Supreme court rules against the national association of realtors, suit could rock the industry; why are pocket listings not allowed?

I’m usually skeptical that lawsuits will totally alter an industry but the recent suit against the National Association of realtors, various multiple listing services, and many large real estate brokerages could be a bombshell. The U.S. Supreme Court on Monday declined to hear the National Association of Realtors’ challenge to a lower court’s ruling. What is the lawsuit? Why is this different than other suits in the past? How will these lawsuits, if successful, totally change the entire real estate industry? Why are pocket listings not allowed by brokers; hint it is not to help the consumer!

Two major suits against the National Association of Realtors claiming antitrust/collusion:

Even though they are two separate lawsuits, they hinge on a common them of collusion/antitrust violations. The recent supreme court ruling was on the recent lawsuit (below), but will impact the direction of the second lawsuit as well.

The First and most recent lawsuit (anticompetitive/pocket listings/MLS)

The U.S. Supreme Court on Monday declined to hear the National Association of Realtors’ challenge to a lower court’s ruling that said an upstart real estate platform can pursue antitrust claims against the trade group.

PLS in 2017 launched an alternative database of “pocket listings” of houses that owners could more discreetly market, publicly sharing less information than otherwise would be required.

Demand for such houses “skyrocketed” in Washington, D.C., Miami, San Francisco and other markets in rePLS sued the real estate trade group in 2020 in Los Angeles federal district court. The complaint seeks damages for lost profits and an order blocking enforcement of the cooperation policy.

Lawyers for PLS said NAR-affiliated listing services saw the new platform as a threat. NAR adopted a “clear cooperation policy” in 2019 to require homes disclosed on PLS to also post on a multiple listing service within 24 hours. In essence the NAR prohibited pocket listings in order to get rid of competition from PLS

“Rather than compete on the merits with an upstart, MLSs conspired to destroy it,” attorneys for PLS told the justices in a filing in December. The lawyers, including Douglas Litvack of Jenner & Block, said “it would be hard to fathom a more obviously anticompetitive agreement” than the cooperation policy. (here is the full brief, if you have some time on your hands )

In essence the Supreme court by not ruling on the realtor’s challenge allowed the suit to move forward. This is not a good sign for the National Association of Realtors.

The second lawsuit (antitrust/sellers should not pay buyer’s agent)

This is the largest most comprehensive suit against the realtor’s association in recent memory. The crux of the suit is based on homeowners in Chicago who sold their homes via national brokerage firms and were forced to pay the buyer side of the transaction at what they claim was “an inflated rate”. They allege that they should be able to negotiate the compensation for their home sale and not be forced to pay the buyer’s side commissions. Furthermore, the United States realtor system is setup radically different than other countries causing commissions to be substantially higher. The suit alleges that the seller should not be forced to pay an “inflated” buyer commission as the end buyer is now doing much of the home search now.

Since the suit was filed, courts have ruled against the National Association of Realtors that tried to dismiss it and the case has not transferred into a much larger class action lawsuit. The recent supreme court ruling will drastically bolster the case against the National Association of Realtors.

More details on the second lawsuit

Plaintiffs, home sellers who listed their homes on one of twenty MLSs bring this action against the National Association of Realtors (NAR) and the four largest national real estate broker franchisors, Realogy Holdings Corp., HomeServices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc., for conspiring to require home sellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount, in violation of federal antitrust law.

Plaintiffs allege that Defendants’ conspiracy has centered around NAR’s adoption and implementation of a mandatory rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation (the “Buyer Broker Commission Rule”) when listing a property on a MLS.

Currently, total broker compensation in the United States is typically five to six percent of the home sales price, with approximately half of that amount—and increasingly more than half—paid to the buyer broker. Defendants’ conspiracy has kept buyer broker commissions in the 2.5 to 3.0 percent range for many years despite the diminishing role of buyer brokers due to buyers independently identifying homes through online services and retaining buyer brokers only after they have found the home they wish to buy. (source: https://www.cohenmilstein.com/case-study/moehrl-v-national-association-realtors-et-al)

On the surface it doesn’t sound like such a big deal, but as you dig into the details, the lawsuit, if successful, will radically change the industry as sellers will no longer be forced to pay a buyer’s agent. Who will now pay the buyer’s agent and what will they be willing to pay?

Who filed the second lawsuit?

In the past, lawsuits against the national association of realtors have been brought by small regional firms. This is not the case on the current suit, the lead attorney in the lawsuit is one of the industries largest and most successful class action attorneys, Cohen Milstein. They have won million- and billion-dollar settlements with Swiss Bank, Apple, Catepillar, BP, etc… This lawsuit is not going away as large firms have deep pockets to fight.

If successful what does this lawsuit mean to the industry

Although this case is just beginning and will take years to resolve, the implications of a successful suit are mind boggling. This case would allow sellers to stop paying buyers agents and throw the door open for a radically different way of buying and selling. An interesting question will arise, will buyers be willing to pay their agent? Furthermore, will buyers be willing to pay their agent 3% of the purchase price? For example if you are buying a 500k house, would you be willing to pay your agent 15k for showing the house, writing the contract, etc… or 30k for the purchase of a million dollar home.

Having a good broker represent a buyer on a purchase is an invaluable service, however, I think most buyers would balk at the current compensation rates if they are now coming out of their pocket. Like any service, they will shop around for the best option and new options will form. For example, companies will sprout up that offer “discount” prices to just write a contract or assist on the negotiation or maybe buyers do it all themselves. Regardless of what the end game looks like, it will be radically different than today.

Summary:

The two lawsuits bring up interesting economic question of who should pay the buyer’s agent and who can control the MLS and basically the lion’s share of business. I can’t think of any other business transaction where a seller pays someone to represent a buyer that is negotiating against the seller. It sounds counterintuitive and is the “crux” of the case.

On top of these two lawsuits the Department of Justice has embarked on its own civil complaint that is very similar seeking information from Corelogic and other data providers on “the ability to search real estate listings on multiple listings services based on compensation offered to buyer brokers”. With the supreme court wading in and refusing to rule on the case letting a lower court ruling stand means these cases are not going away anytime soon and could radically alter the compensation practices of realtors throughout the country. We are just at the beginning of this journey so you will need to keep an eye on future rulings.

Additional Resources/Reading

https://www.reuters.com/legal/government/national-association-realtors-antitrust-challenge-rejected-by-us-supreme-court-2023-01-09/#newsletter

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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