SALT LAKE CITY — Six percent of the biggest transaction most people make in their lifetimes amounts to about $20,000 of the purchase on the current, average-priced home in Utah.
Industry watchers say that’s because, more often than not, the commission typically collected by real estate agents is baked into the final sales price of homes. In Utah, as of Aug. 31, the average home value was hovering around $344,000 according to data gathered by online real estate database Zillow.
That commission — which currently averages between 5% and 6% across the U.S. — is one that’s been around for decades and has, so far, survived the challenges of alternative transaction models for home sales and purchases that have attempted to compete with the National Association of Realtors and its hundreds of subsidiary multiple listing service units across the U.S.
According to the organization, nearly 9 of every 10 residential sales transactions are mediated by its member agents and brokers.
Now, a tide shift may be afoot as the National Association of Realtors comes under scrutiny via a trio of civil lawsuits and a U.S. Department of Justice inquiry — as well as a wave of tech-based disruptors who are helping homebuyers and home sellers complete their transactions for a fraction of the cost of legacy rates.
Jack Ryan is one such disruptor. Ryan is founder and CEO of Los Angeles-based Real Estate Exchange, or REX, a company launched in 2014 that bills itself as functioning outside the association’s multiple listing service system and using artificial intelligence tools to connect homebuyers and sellers while charging 2% for sellers and half the normal commission for buyers.
The typical transaction costs for homebuyers and sellers has remained static for years, in spite of technological advances that have put downward pressure on other agent fee categories, Ryan said at a May Brookings Institute-hosted panel on middle-class housing policies.
“Why is it that residential real estate broker fees are about three times higher in the U.S. than any other developed country in the world?” Ryan asked. “Why is it that every other consumer-facing agent fee in the U.S. — stock brokers’ fees, bond brokers’ fees, travel agents, taxi dispatchers — are all down about 80% over that last 10 years, except for one group? Residential real estate agents.”
Ryan said the multiple listing service systems are designed to protect fee rates and that “there are so many things that they’re doing to constrain competition that results in these fees that are so high relative to any other developed country,” including compelling those listing with multiple listing service agents to agree, at the time of listing, to pay a commission or fee to the buyer’s agent.
This compulsory arrangement, referenced by plaintiffs as the “buyer broker commission rule,” according to the Realtors group, is cited in the biggest of a trio of current civil cases aimed at the National Association of Realtors now underway. In Moehrl v. NAR, filed in Illinois federal court, the complaint holds the buyer commission requisite up as evidence that the National Association of Realtors, along with four of the biggest U.S. real estate broker franchisors, have been “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.”
The experience Sandy resident Chase Wagstaff and his wife had selling their home in 2018 might reflect issues raised by the plaintiffs’ attorneys in the Illinois case.
Wagstaff said he chose, instead of selling through a traditional agent, to use a web-based, flat-fee service to sell his home. Wagstaff said he and his wife put more than $100,000 into improving the home they purchased in 2012 and didn’t believe that paying nearly $20,000 to a buyer’s agent seemed fair, so they chose to list the home without the offer of a buyer’s agent commission. What happened next, Wagstaff said, was shocking.
”I’m absent most of the summer due to work, so my wife took on the task of showing the house and dealing with Realtors,” Wagstaff said. “After we listed, my wife started getting two to three calls a day from agents who were really pissed off and abusive saying, ‘Who do you think you are?’ and ‘Do you know how much work it takes to draft up contracts?’
”And, almost every one of them said, ‘I’m not showing your house to my clients without the 3% (commission).’”
Wagstaff said his wife didn’t want to answer any more calls, so they consulted their real estate representative, who suggested they offer a 1.5% commission on the home, which was listed for around $500,000. The commission, at that rate, worked out to about $8,500 for the buyer’s agent, Wagstaff said.
”The calls kept coming and (the agents) still said, ‘Are you kidding me?’” Wagstaff said. “They were arrogant and rude and still demanding the full 3%.”
Eventually, they found a buyer who had an agent that accepted the $8,500 paycheck for the deal, but Wagstaff noted that numerous other potential deals fell through, not because of the issues with the buyers, but simply due to agents’ insistence that they deserved, and wanted, their full cut.
”It was literally the worst experience we ever had,” Wagstaff said. “And the only reason it worked out is the person who ended up buying our house had a mom who was an agent. And even then, the mom gave us a hard time about (the commission).”
The Moehrl v. NAR complaint is seeking to both recover damages, potentially in the tens of billions of dollars, as well as change Realtor rules that the suit says “requires all brokers to make a blanket, nonnegotiable offer of buyer broker compensation … when listing a property on a multiple listing service.”
The Salt Lake City Multiple Listing Service is one of 20 such services identified in the Illinois lawsuit in which plaintiffs’ attorneys are signing class participants, which they indicate are any persons who paid a broker commission since March 6, 2015, on the sale of a residential property in the listed areas.
In addition to the Realtors group, other defendants include Realogy Holdings Corp., which includes Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, ERA and Sotheby’s; HomeServices of America Inc., which includes Berkshire Hathaway, RealtySouth, Long & Foster, Edina Realty and others; RE/MAX Holdings Inc.; and Keller Williams Realty.
