Credit: American Advisors Group | Flickr
Background
In late 2020, the United States filed a lawsuit against National Association of Realtors (NAR) for alleged antitrust violations. The complaint claims that NAR, the leading national association of real estate brokers and agents with 1.4 million members, has endorsed rules, policies, and practices that reduce competition among real estate brokers, to the detriment of home buyers. These measures revolve around the use of multiple-listing services (MLS).
MLSs are private databases containing homes available for purchase in a particular region. These databases offer real-time updates on the area’s property listings. Sellers’ agents add properties to the MLS, enabling other agents to access and view them. Buyers’ agents heavily rely on the MLS to find homes for their clients. MLSs encompass the majority of homes for sale, making it a crucial resource in the real estate industry. Without MLSs, agents would have to resort to less efficient alternatives.
NAR’S Rules, Policies, and Practices
The complaint points out four of NAR’s rules, policies, and practices that have some troubling aspects.
Concealment
NAR-affiliated MLSs are prevented from revealing how much a buyer’s agent earns when their client buys a home listed on the MLS. While a buyer’s agent can view their commission, it is hidden from the homebuyer. This setup might incentivize a buyer’s agent to prioritize higher-commission homes, ultimately leading to higher home prices for buyers. Perhaps equally pernicious is that this arrangement acts as a deterrent to sellers who might consider offering lower buyer broker commissions, further driving up costs.
Misrepresentation
Homebuyers don’t typically pay their agents directly, which can make it challenging for them to notice that they are indirectly sharing the cost of their buyer agent’s commission with the seller. NAR exacerbates this issue by enabling agents to misrepresent their services as free, even though it is not. According to the NAR Code of Ethics, realtors can use terms like “free” in their advertising under specific conditions.
Filtering
NAR allows buyer agents to screen MLS listings based on commission rates. In other words, homes meeting a homebuyer’s criteria might be left out of search results. This practice, known as steering, occurs when buyer agents guide homebuyers away from certain properties by adjusting their options. This is problematic because buyers are unaware of commission offers, making it difficult for them to recognize or object to steering.
Lockboxes
Lockboxes are used to store keys for homes on sale, allowing agents and potential buyers to access them. However, only members of an NAR-affiliated MLS can access these lockboxes. This practice prevents licensed real estate professionals who are not NAR members from showing properties to potential buyers, reducing competition.
Sherman Act
The complaint cites a breach of the Sherman Act. The Sherman Act prohibits agreements or actions that unreasonably limit competition. For example, while some partnerships may restrain trade, it may not rise to the level of unreasonableness. However, practices like price-fixing and market division are outright violations. Violating the Sherman Act can result in serious consequences, including both civil and criminal penalties. Corporations can face fines of up to $100 million, with the possibility of doubling the fine if it gained over $100 million unlawfully.
NAR Settles
On March 15, 2024, after years of litigation with the Justice Department and mounting class-action lawsuits from home sellers, NAR finalized negotiations. The settlement, while not admitting wrongdoing, involves NAR paying $418 million over a four-year period. As part of the deal, NAR will prohibit offers to compensate buyer’s agents on MLSs. Additionally, NAR will require buyer’s agents to establish written agreements with all clients, detailing their fees and services before starting any work. This aims to give homebuyers clearer information.
When the settlement was announced, NAR stated that continuous litigation “would have hurt members and their small businesses . . . while there could be no perfect outcome, this agreement is the best outcome [it] could achieve in [these] circumstances. It provides a path forward for [the] industry, which makes up nearly one-fifth of the American economy, and NAR.”
While it is still too early to predict the precise impact on the home buying and selling process, some commentators anticipate more complex negotiations. For instance, buyer’s agents might switch to flat fees or hourly rates, or even charge per showing. With these changes starting in mid-July 2024 and potentially resulting in lower agent commissions for both buyers and sellers, it’ll be interesting to observe how this sector of the economy will evolve.
*The views expressed in this article do not represent the views of Santa Clara University.