How commission chaos divided the real estate industry into 4 factions


Join the movement at Inman Connect Las Vegas, July 30 – Aug. 1!  Seize the moment to take charge of the next era in real estate. Through immersive experiences, innovative formats, and an unparalleled lineup of speakers, this gathering becomes more than a conference — it becomes a collaborative force shaping the future of our industry. Secure your tickets now!  Learn more.

The real estate industry is at war, and everyone seems to have an opinion about how to make changes to the status quo while saving a world that works for buyer’s and seller’s agents.

The National Association of Realtors made a major tactical move last week when it reluctantly reached a proposed settlement with the plaintiffs in a slate of landmark lawsuits. The agreement, if approved in court, would protect about 1 million agents and brokers from the nearly two-dozen lawsuits filed by homesellers across the country.

Based on reaction to the news, the terms of the settlement and protection it offered fell short of unifying the industry, with some agents and brokers wondering whether NAR brokered the best deal for them — even as others questioned if the trade organization should have continued the fight in court.

But the settlement was merely the latest episode to expose the fissures that have emerged in a real estate industry navigating a multi-front battle.

“I’ve been saying the same thing for a while,” said James Dwiggins, CEO of NextHome. “We needed to come together with a settlement and move forward with it.”

The industry once showed a united front as lawsuits mounted, but the chasm started to emerge in the weeks before the Sitzer | Burnett trial. And even now, with proposed settlements piling up, the divisions persist.

James Dwiggins

James Dwiggins | NextHome CEO

Among other things, nearly 100 brokerages weren’t covered by the proposed settlement, including HomeServices of America, its affiliates, and any that did more than $2 billion in sales volume in 2022. Brokerages big and small across the country have to choose between accepting change or fighting. Things are coming to a head. 

Most seem to agree the future will look different — they just can’t agree on how it will change or the best route to a smooth landing.

“There are two types of agents,” Mike Repka, CEO and broker of the Palo Alto-based DeLeon Realty, told Inman. “Those looking at what’s going on and saying, ‘How can I adapt and enhance the experience for clients in this new post-Sitzer landscape?’ There are other agents I’m hearing just kind of complaining to each other saying, ‘This is terrible and we won’t show any houses that don’t pay 2.5 percent,’ which is exactly what the whole case was about. Those agents will fail.” 

“There are really two camps,” Dwiggins agreed. “There’s the camp of ‘fight it and go down that road.’ There is almost zero chance that an appeal will work. Period.” 

With real estate at a crossroads, these are the key players and what they’re saying today.

The Compromisers

2

Anywhere CEO Ryan Schneider, center, NAR President Kevin Sears, left, and Keller Williams founder Gary Keller.

THE ARGUMENT: Brokerages and franchisers hashed out agreements with plaintiffs to make changes to the way they and their brokers do business and paid hundreds of millions collectively to the plaintiffs. In exchange, they receive protection from the lawsuits as they continue to mount across the country.

When Anywhere Real Estate CEO Ryan Schneider took the stage at Inman Connect New York in January, he gave some of his only public comments since his company became the first to settle Sitzer | Burnett in September and made clear why his firm was the first to settle. The industry lacks leadership, he said, and settling the case put Anywhere in the driver’s seat.

“We did it because I want to have leadership, time and money to focus on agents, not litigation,” Schneider said. “We did it because I want to take care of our agents and franchisees and protect them from those 20 lawsuits and then the next 20, which are probably inevitable.”

He also said settling the cases offered Anywhere brokerages and agents a level of protection unavailable elsewhere.

“We have our own view and vision of what’s good for this industry and it doesn’t always align with other people,” Schneider said. “Once you kind of have a clear vision of what you think is the right thing, you’ve gotta find a way to get there. If that means you separate from people who don’t have that vision, then so be it.”

The industry had been showing a united front in the weeks leading up to the Sitzer trial, when Anywhere announced it had reached an agreement to settle. Weeks later, RE/MAX settled, too.

