A Stunning Lawsuit Could Change How Realtors Get Paid

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1:10Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Weisenthal. And I'm Tracy Alloway. Tracy, we've been doing a lot on competition stuff lately. Yeah, we really have. Let's see. So we spoke with Lena Kahn from the FTC recently. Before that, we spoke to the DOJ's Jonathan Cantor. So it feels like we've been making the competition rounds. Right. We've talked a little bit about chicken, too, in a few episodes. But competition, more broadly, is a good lens to really learn about market structure across a range of industries. Because every industry is different and every industry has different centers of power and people who have information, people who extract rents from that information.

1:52And so just in terms of, I don't know, sheer curiosity about how different businesses work, the sort of competition lens I find to be very useful for getting to know it. Oh, absolutely. And it's one reason why we keep asking people from the FTC and the DOJ how they actually do their research and learn about industries. But I would say, aside from that benefit, which is a major one, it does feel like there is this kind of groundswell of antitrust pressure, or there's more of a examination of anti -competitive practices nowadays. And it does feel like maybe the winds are shifting a little bit towards the consumer, perhaps given the macroeconomic background.

2:36You know, we've seen a lot of complaints about inflation, higher prices, obviously. Feels like companies are in some respects getting more savvy about what they're charging people. But then you also have companies or industries that have kind of been doing the same thing for a long time. But now people are looking at it more critically. Yeah, absolutely. That's very well put. But it does feel like across the economy, you see this a lot where something has been the norm for 30, 40, 200 years. And then for whatever reason, maybe there's more data, maybe social media, maybe something. Suddenly people wake up and say, wait, is this fair?

3:15Is this right? Is this optimal? Is this a good system? I think we see it a lot in medicine for sure where people are like, wait, this is how it works. But, and again, you know, I mentioned we've been doing a lot on competition. We've also been doing a lot on housing. Yes. And so this is going to be an episode that is sort of a merger. Let's put the two together. Let's put the two together and talk about competition and housing. Yes. So I'm sure listeners have probably seen some headlines floating around about a recent federal civil case called the Sitzer Burnett case. It was basically a civil lawsuit, and it found that the National Association of Realtors plus two large brokerages, I think they were called Keller Williams and Home Services of America, conspired to keep commission costs artificially high.

4:04And the jury awarded Missouri home sellers something like$1.8 billion, but I've read that a judge could, in theory, increase that to damages of as much as$5.3 billion. And this has kicked off a huge discussion about the future of the real estate industry, which has historically made its money from these commissions, at least on the brokerage side. You summarized that very well. That was really good. And this gets to something. There are many aspects of real estate brokerage that I just don't really understand. I don't really get what multiple listing services are. Yeah, I'd never heard of that before.

4:41I knew. I mean, I was familiar with these databases. I don't really get who owns them. I know that access is very restricted. I don't totally understand. So I know you have a buyer's broker, but then also you can go on Zillow and find your own house or something like that. At one point when I was trying to buy a house earlier this year, found something on one of the sites, maybe it was Zillow, but then there was this broker who emerged. I don't really get how all these pieces fit together, but I do understand that if you have access on some level to this infrastructure that is very valuable. Well, here's the thing.

5:16It's one of those costs that is substantial. I think the average is something like 5 % to 6 % commission on a home sale price. But because it's so baked into what both sellers and buyers are paying, it's never really broken out. I think people don't think about it that much. It's just incorporated into the overall cost of either buying or selling a house. But now people are starting to examine it more closely and say, well, wait a second, how is this all working? What are the incentives here? And why has the average commission been so remarkably stable across literally a century, I think? So many questions that we need answers to, because setting aside this one civil case in Missouri, I don't think anyone knows how it's going to change the industry.

6:08If it'll change the industry, we don't know the damages. There are certainly going to be appeals for these types of things last for years and years, I think. And so I don't think anyone really knows where it's going, but it is a good moment to maybe back up and get an understanding of the market structure here and what could potentially change. Yeah, let's do it. Okay. I am very excited. We have the perfect guest, Andrew Ghent. She's a professor of finance at the David Eccles School of Business at the University of Utah, specialist in this area. So Professor Ghent, thank you so much for coming on OddLot.