‘Efficient marketplace’
Following the March filing, Mantill Williams, the National Association of Realtors’ vice president of public relations and communications, shared a statement with the Deseret News discounting allegations in the lawsuit.
”The complaint is baseless and contains an abundance of false claims,” Williams said. “The U.S. courts have routinely found that multiple listing services are pro-competitive and benefit consumers by creating great efficiencies in the homebuying and selling process.
”(The National Association of Realtors) looks forward to obtaining a similar precedent regarding this filing.”
The association filed a motion to dismiss the case in May and is awaiting a judge’s ruling on the action. Ahead of that filing, the association’s general counsel, Angie Johnson, posted a statement on the organization’s website further discounting claims of conduct in violation of federal antitrust rules.
“In fact, the commission offered to the buyer’s broker is not at all determined by NAR or the MLS,” Johnson said. “And contrary to what the class action law firms allege, the commission is subject to negotiation.
“The MLS has been around for well over 100 years and has contributed to an orderly and efficient marketplace. We are going to aggressively defend ourselves, along with the rights that enable homebuyers and sellers to continue to have access to a highly efficient market.”
In its motion for dismissal, lawyers for the Realtors association argue numerous aspects of the civil complaint, including that it fails to offer any evidence of anti-competitive practices or harm to consumers.
“No plaintiff alleges anything more than the recent sale of a home which involved payment of a broker’s commission by the listing broker,” the filing reads. “Tellingly, no plaintiff makes any factual allegations that the relevant NAR rules in any way 1) prevented them from negotiating with their listing broker for a lower commission rate; 2) prevented them from insisting that their listing broker make only a nominal compensation offer to buyers brokers; 3) prevented their homebuyers from utilizing a broker paid directly by the buyer; or 4) decreased the net proceeds that the plaintiff received from the sale of the home.”
The motion also poses a response that turns an allegation in the complaint on its head, arguing that not only is the multiple listing services system not anti-competitive, it actually functions in a pro-competitive manner.
“As plaintiffs admit, by offering a commission in the MLS listing, the listing broker incentivizes other MLS participants to show their clients the listed home and, thereby, efficiently produce a sale,” the motion reads. “This effect is pro-competitive and, as plaintiffs concede, has caused the MLS to become an effective tool for marketing homes to potential buyers.”
Justice inquiry
While the civil actions targeting National Association of Realtors policies, which also include cases in Missouri and Minnesota, are likely years away from resolution, the U.S. Department of Justice has also begun an inquiry that’s also focused on potential antitrust activities.
The Department of Justice typically does not comment on, or confirm active investigations, but a document leaked in May details a civil investigative demand for information held by CoreLogic, the California-based data company that manages the information behind the National Association of Realtors’ multiple listing services.
The justice department is demanding a long list of data and records related to real estate transaction records in the pursuit of potential evidence of “practices that may unreasonably restrain competition in the provision of residential real-estate brokerage services in local markets in the United States.”
Other evidence of animosity between legacy model real estate brokers and agents and those functioning under new, flat-fee systems has bubbled up in their shared professional enclaves.
Caught on video
At a mandatory July agent training class, hosted by the Salt Lake Board of Realtors, an instructor made comments critical of Homie, a 3-year-old Utah-based company that utilizes web tools, along with agents and lawyers, to assist those selling homes for a flat fee of $1,500. Homie and its agents are dues-paying members of the group, but that didn’t keep instructor Gary Cannon, a former Salt Lake Board of Realtors president and board member, from expressing his opinion about the company.
“The challenge with some of these models ... is the race to the bottom,” Cannon said. “You are basically saying, ‘I want to sell my house on my own.’
“All Homie signs are a ‘for sale by owner’ sign. The service we provide blows that one out the door. The consumer isn’t giving us the opportunity to tell them what we do.”
Following a Deseret News request for a response to the comments, which were captured on a cellphone video of the training session, the Salt Lake Board of Realtors shared the following statement:
“Instructors are independent contractors who are hired by the Salt Lake Board of Realtors to teach many different real estate courses. Since we hire many different instructors, improper or inappropriate comments and views expressed by any one of them does not fairly represent the board. Instructors do not speak for the board, its directors or the CEO. Furthermore, instructors are obligated to not disparage any business model or brokerage and are reminded of this responsibility regularly. The board will contact this instructor and take any corrective action necessary.”
Salt Lake Board of Realtors President Scott Robbins also told the Deseret News that he was “unhappy and disappointed” by the comments and noted they do not represent the views of the board.
Cannon told the Deseret News his comments were an expression of his personal opinion and he also issued an apology.
“If my comments were offensive to anyone or to a specific company, I apologize,” Cannon said in a statement. “My class is on a PowerPoint and I think that my comments were taken out of context from the content or point of the class.”
Homie co-founder and CEO Johnny Hanna expressed his disappointment in, and lack of surprise by, the comments made in the class.
“The time has come for greater transparency around anti-competitive business practices and high commission models,” Hanna said in a statement. “The truth is, Homie delivers a high quality, lower cost alternative to the old way of doing things. When disruptors enter a market, consumers win.
“We are never surprised when we receive criticism from other agents or brokers. Taxi cab drivers never liked Uber.”