The real estate industry on trial

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0:27Maybe you've already heard of all the drama going down in the real estate industry lately. How there have been all of these lawsuits about how realtors get paid. The big one in the news, Burnett versus the National Association of Realtors. Today, we've got the behind the scenes story of what went down. It starts in 2019 in Missouri with a lawyer named Mike Ketchmark. What I'm picturing is you at your desk, like a shingle out front, you open the door and a bell rings and somebody walks in and is like, have I got a case for you? Is that what happened? It was my cell phone that went off, and one of my really good friends in Kansas City is a lawyer, Brendan Boulware, and he called me on a Monday and said, hey, can I stop by your office and talk to you about a case I want to get you involved in?

1:13And I said, sure. Now, Mike was maybe an unusual choice to work on something like this. He doesn't know anything about real estate law. He's actually a personal injury lawyer. I represented families, usually in wrongful death cases, where somebody had lost their life because of a tragedy of a product or a work-related tragedy. The friend wants him on the case because Mike is great in front of a jury. He's got this folksy charm about him. He uses football and barbecue metaphors. And he'd won these huge verdicts, one for the widow of a truck driver who was killed on the job, and another against a corrupt pharmacist and a handful of pharmaceutical companies.

1:51So the lawyer friend drops by Mike's office and pitches him the case. He just explained it and told me the story of this couple in Kansas City, Rhonda and Scott Burnett, who had bought a house. And when they went to sell it, they got charged a commission. And they didn't understand why. Scott and Rhonda sold a house that they owned for$250 ,000. And out of that amount, they paid about$15 ,000 in commission that got split between two real estate agents, One who represented them, helped them list and show their home. And one who represented the buyer, the real estate agent on the other side of the transaction.

2:29And Mike's lawyer friend is like, sure, this is how selling a home in the U.S. usually works. But it is also kind of weird. Rhonda and Scott were essentially paying for both sides on the sale of their home. A seller's agent and a buyer's agent who were both incentivized to get a high commission. kind of maybe seems like a conflict of interest. A conflict of interest that most people never really question. And I'm like, well, this is how people buy and sell houses. I guess I just never thought about it. And it made me feel kind of dumb. Because I thought, well, why didn't you know that? Another problem for the Burnetts was just how high that commission was.

3:12So back when they first signed some paperwork to sell their house, they were given a choice of what to pay their real estate agent. They could pay 6 % or 7 % or 8 % or 9 % commission. These are like these little boxes that they can check on the paperwork. And Rhonda is like, yeah, I'm going to pick 6 % commission so I pay less. She then asks her realtor if she could negotiate an even lower rate. And the agent says no. Yeah, 5 % to 6 % commission is kind of the going rate in the U.S. It's worth pointing out that this is really high compared to most other countries, where it is also way less common to have agents at all who represent buyers.

3:52Now, Mike's lawyer friend, he says, look, the way commissions work in real estate in this country, it isn't just peculiar, it's illegal. So Mike agrees to take a closer look. I started looking at this and taking into it, and I was stunned. And I just couldn't believe it. Mike was like, it does look like something illegal happened here. You know what? I'm in. Hello and welcome to Planet Money. I'm Amanda Oronchik. And I'm Keith Romer. That case that Mike had just signed on to would soon become a much bigger fight. A fight about the way homes are bought and sold in the U.S. at a time when home prices seem like they just go up and up.

4:37A fight about how real estate agents have done business for more than 100 years. Today on the show, how a personal injury lawyer teamed up with a bunch of Missourians to radically change the housing market.

4:56This message comes from LinkedIn ads. One of the hardest parts about B2B marketing is reaching the right audience. That's why you need LinkedIn ads. You can target your buyers by job title, company, role, seniority, and skills. All the professionals you need to reach in one place. Get a$250 credit on your next campaign so you can try it yourself. Just go to linkedin.com slash nprpod. That's linkedin.com slash nprpod. Terms and conditions apply. Only on LinkedIn ads. Scott and Rhonda Burnett, the couple that Mike Ketchmark had agreed to represent, did not like how things had gone down when they sold their home.

5:35They especially didn't like the part where 3 % of the proceeds from the sale had gone to the real estate agent who represented the buyers, the people who bought their home. But for a court to consider this illegal, Mike was going to have to prove that there had been some kind of conspiracy between agents on the seller's side and agents on the buyer's side to keep that commission high. There's a law, it's the Sherman Antitrust Act, that says that you cannot join with competitors to follow a system that's designed to inflate or stabilize prices. Mike starts digging, and pretty quickly it becomes apparent to him that what had happened to Rhonda and Scott Burnett wasn't just some isolated case.

