Will the antitrust settlement change the real estate market?

You may have read a lot about settlements between real estate companies and plaintiffs in a class of regional lawsuits. Breathtaking media reports predict swings in home prices, upheaval in the real estate industry, and nothing less than a sea change in the way Americans buy homes. Almost none of this seems true.

The cases concerned the common practice of selling agents paying the buyer’s agent a portion of the commission, often three percent each (though this is not always the case). The lawsuit alleged that failing to disclose information to buyers and sellers constituted an anti-competitive business practice. The Missouri court agreed and the floodgates opened. Although the lawsuits were originally filed in Kansas City and Chicago and were limited in scope, they were followed by copycat lawsuits that affected most major real estate companies, including those in Minnesota.

There have been a number of settlements, including with local owners Edina Realty and the National Association of Realtors (NAR), that will change the agent commission process. The impact of these changes is disputed. Minnesota law already requires more disclosures than many states. Buyers sign a “representation agreement” that discloses how the buyer’s agent is paid.

What will change will add complexity to the home buying process and additional layers of work for each agent. Whether this will lower the costs of buying and selling a home is anyone’s guess, but there’s no logical solution to it, says Josh McFall, CEO of Minnesota Realtors, a trade association representing 22,000 real estate agents in the state. “The only thing we know for sure is that this will have an industry-wide impact,” he says.

The settlement will require the removal of a data field on the Multiple Listing Service (MLS) for each home that discloses the sales commission being offered to the buyer’s agent. This is believed to be a form of control that may result in agents not showing the home to a buyer. While commission arrangements have always been subject to negotiation between agents and buyers and sellers, these negotiations will now be mandatory in every transaction, and sales agents will need to find other ways to inform buyers’ agents about the commission structure before viewing a home.

“Our system has been the envy of the world and I’m not sure this will make it any better, but real estate agents are the most creative entrepreneurs out there.”
—Josh McFall, CEO of a Minnesota real estate brokerage

Media assumptions that the settlement will reduce buyer’s agent fees are false, McFall says. “The settlement creates more work for buyer agents and no one works for free.”

McFall says the settlement could force some buyer’s agents to consider alternative business models, such as fixed-price commissions or tiered services, where they offer roughly different prices. He believes agents can actually make more money by settling. “But this is at the cost of predictability. (The settlement) took away a clear understanding of the terms of the transaction. Now these are all private deals,” McFall says. He believes that many real estate companies will develop commission policies for their agents.

He doesn’t see any of the more optimistic consumer forecasts coming true. “We don’t see a decline in commissions and we don’t see an impact on house prices.” He suggests that the prospect of agents suddenly competing on costs is rooted in error. “Agents have always been able to compete on price, always negotiate commissions with buyers,” McFall says. It’s just not as common as buyers focus more on service and early access in a market where homes are hard to find and many sell above list prices.

TCB we contacted several local agents about their expectations for the changes, but each declined to comment, referring us to management or industry association spokesmen.

McFall says commission data will be made available to the MLS in early fall. “Then the old way will disappear,” he says. “Our system has been the envy of the world and I’m not sure this will make it any better, but real estate agents are the most creative entrepreneurs out there,” and he sees no short-term threat to it.