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Industry Evolution: EMBRACING THE CHANGE
We still accomplish the end goal of all those former endeavors but we do so in a way that reflects changes in thinking, resources and cultural expectations. Yet, few of us played a role in development of how we now go about accomplishing the outcomes of our daily lives. It is unlikely that any reader of this article series helped develop the automobile or modern kitchen equipment. Still, the evolution of those tasks affects each of us daily.
Within the real estate industry, we stand on the cusp of imminent evolution. Unlike the evolution described above, that all of us can now study as historical events, evolution in the real estate industry is about to unfold. It is our future and it is unavoidable. However, also unlike the evolution described above, evolution that happened despite us, those of us within the real estate industry have the unique ability to create the evolution that will morph our industry. We hold the levers of change and if we act responsibly and timely, we can create the future of our industry. If we hesitate through dissension and debate, get bogged down in committee meetings or simply refuse to confront the inevitable, then our industry will still see radical change but the change will happen to us instead of by us. Instead of creating outcomes, we will react to them.
This article series will describe the forces applying pressure to the industry, industry reaction and ideas for consideration in creating the change. Industry leaders, rather than regulators or industry detractors, should be the creators of the industry evolution that lies ahead. Rarely is our industry given such an opportunity to proactively create change that will be beneficial to industry members and consumers alike. We must embrace this moment and act with timely, powerful and wise decision making.
This first article in the series describes the pressures on the industry that will force evolution.
Why evolution is inevitable.
Our industry is the subject of intense scrutiny, regulation and innovation. Technology has enabled unprecedented development of competing business models and options for consumers. Every year, there are industry members offering new and different services, catering to varying levels of consumer capabilities and providing a variety of costing options. That is good. But it has also caused folks inside and outside the industry to challenge the status quo. Is the way we are doing business the fairest, most transparent way that we, as an industry, can do business? That is the question at the heart of the challenge. Much of the push to improve has taken the shape of lawsuits against industry leaders and regulatory probing.
Industry Lawsuits
There are several lawsuits pending, filed by large groups of plaintiffs (“Class Action Lawsuits”). The plaintiffs are people who have sold real estate in recent years. Most of the Class Action Lawsuits name the National Association of REALTORS® as a defendant, along with several well-known franchises and large multiple listing services. To date, there are no Washington State defendants named in any of the lawsuits except that some of the defendant franchises have franchisees in Washington. These lawsuits are progressing at different speeds and all are in the pre-trial phase. None of the theories claimed by any of the plaintiffs has yet been subjected to a final verdict by a judge or jury. Consequently, nobody can predict with certainty how any of the pending cases will resolve which gives us, the real estate industry in Washington State, a unique opportunity. As an industry, Washington real estate professionals can study the asserted claims and decide, proactively, if any of the claims raise an issue that should cause us to evolve.
The primary issue presented in the Class Action Lawsuits concerns compensation. NAR has a rule requiring that a seller offer compensation, even if it is only a dollar, to buyer’s broker. Plaintiffs in the Class Action Lawsuits argue that the rule is unfair and is sustainable only because NAR controls the market and engages in non-competitive behavior. Plaintiffs urge the court to accept the theory that it is unfair to force sellers to pay a broker who advocates against the seller’s interest by representing the buyer of seller’s property. NAR counters with a variety of good arguments including the fact that buyers who are dependent on financing to complete the purchase rarely have funds available to compensate their own broker. NAR would assert that its policy is consumer friendly because it ensures that buyers are able to gain representation in home purchases. Because seller pays buyer broker’s compensation from seller proceeds, there is no doubt that buyer indirectly funds the compensation to buyer broker but buyer’s lender is not involved in the process.
The plaintiffs assert that the anti-trust conspiracy that allegedly begins with the NAR policy to compensate a buyer’s broker includes pressure on sellers to offer buyer brokers a certain rate of compensation. Even though no specific rate is expressly required, plaintiffs argue that if compensation is not offered in a certain amount, buyer brokers will not show seller’s property. Thus, plaintiffs assert, the NAR requirement to compensate buyer brokers results in a conspiracy between NAR and the other defendants that forces sellers to pay what the plaintiffs describe as excessive compensation, if sellers want to be viable in the market. It is too early to anticipate how any of these arguments will be resolved judicially.