6:18They were not the only ones who had paid an inflated fee and didn't really seem to have much choice about it. We started investigating this and saw that this was happening statewide in Missouri. And it was a system-wide practice, so we decided to expand the class. Within months of joining the case, Mike and the team expanded it to a statewide class action representing 500 ,000 Missourians. And they weren't just going to sue the two companies that had worked on the Burnett's house sale, but all told, four of the country's largest realtor franchises, companies like Keller Williams and Home Services of America, and also the National Association of Realtors.

6:59I had never heard of the National Association of Realtors. And when I started looking into it, I thought, wait a minute, they're the largest lobbyist in the country, bigger than Big Pharma, bigger than the NRA, than all of these organizations. And the answer is yes. The National Association of Realtors has over a million and a half members. It is the biggest professional organization in the country, and it sets standards for the industry. They even trademarked the word Realtor, TM. him. And there's this one moment early on when Mike starts to realize just what kind of behemoth he's up against.

7:34He dialed in to this routine call to figure out some scheduling issues with the defense. And I remember at one point in time, there were 123 defense lawyers on the phone. And I just thought, man, what have we done here? It's possible that Mike is exaggerating here, but... But a lot of lawyers in any event. Definitely, yeah. Definitely more lawyers than what Mike has at his law firm, where there are four. Mike, Mike's best friend, Mike's son, and a lawyer named Ben. To Mike, a gabillion lawyers, that was a sign. The other side was scared. You know, I'm a trial lawyer, and in a lot of ways, I feel that sometimes these corporations bring a briefcase to a good old street fight, and that's what jury trials are.

8:20Jury trials, the street fight of lawsuits. Now, unlike most corporate litigation, this was not going to be quietly sorted out behind closed doors in arbitration or settled between the parties in a judge's chamber somewhere. Mike was determined to make his case before a jury. Remember, that is why his lawyer friend tapped Mike in the first place. Mike knows how to work a crowd or, you know, a jury. So as Mike and his team get their arguments together, they practice and they do this in front of mock juries made up of real people. We'd pull 24 people literally just kind of off the streets and we would present the case.

8:58I'd put on the plaintiff's side. Some of the lawyers I was working with would put on the defense side. We'd give them the jury instructions and we'd watch them deliberate. Mike says that they ran these mock trials 18 separate times. This is where Mike would try out his Americana-laced metaphors. I said, look, I live in Kansas City. I'm a huge fan of the Kansas City Chiefs, world champions. And I said, when the Kansas City Chiefs host the Denver Broncos, we don't pay for their coach's salary. When you sell your home, why are you paying the buyer's agents? Mike's argument to those mock juries was that the high commission being paid to the buyer's agents, that had become baked into the way houses are bought and sold.

9:42It was at the very heart of this price-setting conspiracy. Mike explained that most homes for sale in the U.S. are posted on databases called multiple listing services. Consumers can usually search these databases, but they can't post a listing of a house for sale. Only realtors can do that. There are about 800 of these databases for different markets across the country, including one around Kansas City. When you logged into that, it would list every house that's for sale in Kansas City. You pull it up and you see 7 ,000 houses that are for sale. you would see that these are the houses, if you're on the buyer's side, that you're going to get paid a 3 % commission on.

10:18This is a rule. Real estate agents listing a home on one of these databases have to post how much commission they're offering. Commission that will go to the real estate agent on the other side of the transaction, the agent representing the buyer. It's been like this for decades on the MLS. It had been a platform for collusion before. It had been this vehicle for agents who represent the sellers and agents who are representing the buyers to kind of know pre ahead of time what the commission was going to be. Mike explains all of this to the mock jury and he says, here's where things get a little thorny.

10:54Imagine an agent lists a house on the MLS and posts that this sale comes with a 3 % commission for the buyer's agent. Great. All of these agents are going to bring their clients to come see this house. But what if the agent posts a listing offering a low commission, like more like 1 %? The incentive all of a sudden for buyer's agents to show that house becomes much less. Mike says he could tell that the mock jury was totally buying his arguments. I'm like, they get it. They understand. They get it. Mike says that posting the commission on a database can lead to what is known as steering, where agents steer their clients away from homes with low commissions to homes with big commissions, where they're going to make a lot of money.