6:41Thank you so much for having me on the show. Absolutely. How do brokers get paid? I buy a house. I go on Zillow. I find something. I see a bid. Seems cool. Somehow I come to an agreement. It all seems baked in. How are individuals getting paid in that transaction in just the sort of standard case? You have the basic intuition, right? You buy a house and the seller agent and the buyer's agent, they're going to split the commission. And before you even approached anybody, that was set in the listing contract. So it will say in the listing contract, five or 6 % typically, and that will be split evenly between the selling agent and the buying agent.

7:24So it's baked into the home price right now. You know, for a very long time, National Association of Realtors effectively instructed its agents to tell buyers it was free. So you may as well work with an agent because it's free. And of course, I think a couple of years ago, they finally backed off that. So it's no longer claimed to be free. But you're absolutely right, Joe. It's baked into the price of the house. So just before we dig in further into commission structures, can you walk us through all the various lawsuits that seem to be floating around at the moment? because I mentioned the one that's gotten the most headlines.

7:58So the Sitzer Burnett one. But there are other things out there. There's a Gibson case in Missouri. I think I saw a headline about apartment brokers in New York also being sued. And I guess I'm curious, like why these are coming up as civil lawsuits versus something more federal or, you know, like more targeted from the DOJ or something like that. I think the DOJ did have some sort of settlement with the National Association of Realtors a few years ago. But walk us through what this landscape of ever-multiplying lawsuits, it seems, actually looks like right now. This has been going on for some time.

8:36And the puzzle you alluded to earlier in the show about why has this stayed sticky? We've had this technological advancement where 30 years ago, it wasn't super feasible for you as an individual consumer to go and find a home online and effectively, all the technology hasn't translated to lower prices for consumers. And I don't have a good answer for why now, except that we've had this longstanding affordability crisis in the US that sort of came to a head with COVID. So COVID, because it increased residential demand so fast, we saw this big increase in home prices and supply hasn't had a chance to catch up.

9:15And so I think that might be why there's a little bit more openness to sort of thinking about this. But you brought up rental agents, but the other lawsuit we're seeing is one about RealPage and the software for rental housing, where again, it's like, are the landlords colluding here by using the same software and providing data to basically extract the most they can from renters? So that's my best guess. I think the FCC does have lawsuit against realtors as well. But that's my guess. It has been a long time coming. You know, I have to say, I was very happy to see the Burnett sister case because I think it's a bit outrageous to force consumers to pay this price.

9:56And I want to get into another sort of maybe more hidden cost of being forced to hire a realtor, which is what sort of incentives they have in terms of your portfolio by being forced to work with a full service broker. Right. So I assume that given the way these commissions are set, where like the selling agent will split the commission with the buying agent, I assume that means that buying agents are incentivized to push the listings that have a higher fee, right? If someone is offering them like 1 % instead of 2.5%, they're probably not that interested. They're probably not going to be pushing that property as much to buyers.

10:36For sure. There's very few in practice of commissions that are really in the 2 % range for combining the buyer and the seller. I think the more concerning part to me is that a full service agent has an incentive, first of all, to always get you to buy. That's kind of obvious because they get paid as a percentage of the house. But they also have an incentive to put you into the most expensive home you can qualify for a mortgage for. And this is actually the bigger concern to me because having all of your assets in one asset that actually has a lot of not diversified risk is actually not great from a financial portfolio perspective.

11:16So for the average household, the vast majority of their wealth is in their house. And you might not want to be in a house that is taking up 40 % of your income to pay the mortgage. and maybe a smaller house might be a better fit for your portfolio because then you have a little bit more money to put into stocks and bonds and maybe some private equity. So that's actually my bigger concern with the current structure is that it's very hard to get a flat rate service right now with a buying agent. I want to make clear, I think a lot of buyers may benefit from the expertise of somebody to help them buy a house or to help them sell a house.

11:56The structure though, isn't giving me the option as a consumer right now to say, I want to pay somebody a flat rate to show me around, or I want to pay somebody$10 ,000 to show me around and do all the paperwork and also look at how it fits in with my overall portfolio. That structure doesn't exist right now. That's what concerns me most because of the listing agent having it put in the contract. So how the buyer agent is going to get compensated is determined again before you even walk through the door. So wait, let's just say Tracy and I wanted to become buyers agents, buyers brokers. And we said, you know what, we're just going to charge by the hour.

