s offer of compensation to a buyer’s agent to be the subject of “Commission Steering.” In the majority of cases, compensation only came from the seller, and compensation was rarely discussed with the buyer, creating the potential conflict of interest for buyer’s agents to influence the properties presented to and shown to their buyer clients.
To compound that, this potential problem created the actual and/or perceived impact that buyer’s agents would not show properties to their buyers if the seller/listing offered a less-than-desirable compensation to the buyer’s agent.
As a result, the offering of certain ranges of compensation amounts became/remained common.
The best way I heard this problematic symptom explained was by comparing it to another industry.
Say you were to call six different plumbers—a newer contractor and a veteran one in each of three different cities, say Philadelphia, Chicago, and Kansas—and get a quote on an identical job. Chances are, you would get a wide range of prices due to geography and contractor experience. If you were to repeat the process and call six real estate agents following the same criteria, the quotes you would receive on compensation would likely be fairly similar to each other.
It certainly shouldn’t be that way. A seasoned real estate agent with 20+ years of experience and hundreds of successful transactions completed should not be compensated at the same rate as a brand-new agent with a two-week-old real estate license. But that’s how the system has worked.
Inability or Failure to Address the Issues
At the real estate agent level, bucking the trend to change the system was problematic.
If a listing was offering an amount inconsistent with a buyer agent’s time, expertise, and expenses, the agent would need to have a written agreement from their buyer, spelling out that the buyer would be responsible for an agreed-upon compensation amount.
While the process and forms for this agreement have existed for some time, it was not common for agents to use them with their clients. Those that did institute the practice were at a competitive disadvantage, as potential clients could and would easily push back, saying, “I talked to another real estate agent, and they said they didn’t need me to sign any agreement.”
Specific commission collusion did not occur among individual agents in our marketplace at any scale, and likely not in any other markets. And to my knowledge, this wasn’t even argued in the lead class action lawsuit.
I also strongly doubt that the leadership of the National Association of Realtors and leaders of real estate brokerages across the country came together in a back room, or had secret conversations, to “fix” real estate commissions at a certain amount.
However, the headlines and base claim in the lawsuits tend to give the impression that is what occurred.
What did happen was a failure to address systems/practices that evolved over time to ensure they remained in sync and appropriate. I don’t think real estate brokerages have the ability to coordinate such a change. In fact, I find it very likely that real estate brokerage leaders would have actively avoided entering into any discussion with each other about compensation models, out of the perception or reality that such conversations would be antitrust violations. Alternatively, if a real estate brokerage decided to make changes to how they did business, they would have been fighting the remainder of the industry, with likely significant pain points and financial loss.
So the power to enact and lead such a change could only be done by NAR as the industry’s prominent trade organization.
But NAR did the opposite. In 1996, they adopted the “Cooperative Compensation Policy” (aka the “Participation Rule”) that required seller’s agents to make an offer of nonnegotiable commission to buyer's agents in order to list a property on the Multiple Listing Service (MLS).
The Settlement Agreements
As a result of multiple lawsuits, NAR and many of the largest brokerages have entered into class action settlement agreements. From what I’ve seen, in entering the settlements, all defendants have denied any wrongdoing. The settlement agreements have resulted in large sums being paid into a settlement fund and a number of real estate practice changes. The key changes are the requirement that member broker/agents enter into written agreements with buyers when they begin their relationship, that offers of compensation from sellers/listing brokers no longer be displayed on the MLS, and increased disclosure that real estate commissions are not set by law and are negotiable.
These key changes boil down to a forced change in the industry, meaning that moving forward:
Sellers are responsible for paying seller’s agents.
Buyers are responsible for paying buyer’s agents
the capability still exists for sellers to assist buyers in fulfilling their obligation to their buyer’s agents.
Settlement Impacts
The “behind the scenes” view of the real estate industry, even just from the agent perspective, has been chaotic since the NAR settlement was announced in March. In addition to understanding the changes, there were significant obstacles in implementing them, most specifically the new change that buyers are responsible for paying their buyer’s agents.
To cite specific examples, the U.S. Department of Veterans Affairs, which provides a mortgage loan product to eligible veterans, forbids buyers in their program from paying real estate commissions.
Similarly, in New Jersey, if a buyer was purchasing a property and both the seller’s agent and the buyer’s agent happened to be working under the same brokerage, the brokerage was prohibited from collecting compensation from both the buyer and the seller. Since the listing agreement is typically negotiated and executed first, this effectively prohibited buyers from paying their agents under these circumstances.
Thankfully, fueled by the necessity of the settlement changes, the VA policy has been suspended as a permanent fix is underway, and state laws like New Jersey’s have been revised to address the obstacles.
While the settlement agreements forced a change—perhaps to the way it should have been for a while now—there were figurative mountains that had to be moved to make implementation possible.
Given these reasons, and perhaps in an unpopular opinion among my peers, I firmly believe that the impact of this settlement and the practice changes made are overall good for the industry and good for consumers.
As these practices went into effect and the industry adjusts to them now, these changes provide:
Increased Transparency to Consumers
Buyers and sellers can now clearly see, negotiate, and understand their agent’s compensation.Reducing the Opportunity for Commission Steering
Buyer’s agents no longer have a reason for the seller’s offered compensation to affect their motivations to promote or dismiss a property to their buyer client. An offered compensation now directly affects the buyer of the transaction, not the buyer’s agent.A Higher Standard for Real Estate Agents
It was easier in the “old model” for an agent to get licensed, work with some family and friends, and imply, “Don't worry, the seller pays me.” Then, upon a successful sale, they would collect a commission check likely equal to that of a top-selling veteran agent. Today, real estate agents will have to demonstrate their knowledge and value to negotiate commission with their buyer, and then do so again against another party.
So, Should the Real Estate Industry Have Been Sued?
When looking at the industry as a whole—the brokerages, the agents working under them, and the trade associations—no, this collection of parties did not collude and fix prices as the lawsuits and headlines seem to indicate.
I’ve specifically shared here how both brokerages and agents were limited in their ability to work together or individually for change to an outdated system.
Looking at industry history, the National Association of Realtors (NAR) didn’t pull a flawed, anti-competitive model out of thin air—the practice existed already. But as the model evolved to become more flawed, when NAR could have used their influence to advocate for legislation to promote a new way in the 1990s, they instead implemented a policy that preserved the outdated practice.
Unfortunately, this misstep clouds their outstanding history—creating a code of ethics that crafted the industry prior to most states' real estate laws and licensing requirements, and being the standout advocacy organization not only for real estate professionals but also for homeowners and in the defense of homeownership.
Another relevant note: membership in NAR isn’t exactly voluntary, which has been the subject of several more recent lawsuits by brokerages and agents. While NAR may have made the key mistakes in how they addressed change, its members didn’t have much freedom for input or objection.
Positive Change
I’m glad to see the recent changes we’ve had to real estate industry practices, though lawsuits and settlements were probably the most painful way to make needed changes.
I'm also glad to see the perhaps unintended consequences, including a collection of brokerages taking the change even further and completely ending the practice of broker-to-broker compensation, which is still legal and permitted under the settlement.
So, I’m still not entirely sure myself if the industry deserved to be sued…but looking at the overdue changes that have been brought about, it really is good after all, deserved or otherwise.