11:41So when people want to list their homes for sale, their agents push them to offer a big commission, usually that 6 % number, to ensure that buyer's agents show their house, bring in potential buyers. But the problem with that, Mike says, is that it is anti-competitive. Real estate agents, we should say, disagree with this characterization. Back in October, Planet Money's daily podcast, The Indicator, spoke to Ron Phipps, a former president of the National Association of Realtors. Ron is also a realtor, TM, and he says, imagine you were looking to buy a house. If you were to come into my office, we would sit down and have a conversation saying, these are the services I'm going to provide.

12:20And we're going to have a conversation as to what the nature of my fee structure is and what my compensation structure is. And if we come to terms and say, look, it is X amount. When I start searching, I'm going to show you everything in the market. Ron says he's going to show you all of the houses, the ones where he would get the usual 3 % commission and the ones where he'll make much less, like 1 % commission. He says he is not going to steer you away from the homes where he gets paid less. Also, he says it makes sense to take commissions for both the seller's agents and buyer's agent out of the sale price of the home.

12:54because buyers are usually so stretched financially, they wouldn't otherwise be able to afford to pay an agent. And Ron says the service agents provide is really valuable. He thinks it is worth it to have someone like him help you when you're trying to make a big purchase like a home. It's not like picking a car or picking a meal. It's a significant permanent investment, but you really want to have that expert, trusted advisor's advice. So in a nutshell, those were the realtors' arguments. The trial began last October. It took place in a windowless federal courtroom in Kansas City, kind of like the sort of room you'd see in a TV drama.

13:33And when personal injury lawyer Mike walked in, he said there were an uncountable number of defense lawyers on the left and on the right, a table for three. Him, his partner, and the man who brought on the case in the first place. Over the course of two weeks, both sides make their cases. Mike says, in his opinion, the realtor's arguments kind of missed the point. They defended this case by saying, well, you know, but people were happy when they sold the house. But Mike was like, this isn't about the quality of the service. It's about collusion, whether or not the real estate agents were getting together and agreeing on prices, which is bad for consumers.

14:11Now, Mike, he did not want to do some long, boring explanation about how competition works. He wanted to use an example that the jury could relate to, like buying chicken for a barbecue. The way I described it to the jury is, if you think about it, like if you have five companies that are chicken producers, they can't get together and say they're going to charge$5 a pound on chicken. It's just against the law. It's collusion. Mike says the same rules apply to realtors, no matter how happy their customers might be. Well, that's like saying people at my barbecue were happy because the chicken tasted good.

14:47That doesn't matter, right? I mean, like, you can't do that. It's not the free market. Next, Mike went after the argument that clients could always negotiate their agent's commission. You know what's even more compelling than a folksy metaphor about barbecue or football? A startling piece of video evidence. On the second day of the trial, Mike played a video featuring the CEO of Home Services of America, a guy named Gino Bluffari, at a presentation training realtors from different companies to insist on a 6 % or more commission. For example, one home seller saw that I had written in a 6 % commission into the contract and would ask Gino, aren't commissions negotiable?

15:30I would always answer confidently, yes, commissions are negotiable, but I can only go up. Then Mike played a video of his deposition with Gino Bluffari. asking about this training video. Do you believe it's appropriate to get a group of competitors in the real estate industry together and tell them to write 6 % in on the commission line and then to tell the buyer it's negotiable, but it only goes up? Do you believe that that's appropriate? It's a generic training. Okay. Okay. Well, I don't think whether it's generic or not, it's not my question. I'm asking you if it's appropriate. Mike dropped the real shocker on the seventh day of the trial.

16:08a video clip of a podcast interview with Alan Dalton, head of Real Living Real Estate, explaining his best practices for keeping a big commission. This is the only technique that I know works every time. Yeah. In this video, the CEO says he learned this technique from one of his top realtors. She had a client ask her to reduce her commission by$10 ,000 at closing. But she did not want to take a pay cut. So she used the tried and true technique that she had been using for 40 years. You might want to write this down if you have your iPhone. First of all, the technique is profanity-laced, but I'm not going to use any of the swear words because I'm not going to end my career today.

16:48Here's a technique. There's no bleeping, bleeping way I'm going to cut my bleeping, bleeping commission. What do you think? I'm a bleeping, bleeping hooker standing outside the Lincoln Tunnel at 3 o 'clock in the morning giving bleeping, bleepings to sailors? If you think I'm going to cut my bleeping, bleeping commission, you can take this home and shove it up your bleeping, bleeping, and I know that it will fit, right? Did everyone get that? Oh, yes, I think everybody heard him loud and clear. When this played in the courtroom, people were like, oh. The Realtors' side said that not only was this video totally vulgar, it wasn't even on the exhibit list.

