If you ask any attorney who is following the Buyer Commission lawsuits, the outlook is grim. MLSs that require a listing broker to provide a blanket, unilateral offer of compensation to buyer brokers in order to submit a listing to the MLS is likely to be rendered obsolete. Moreover, the case may require those commissions to be returned to home buyers. Imagining a future of the MLS without the offer of compensation, should be the top issue discussed in MLS board rooms today.
Mass Brokerage Bankruptcy is Possible
If these buyer commission cases resolve to demand that brokers return commissions to consumers, brokerages will likely be wiped out. The tight margins in brokerages do not allow them to build the kind of cash reserves that will be required to pay back multiple years of buyer commissions. However, there are strategies to insulate your brokerage company from making these payments. With mass brokerage bankruptcies, the size and scale of your Association and MLS operations will be forced to change dramatically as well.
Build a Plan in Your MLS and Association
It’s hard to plan around litigation because of timing. Judges can issue judgements from the bench during pending litigation to impact how the industry operates, and there are likely to be significant appeals. Regardless of the timing, you can build a plan now. The plan anticipates a variety of operational procedures for the MLS given a series of possible outcomes that range from doing nothing to dissolving the MLS.
Require Buyer Agency Agreements Now
Associations, MLSs, and brokerages can immediately do one thing. Today, you can require real estate agents to file the buyer broker agency agreement. The buyer signs the agreement to acknowledge that the commission to the buyer’s broker is some percentage of the purchase price and that it will be paid at closing though a reduction in settlement payments to the seller. There are some regions in America where these agreements are always used – like in Minnesota.
Associations would be advised to create education courses bringing their members up to speed on the risk of negative litigation outcomes and help drive home the importance of requiring signed buyer-broker agency agreements.
Provide a clear reference in listing agreements that outlines the offer of compensation to the buyer’s broker. Our understanding is that this language exists in many state and local listing agreements but not in all of them.
Demand Referral Fee Disclosures
According to a recent WAV Group study, few consumers are aware of the ever-increasing number of national websites that are now charging significant referral fees for closed transactions instead of advertising. When a home buyer lead is generated from a source that will result in a referral fee, the buyer should be required to sign a disclosure acknowledging they approve of that fee the moment the buyer’s agent starts providing transaction services. I would love to see these disclosures required under RESPA, but MLSs and Associations can proactively enact these disclosures now. Zillow, Movoto, Homelight, Realtor.com, and other referral fee websites charging a referral fee should be more transparent to the consumer; require the consumer to acknowledge that a significant percentage of the commission will be paid to the website where they found the listing and when they were connected to an agent.
Create New State and Federal Laws
We are not barred lawyers. We do provide expert witness testimony for many real estate lawsuits, however. From our experience we believe the industry can be protected from this litigation if states can pass a law that permits the current blanket unilateral offer of compensation. If new state law and/or federal laws support the offer of compensation, that might insulate the industry practice – especially if the law limits the type of litigation that the industry faces today. State Associations of Realtors® are particularly good at shaping legislation that supports the brokers and agents in their state. You are seeing state level control being restored today, as an example, in the wake of federal changes to Roe v. Wade.
I recall the final negotiation of our last home purchase. The listing agent and our buyer’s agent both agreed to a commission reduction to close the deal. My fear is that the data in the MLS which shows the offer of compensation paints a flawed picture of what really happens. Buyer’s agents sometimes discount their commission, provide commission rebates, and the like. I do not believe that evidence has been reviewed in this case. The data would need to come from the broker’s closing documents.
If your Association, MLS or brokerage would like help navigating these potentially troubled waters and building a proactive plan, call us. We’re happy to help.