The Securities and Exchange Commission (SEC) mission is protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. The largest asset class in America is real estate – exceeding $43.5 trillioN – yet, the SEC does not govern real estate, despite representing the largest investment of consumers. How could our federal government have missed the important role of regulating the conduct of this marketplace.
Generally, I am not a fan of regulation. However, when other powerful federal organizations like the Department of Justice and the Federal Trade Commission unjustly target the real estate industry, then a regulator like the SEC may be the best way to protect the business practices from other federal predators and class-action lawsuits.
The MLS is a marketplace of participating brokerages that facilitates cooperation and a unilateral offer of compensation. Today, the courts are hearing cases that challenge that cooperation (clear cooperation), and the offer of compensation (how buyer’s agents get paid).
Pundits argue about the likely outcome of these cases, but litigation has already had an impact on the MLS marketplace. The fear of litigation has caused many MLSs to quietly quit Clear Cooperation and make the unilateral offer of compensation optional.
Furthermore, many MLSs are considering disassociating from the National Association of REALTORS.® The reasoning is threefold. First, MLS affiliation requires the adoption of a standard set of rules that the plaintiffs are characterizing as anti-competitive. Secondly, the NAR’s insurance of MLSs is not capable of covering the liabilities. Lastly, NAR has not satisfied the affiliated MLSs in fending off the FTC, DOJ, Civix, and the recent class action litigation (I am not saying that NAR’s efforts and investments have not been substantial, but the outcomes have not been satisfactory).
Today’s legal claims seek to indicate that the cooperation and compensation marketplace is a corrupt conspiracy of anti-competitive collusion and price fixing that undermines the free market for home buyers. Could the same be said of the Stock Market with its regulations?
Honestly, it is harder to know the commissions paid and the other hidden fees paid on stock trading than a real estate transaction. I know the fees that my broker charges me, but what about the fees of the other broker? Clearly those fees impact the price of the stock and the cost of trading. Where is that disclosure? How can I negotiate those fees? $100 trillion in stocks are traded every year with all kinds of hidden commissions and fees. Billionaires are created by the stock market, not the real estate market.
Why are there no class action lawsuits aimed at stock traders?
Answer: the Securities and Exchange Commission, which is the regulatory supervisor, has a code of conduct for the marketplace that is written in federal law. As long as licensed brokers follow those federal rules, they are immune from litigation.
Admittedly, this is a bit of a whimsical article. I am not terribly serious. The real estate industry is regulated at the state level by the real estate commission or department of real estate, or a similarly named group. But it does seem like those state regulatory authorities should be named along with the brokers, franchises, and MLSs in these cases. Or they should join the defense in supporting briefs. State real estate authorities are the ones that review and approve the binding contracts that consumers sign!
Why are franchise organizations like Keller Williams named in these lawsuits? They do not sell real estate; they do not represent any buyers or sellers; they are not members of the MLS, or practicing as broker or agent members of the National Association of REALTORS®. HomeServices of America and Anywhere do have brokerage operations, but to my knowledge, KWRI does not.
One more thing. Why aren’t Zillow, Realtor.com, and Movoto named in these lawsuits? They often get 1/3 of the buy side commission for referral fees that are not being disclosed to the consumer. In the case of just one of those companies, the commission revenue is over $2 Billion – far more than the revenue of any franchise organization or MLS.
As you can tell, I am not a fan of these lawsuits. Even Fannie Mae and Freddie Mac offer compensation to the buyer’s agent!
Hard working agents have done their level-best to work with homebuyers for an average of more than 300 days, touring dozens of homes, writing multiple offers, negotiating purchase prices that are 7% lower than list price, negotiated closing credits, provided emotional support, delivered consultations, helped with searches, reviewed properties, informed clients on the contracts, and shepherded them though financing and closing. Not to mention the fees that these agents pay for dues, licenses, continuing education, software, a car, a phone, a computer, and the hundreds of hours spent on the transaction. In my opinion, the buyer’s agent does waaaayy more work than the listing agent.
But in all seriousness. The thought that this litigation could tear apart an entire industry that has legally operated cooperation and the offer of compensation for generations is terrifying. A federal law that aligns with the state law with federal oversight would strengthen the process.