As a side note, there was a companion lawsuit filed by a group of buyers asserting that they paid excessive purchase prices in order to fuel the compensation offer that sellers were required to make for the benefit of buyer brokers. That case was dismissed, but it was dismissed in a way that allows the buyers to re-file the lawsuit, asserting the claims differently. It is anticipated that the industry has not heard the last of the claims asserted by the buyer plaintiffs.
Regulatory Review.
The Department of Justice (“DOJ”) is investigating the National Association of REALTORS® and has been doing so since before 2020. In 2020, a settlement was reached between DOJ and NAR but with the change in presidential administrations, the settlement was revoked by DOJ. There are legal wranglings that will impact whether the settlement is enacted or revoked but regardless, the industry will see change as a result of the DOJ investigation. At a minimum, here is what we know about the issues of concern to DOJ.
Multiple Listing Services should publish the selling office compensation for buyers to see.
DOJ wants buyers to know, prior to entering a purchase agreement, what the buyer broker is receiving in the form of compensation from seller. DOJ wants that information included in an MLS printout, for buyers to see, so that buyer is given meaningful notice of the seller’s offer of compensation before buyer writes an offer.
Brokers should not state that broker services to buyers are “free”.
DOJ wants real estate brokers to stop advertising or claiming that brokerage services to a buyer are “free” to the buyer or in any way asserting that buyer gets the benefit of a real estate broker at no cost to the buyer. Since seller funds the buyer broker’s compensation from the proceeds of sale, the purchase price buyer pays for the property is related to the compensation owing from seller to buyer’s broker. Even though buyer broker’s compensation comes directly from seller, DOJ is offended by industry members leading buyers to believe that buyer has no role in paying broker’s compensation.
Brokers should not filter listings by the amount of compensation offered to a buyer’s broker.
DOJ believes that multiple listing services should prevent buyer brokers from filtering listings by the amount of compensation offered to a buyer’s
broker. DOJ wants to see an MLS scenario where buyer brokers are required to expose available properties to buyers, regardless of the amount of compensation offered from seller to buyer’s broker.
Non-MLS members should be given an opportunity to show and sell seller’s property.
DOJ recognizes that there may be brokers, who are not members of the MLS that lists seller’s property, who represent potential buyers for seller’s property. DOJ believes that those brokers should be allowed to introduce their buyers to seller’s property, even if seller has no obligation to compensate those brokers through the MLS.
Internal Market Pressures.
Finally, there are industry members who practice real estate sales in non-traditional ways, who believe they are victims of anti-competitive behavior related to topics such as policies that discourage pocket listings and the way MLS listings are displayed. Other industry members and critics take issue with dual agency, arguing that a broker cannot adequately serve either party if broker is a dual agent.
All of these industry pressures should be considered as the Washington real estate industry considers its future. Our industry will see change... will it be change that we proactively initiate or will it be change that is imposed on us through judicial and/or regulatory decisions?
As we consider this issue, it is important to remember that NWMLS services more than half the brokers licensed in Washington State. NWMLS is member-owned. It is not owned by a local REALTOR® Association and thus, NWMLS has the ability to make rules changes beyond those allowed by NAR. NWMLS saw some of these issues coming and in 2019, made a rule change, eliminating the requirement for sellers to offer compensation to buyer brokers and publishing the amount of compensation offered to buyer brokers in the public section of the listing printout. Since that rule was changed, the difference in compensation offered by sellers, to buyer brokers, generally, has been negligible. In other words, the compensation offered by sellers to buyer brokers was largely unaffected by the change in MLS policy.
More recently, NWMLS announced a new set of rules changes and revisions to the statewide forms that are geared toward increasing transparency related to compensation offered from seller to buyer broker and creating a more buyer-friendly platform for negotiation between buyers and brokers regarding the compensation paid to buyer broker. Those rules changes and forms revisions take effect October 3, 2022.
The industry is poised to listen to the concerns expressed by plaintiffs, regulators and other industry members and create change that will be positive for consumers and industry members. If the industry fails to act, change will be dictated to the industry rather than emanating from the industry. To this end, the Washington REALTORS® president, Cheri Daniels, has formed a Presidential Advisory Group to advise the Association regarding recommended actions. Subsequent articles in this series will describe the progress of that advisory group, the pending litigation and regulatory review and other issues that members of the Washington real estate industry should consider as we create the evolution that will shape our industry for generations to come.