12:38And it doesn't matter whether you buy a$2 million house. It doesn't matter whether you buy a half a million dollar house. This is our hourly fee. We'll take you around, et cetera. Is that possible under the current structure? Could we even enter the market with such an offering? It's technically possible, but then it's almost impossible to do, though, because the way buyers are going to perceive it. In addition, they're going to get compensated this, you know, two and a half or three percent of the home value. And so very few buyers are going to be willing to pay that given right now they're looking at a market where they don't have to come out of pocket.

13:13And again, that additional two and a half, 3 % is already baked into the value of the house. And so I think it'd be very hard to convince a buyer of the value of their services. What if we said we're going to remit that 3 % to you, you get cash back? It's a good question because there is a company called Homie here in Utah that's been trying to do that. And the Utah Association of Realtors have made it very hard for them to actually run a competitive business model with that. There are some companies around the country that have tried that to try to remit. I think Redfin might have that model where they're trying to remit some of that brokerage commission to the buyer exactly to try to.

13:53So some buyers who are like, I don't really want to pay the full 3%. And it sort of depends on how powerful the realtors lobby is in various states, the success these companies have had with this.

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15:33Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. So you mentioned expertise of realtors earlier. And my understanding that this is, without being mean to the thousands of realtors across the country, this is a point of contention.

16:13And one of the arguments is that, well, the fee, the commission basically remains the same across all different types of realtors of varying skills who might put more or less time into either buying or selling your home. So I guess the question is, how valid is that criticism? How difficult is it to buy or sell someone a house, particularly in this market? I think the answer is that there's huge variation in the quality of realtors. And what services do you want as a home buyer? You can't unbundle them right now. I know in my own case, I basically have the house picked out by the time I go to it.

16:56Like with the realtor, I'm basically having to pay somebody a huge amount of money to fill out some paperwork. I could have either done the paperwork myself or hired a real estate attorney for a couple thousand dollars. Typically, they're going to put a second year associate or something. It's not complicated paperwork for most residential real estate transactions. And I do think it's very costly to get a bad realtor because, again, these are ones that are especially unlikely to understand the risks of the home. Home ownership is really, really risky. And I think people underestimate that, maybe especially with recency bias, if you bought a home in the last five years, you've done phenomenally well.

17:37And people somehow have forgotten what happened if you bought a home in 2005 in Florida. So home prices do go down. And individual homes often have, every home has defects. But what does it take to be a realtor? In most states, you have to have a college degree in some field, some sort of college degree and either, you know, somewhere between 50, 70, maybe even a hundred hours of online training, but half the online training tends to be like propaganda from the National Association of Realtors on why it's terrible to work without a realtor. You know, so I do think there are nuances of buying a home and it seems scary.

18:15I think, especially for first-time home buyers, right? There's this huge sense of like, what if it goes down? And what if I missed like a leak in the ceiling. And there's, you know, I think when you've done it a few times, you're like, oh yeah, old houses have leaks. Tell me about it. That is just part of the deal that there's a lot of maintenance costs that you won't foresee, but it is scary. And I do think there are some downside risks that working with a realtor, you know, a good realtor can help with. And good realtors also, you know, they view their customers more as sort of a long-term relationship and they know they're going to get business from word of mouth and they'll help you with a lot of little things.

18:54But what I would say, Tracy, is it's not hard to get your realtor's license. That is a true statement. How hard it is to sell a house or buy a house, that is a sort of, it varies by agent and it varies by individual consumer as well. So I want to talk more about why it is that the rise of sites like Zillow, Redfin, et cetera, haven't actually had the effect of cutting out the brokers who make a lot of money. But before we do, can we just talk about for a minute the specifics of the Sitzer Burnett claim? What was actually alleged here in terms of what the plaintiffs deemed to be anti-competitive or unfair about how the market is structured?

19:35And I think also a couple of the brokerages had already settled out of court and weren't affected. But just walk us through what what really this was about yeah so this is a group of individual home sellers okay okay and what they're alleging can i just tack on i don't understand why damages were awarded just to the sellers and not to the buyers as well who would be i mean they're paying the sellers by paying for the house and the cost is incorporated in the purchase price yeah so it's a good question the buyers were not part of the suit right so this is a class action suit and the buyers are not part of the party to suit.