17:31So they tried to get the judge to declare a mistrial, but motion denied. It's a smoking gun. It's like you're accusing somebody of robbing a bank and you got a video of them doing it. But Mike's argument wasn't just that realtors were refusing to negotiate on commissions with their customers, but that there was collusion that seller's agents and buyer's agents were working together to ensure high commissions. You know what's even more compelling than folksy metaphors and vulgar videos? data. Data. Data that they said proved that the realtors had colluded. Mike's team had hired an economist who looked at homes in the Kansas City area that had been sold by three big realty companies, thousands and thousands of transactions.

18:16And he was looking to see what commission was being given to the buyer's realtor. Now, in a truly competitive market where people are negotiating back and forth, you would see a range. 1 % commission, 2%, sometimes 4 % commission. But that is not what was happening in Kansas City. To help drive home the point, Mike puts up a chart of the economist's analysis. It was a very visual image. If it's a randomness to it, you would expect on a chart like all these dots all around. But because it wasn't, it was a single bar graph. It was basically one red line, practically all the dots right there at 3%.

18:53In almost every sale over seven years, in fact, in 92.6 % of the home sales in Kansas City, the realtor representing the buyer was getting the exact same commission. 3%. 3 % of the total value of the home. The economist told the jury that this was one of the clearest cases of collusion and price fixing he had ever seen. The prices were so stabilized that that's exactly what the commissions were. And the chances of that happening without collusion was almost zero. Then Mike's team presented evidence that this wasn't happening only in Kansas City, but also in other markets across Missouri, Columbia and Springfield.

19:32And each of those individual markets had their own data. And in each of those markets, they saw the same thing. A commission rate was basically fixed. Finally, both sides had finished calling on their witnesses and presenting all their evidence, vulgar and otherwise. And Mike turns to the jury to make his closing argument. What I told the jury was that they had the chance to hit the reset button on the housing market. And that they had the ability and the power to say, follow the law. Don't collude with your competitors. Don't fix and set prices to benefit you. On October 30th of last year, Mike wraps up his statement.

20:11The realtor side says their piece. And then? The jury goes out and then you sit there and you get a pit in the bottom of your stomach because they're literally just answering five questions. It's like, you know, question number one, do you find that there is a conspiracy? And then they answer yes or no. If it's no, the case is over. The four and a half years that Mike and his team had spent preparing for this trial, everything hinged on the jury's decision.

20:40Coming up after the break, the jury returns with their verdict. An update on where things stand today and what this all might mean for you as a consumer.

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23:01The line that stayed with me is she said, he made you feel like you were joining a special club. And that kind of speaks to why the crime worked. In our latest bonus episode, my conversation with Emily St. John Mandel. You can check that out now if you're a Planet Money Plus listener. If that is not you, it could be. You get bonus content, sponsor-free listening, and you get to support our work. Just go to plus.npr.org. After two weeks at trial, Mike and his team sit at their table for three and wait for the jury's decision. Mike's parents, a bunch of his cousins are also there, sitting behind him in the gallery.

23:41Finally, after a couple of hours of deliberating, the jury comes back into the courtroom to present their verdict, their answers to a series of questions. Was there a conspiracy? Did you find that these defendants engaged in it? Did you find that it harmed the plaintiffs? The jury says yes, yes, and yes. And then the final question, how much in damages is owed to the victims? And they awarded to the penny what we asked for. How much were you asking for? $1.8 billion. The amount of commissions that were taken that they shouldn't have had to pay. $1.8 billion for the 500 ,000 Missourians who recently sold their homes.

24:21Now, one interesting thing about antitrust cases is that they sometimes fall into this category of cases where the law says the penalties should be more than just a refund of what is owed. Under the law, it's called trebling damages. under the antitrust laws, you automatically triple that amount. So it's going to be tripled to$5.4 billion. Mike, is this the biggest case you've ever done? Oh, yeah, by far, hands down. By far. Yeah, can't compare anything else to it. In the months that follow the verdict, things went from bad to worse for the National Association of Realtors and the big real estate firms.

24:57In addition to the Missouri case, they were soon facing more than a dozen similar lawsuits with similar sets of facts in a bunch of different states. And Mike, he has been working to expand the case, this time from Missouri to the entire country. Mike knew that the damages the companies and the NAR owed were so large that they could go bankrupt. And he says that this case, it wasn't just about the money. The people he was representing wanted to change the whole system. So with all of that in mind, Mike went to the NAR with an offer. You can either go on appeal. If you lose it, we'll collect this money.