Keller Williams followed in February; the company had been publicly resolute in its desire to fight the Sitzer verdict with NAR and HomeServices of America. But around lunchtime on Feb. 1, Keller Williams announced it had reached a deal to settle several key cases — Sitzer, Moehrl and Nosalek — and agreed to pay $70 million and make some changes to the way it does business.

These are the compromisers that, whether out of a necessity for survival or as an attempt to create a strategic advantage against competitors, agreed to make changes that were supported by plaintiffs and attorneys suing them.

“In regard to the settlement, what you see is business prudence,” said Victor Lund, a founding partner with WAV Group. “They look at a cost-benefit analysis of settling versus fighting. For those who settled, the cost-benefit analysis was, ‘Hey, the settlement is a good deal. We’ll take it.’”

Anywhere agreed to pay $83.5 million as part of the settlement agreement. RE/MAX will pay $55 million. Along with Keller Williams, the groups agreed to no longer compel their members to belong to NAR. The firms will prohibit brokers from claiming buyer agent services are free, and all must limit the practice of sorting listings by offers of compensation.

More and more, this group of compromisers appear to believe that change is inevitable; it’s just a matter of when and how.

“Every single person who owns a large brokerage or franchise, mine included, has talked to lawyers about what our outcomes are like,” Dwiggins said. “There’s no scenario where we all haven’t had that discussion at this point.”

“All paths, in my opinion, lead to settlement,” Dwiggins said.

NAR had been marching forward after the verdict, signaling up until just days before news of its settlement broke that it planned to stay in the court fight. Indeed the organization was the biggest and most prominent non-compromiser in the industry.

That all changed Friday morning when the trade group announced its settlement.

“We have always wanted to reduce the significant strain on our members and provide a path forward for the industry,” NAR President Kevin Sears said in a statement Friday.

KEY PLAYERS

  • Anywhere Real Estate
  • RE/MAX 
  • Keller Williams
  • National Association of Realtors

The Reformers

4

From left: CRMLS Vice President Edward Zorn, NextHome CEO James Dwiggins, and The Agency CEO Mauricio Umansky.

THE ARGUMENT: The deep thinkers closely studying the Sitzer | Burnett verdict and statements by the Department of Justice believe they have determined what they view as changes necessary to move ahead.

NAR’s settlement was significant in that it promised sweeping changes to the rules that brokers and agents follow when transacting real estate.

Those changes seemed to follow guidance from a group of industry reformers who examined the landscape and began to think of policy shifts that might appease a Department of Justice that has shown an intense interest in the matter.

“We lost. Now we need to look forward,” Dwiggins said. “I don’t believe that the verdict was correct, for the record. But we are where we are now.”

Dwiggins is among a cohort of reformers who came up with a list of ideas that coincidentally ended up as the framework for NAR’s proposed settlement. For instance, this group of reformers has argued that the industry needed to consider whether all agents should be compelled to use buyer representation agreements, rather than to leave it up to brokerages to decide.

“Why don’t we as an industry mandate it?” Edward Zorn — general counsel for the California Regional Multiple Listing Service (CRMLS) and another prominent member of the pro-reform cohort — said on stage at Inman Connect New York in January.

As part of the proposed settlement, NAR has said it would implement a rule by mid-July requiring agents to have a signed buyer representation agreement before touring a home with a client.

Another change the reformers called for was to remove all offers of compensation from the MLS.

“It is very, very realistic to see that occur where it’s not a field that you can put zero, which is what everyone’s talking about. It’s that field is gone,” Dwiggins said last month. “Like, there is no contractual offer of compensation in the MLS.” 

Here again, the reformers have had some success; NAR agreed to create a rule removing offers of compensation from the MLS as part of the settlement.

Other reformers include Mauricio Umansky, CEO of The Agency, and Compass agent Jason Haber. The two announced at Inman Connect New York they’re rolling out a new trade organization called the American Real Estate Association, which would compete with NAR.

It has yet to be seen in what ways the group would differ from NAR. But Haber says there is reason to be optimistic about its potential to make a difference. Haber and Umansky hosted a meeting this month inviting agents and brokers from across the country to share their ideas for a competing trade group. Hundreds attended, Haber said.

“Standards around the country should be raised,” Haber told Inman. “Raise the bar of entry, and reduce the agent count.”