20:11So I think they don't have standing. Tracy, that would be my understanding. And technically, in terms of the actual pecuniary cost, it is sellers that are paying it. You're right. Who actually paid for the higher house price to compensate the sellers? It's the buyers, but they're not part of the suit as far as I understand. I feel more class action lawsuits might be coming on behalf of buyers. Yeah. I mean, I'm actually really happy. It's hard to imagine spending this much time on a case, right? When it's 20, 30 ,000 or something. It's not a huge amount of money. And it's a lot of time in the seller's lives.

20:45But what they're saying is they're claiming it's a restraint of trade. It's a collusion to set the price specifically for the buyer's commission. So the sense is you could negotiate over the overall 5 % or 6%. There's not a ton of negotiating room because oftentimes, because again, there's propaganda in the realtor's course, they'll say, no, I'm not going to even take it if it's a 3 % commission overall. That's how they're sort of taught. But specifically, we haven't heard what the remedies are. And I'm excited to see what the court comes up with with the remedies. But my guess is they're no longer going to be able to mandate in the list agreement.

21:23So basically, the deal, what these home sellers were faced with was, if I want to work with a realtor, and the only way you get your house on the multiple listing service is you work with a realtor. That's sort of a requirement to get your house. So if you can't get your house on the multiple listing service - So this is key. Just as you explain this, explain the role of the multiple listing services within the market infrastructure. It's almost impossible to sell a house without, I don't want to say impossible, but you'd be taking a huge discount because buyers won't even see your house. Even when you go to Zillow or Redfin or some of these.

21:57So Zillow does have a for sale by buyer option, but it's actually shown differently. If you look at the fine print, it's actually shown differently than any contract that is on the multiple listing service. So this is basically information that realtors share with one another. In disclosure states, which is the majority of US states, you can see the transaction prices and you can see the listing prices. And that is a matter of public record. It's actually harder in states like the one I'm in, in Utah or Texas, some of these other what we call a non-disclosure states. In non-disclosure states, sales prices of real estate are not a matter of public record.

22:34What that means is that the only people that have access to that information are realtors through the multiple listing service. So it's not a matter of public record. What's on the MLS is not public record. And so part of the reason that realtors in states like Utah and Texas have resisted going to a disclosure regime is that it takes away their informational advantage, if that makes sense. So right now, even if I could hire a realtor piecemeal to either sell or buy a house, so I didn't have to pay it through this commission structure, it still would make it pretty difficult for me as an individual buyer or seller to figure out the fair market value of my house, either that I'm buying or selling, because I don't have the information, but the realtors do through the MLS.

23:23Got it. So there's obviously been a lot of reaction to this decision on the case. And I've seen so many commentary pieces about what this means for realtors, for the housing market in general. And I suppose you could sum it all up by nothing good for realtors. But a lot of it seems to be going in various directions. So why don't I just ask you the top line question, but what does this mean for the real estate broker industry? So it's a good question. My hope would be is that it forces out some of these very part time realtors that do a couple transactions a year that I think are really not helping homebuyers or sellers.

24:08Because I think those folks are just sort of waiting for good luck, a windfall. That's how they can stay in the industry, even though they're not they don't have a ton of expertise. I do think you'll see commissions come down and I hope you'll see more piecemeal services. The other thing I suspect, we really need to know what the court decrees as remedies, because that's what we haven't seen yet. The hope is that the remedies will be, you cannot, it cannot be the seller that's compensating the buyer's agent, at least not as a commission. People do have worries about that, particularly for first-time homebuyers who are credit constrained, right?

24:43They have limited cash and asking them to come up with another 10 or 15 or even$20 ,000 to compensate a broker. That's hard. But that, I suspect, is going to be the remedy because the particularly anti-competitive part of the case, the allegations are that you're setting the price in advance with no opportunity for the buyer to negotiate. Right. So just on this note, I mean, could the National Association of Realtors agree to some sort of settlement where they do decide to make some changes? Yeah, they've said they're going to fight it, right? So they're going to appeal. Right, they're appealing.

25:18I'm interested to see what's in that appeal. They could settle. But I suspect what they're going to claim is that these laws are largely set at the state level and they're going to say it has nothing to do with the National Association of Realtors. I don't know this for a fact. I'm speculating. The court has been asked to come up with remedies specifically. And so the settlement doesn't really deal with the remedies unless NAR would agree to its various member organizations, these state level realtors boards, you know, that might be an option. But we have to see remedies. We have to see we are no longer going to engage in this practice that has been identified as restraint of trade.