 KEY PLAYERS

  • NextHome CEO James Dwiggins
  • CRMLS General Counsel Ed Zorn
  • Compass agent Jason Haber
  • The Agency CEO Mauricio Umansky

The Fighters

3

Christy Budnick, Berkshire Hathaway HomeServices CEO, and Gino Blefari, CEO of HomeServices of America.

THE ARGUMENT: The industry establishment players who plan to resist change and believe they can defeat homeseller and buyer plaintiffs — and their trial lawyers — by making their case in court. Billions of dollars are on the line.

HomeServices is the biggest fighter and has signaled it still has no intention of settling the cases.

Defiance to the pressure created by the Sitzer verdict also appears to be trickling down to the state and local levels who look to NAR for guidance and leadership.

“Our approach to litigation and the strategies we employ are decided upon by our leadership team, focusing on what is best for our brands, agents and consumers,” said Chris Kelly, executive vice president of HomeServices of America. “Each decision is based on the individual merits and specifics of the case.”

On March 18, attorneys for the Sitzer | Burnett plaintiffs asked the court to order HomeServices to pay the vast majority of the damages awarded in a jury verdict this fall: $4.7 billion.

The framework of the settlement also means that 96 brokerages — including major names such as eXp Realty — that were left out now have to decide whether they become fighters or join the reformers and compromisers.

“Our team is committed to guiding you through any regional rule adaptations as they unfold,” eXp Chief Strategy Officer Leo Pareja wrote in an email to eXp employees three days ago. “Meanwhile, eXp Realty’s legal stance remains unwavering.”

NAR settled only reluctantly and may have been compelled by the risks of moving ahead in court. Now, other brokerages will have to make the same calculation.

“No one has deep enough pockets to pay the ruling,” Lund said. “Everyone would have to go bankrupt except for Berkshire Hathaway.”

Key Players

  • HomeServices of America
  • eXp
  • 96 brokerages

The Referees

5

Judge Stephen R. Bough, left, and U.S. Attorney General Merrick Garland.

THE ARGUMENT: These are the forces behind the scenes or in the courtroom. The DOJ is out to create what it says would be a more competitive marketplace in real estate, sharing its opinions with judges along the way.

Guiding much of the debate are the referees, namely Merrick Garland’s Department of Justice and the judges overseeing the countless cases.

With new cases being filed across the country, a panel of judges is set to hear arguments about potentially consolidating most of them into one multi-jurisdictional case this month.

Stephen R. Bough, judge in the U.S. District Court for Western Missouri, presided over the Sitzer case. Bough has signaled he’s prepared to approve the proposed settlements from RE/MAX, Keller Williams and Anywhere. He has yet to issue a final ruling that could dictate how real estate operates in the future.

Appointed by President Barack Obama in 2014, Bough rejected calls for a mistrial and dismissal by the real estate defendants. He has yet to rule on motions for a new trial. Bough will consider final approval of the settlements in May. But even if he does, that may not be the end of it.

A judge overseeing a lawsuit in Massachusetts, a case known as Nosalek, approved a proposed settlement before the Department of Justice intervened.

In a filing in February, antitrust attorneys at the DOJ signaled they weren’t satisfied with any settlement that didn’t completely separate brokers from negotiations around commissions.

The DOJ wants to see a future where buyers negotiate directly with their broker without involvement by the seller or listing agent. That sort of commission “decoupling” leaves in question where the money for the commission would come from, and if lower-income buyers are put at a disadvantage as a result.

The agency has also been moving to continue investigations of various NAR rules and policies.

But whatever ultimately happens, NAR President Kevin Sears indicated to a crowd of real estate agents last month that the intervention by the DOJ was a bigger threat than the $1.8 billion Sitzer penalty. 

“The way that we operate our business is going to change,” Sears said. “It is going to change whether we embrace it and adapt, or it’s going to be forced down our throats.”

KEY PLAYERS

  • Attorney General Merrick Garland
  • Judge Stephen R. Bough
  • Judicial Panel on Multidistrict Litigation

 Email Taylor Anderson





Source link

About The Author

Scroll to Top