Classes and Education

Commissions Lawsuit Impact on the Real Estate Industry

December 22, 2023
Classes and Education

Commissions Lawsuit Impact on the Real Estate Industry

December 22, 2023
Classes and Education

Commissions Lawsuit Impact on the Real Estate Industry

December 22, 2023
Classes and Education

Commissions Lawsuit Impact on the Real Estate Industry

December 22, 2023

Steve Brobeck is a Senior Fellow with the Consumer Federation of America and served as the executive director of the Consumer Federation of America from 1980 to mid 2018.

Mr. Brobeck is a guest on the NAEBA podcast, Listen Up Home Buyers! He talks about the impact of the October 2023 lawsuit and verdict that could reshape the real estate industry in America.

Transcript of the podcast:

Victoria: Hello and welcome to the podcast, Listen Up Home Buyers. I'm Victoria Ray Henderson, and today's guest is Steve Brobeck. 

Mr. Brobeck served as the Executive Director of the Consumer Federation of America from 1980 to mid-2018, and he now holds the position of Senior Fellow, where he has researched real estate issues since the 1990s. 

Steve, welcome to Listen Up Home Buyers.

Steve:  It's great to join you, Vic.

Victoria:  Yeah, thank you. So we have so many things that we could talk about and that we have talked…But the one thing I'd love to talk about today is the Real Estate Agent Commissions, and specifically that recent verdict by the Federal Jury in Missouri, which ruled that the National Association of Realtors and several brokerages had conspired to fix prices by setting a standard where seller pays the listing agent a commission. And that is split with the buyer's agent. And that decision found the defendants liable for $1.8 billion in damages. And of course, this verdict is just sweeping through the country, could dramatically change the real estate industry. So, I'll start with what are your thoughts on the verdict?

Steve:  Well I'm not surprised at all; the jury hardly deliberated at all. When they went into that jury room, they had made up their mind. They spent a couple of hours deciding on the damages. Yes, they decided on 1.8 billion, but in fact, with the trouble damages, the cost to the industry could be over $5 billion. And that is just essentially in the State of Missouri, if you project it out to the whole country, you're looking at awards that would bankrupt the industry two or three times over. But that is not what the industry eventually is going to have to pay.

Victoria:  Yeah. When you heard about this verdict, what did you hope would come from it?

Steve:  Well, essentially, prices have been set by the industry for 80 to 90 years. And what we'd like to see, and what we believe in at CFA is price competition. And we believe that if there were effective price competition, you would see a much more diverse marketplace. The commissions on average would come down. We predicted 3 to 4%, but just as importantly, there would be different rates for different agents. Those that are really good at what they do, have a lot of experience would be able to charge more than those who just received their license. I just in fact, received a sales license in DC, and I do not deserve 3%, you know, for facilitating a sale.

Victoria:  Congratulations. And you're always welcome to join my brokerage if you…We offer a great training program. But the reason that I bring that point up is because you mentioned that 3%, or whatever the commission would be. And you know that you as a newbie; newbies never make their full commission, they're always either working on the team, under the tutelage of, you know, somebody and they should be supervised and should be getting some training.

Steve:  Well, the thing is, yes, maybe they're only receiving one and a half percent. Two reports on this whole problem of training. It's very easy in almost every state for someone to get a real estate license. Yet, this is actually…Practicing brokerage is complicated or it should be complicated and demands a lot of skill and knowledge. And unfortunately, one of our reports documented how incompetent so many agents are. They're often bailed out either by their broker or in many cases they're bailed out by the agent for the other party in the sale. That's just not the way an industry should function. You have to go back historically. 

Back in the 1920s, even earlier, the industry tried to set prices and force all members of the industry to charge the same price. The Department of Justice in the 1940s sued them about that, and they retreated and they made those price schedules voluntary. The Department of Justice sued them again, and they backtracked again. Then they engaged the industry in widespread collusion. Discounters have tried to offer lower rates and they failed. What the litigation tries to do, and what the jury clearly understood the industry is trying to do is, or should do, is to completely separate the listing agent and the buyer agent commissions. And if that's done, there actually is a chance for there to be real price competition, which by the way we believe would help the most confident agents. 

Right now, there's a glut of agents. Our current research shows that nearly half of all agents sold no or one property in the last year, and that essentially then puts huge pressure on the successful agents to continue and maintain the 5 to 6% rates.

Victoria:  I often find, and the reason that many of these newbies don't have sales is because they're working as secretarial duties. They're on teams where they're following people around, and so they won't have a lot of sales. Now, I'm not arguing for…You know, I agree with you there are a lot of agents, and too many, but so many of them are used as support staff. So, I think, you know…

Steve:  That's right. But remember, their aspiration is to be an agent; to sell property and collect commissions. And when they can, yes, some of them, and we've actually documented in the study that we're going to release early next year, but they end up working as admin staff to successful brokers. That's true.

Victoria:  Yeah. Just in the beginning of the month, The Association of Independent Mortgage Experts, they release this open letter, and they're really concerned about the decoupling of the commissions. And the main reason is, you and I have discussed this before about putting additional finances onto the buyer, and specifically they're talking about vets; veterans, and first time home buyers, and they're saying that they could be adversely affected. VA guidelines, they prevent people from being able to finance a buyer's agent. So what we would end up doing in that situation, if it was decoupled, is asking the seller for a credit to pay the cooperative commission or the commission for the buyer's agent. 

And then there’s the issue of the appraisal. What happens if to the appraisal when, you know, if the mortgage industry did end up being able to do this, which I don't think that they're going to agree to, the home value would then be impacted. So what are your thoughts on that?

Steve:  If the industry decided that they wanted to remove those barriers, and I've talked to many people in the industry about this, it could get fixed and it could get fixed without even going to Congress. If, in fact, the real estate industry, and I think the mortgage industry and the consumer groups and housing groups would join them as well and go to the regulators and said, look, you’ve got to tweak these regulations to allow essentially a price competitive market to take place lowering the costs for buyers and sellers that would occur. 

Vic, I have talked to hundreds of realtors over the last 30 years, all of whom I consider to be professionals; they're the full-timers with experience. And quite a few of them complain that the industry will never be a profession until you have professional standards, which would greatly reduce the number of agents and give exclusive buyers like yourself a better opportunity to recruit clients.

Victoria:  I agree with you that real estate standards need to be higher. And I will say that the National Association of Exclusive Buyer Agents, are specific real estate brokers and agents who are consumer oriented with a focus only working with buyers. What is your opinion of exclusive buyer brokerage in general?

Steve:  Well, I'm glad you asked me that question because I am a strong believer in exclusive buyer brokerage. What the exclusive buyer brokers recognize, and I understood this when I first started to study the industry back in the nineties, is they recognize there's a fundamental conflict of interest in the industry. You basically cannot, without exposing that conflict of interest, list properties and sell properties. So you list properties and then you have a buyer. Now, who's your obligation to, is it to the, the sellers whose properties you've listed to show them the properties first? If not, then you are actually violating your fiduciary duty to the buyer. 

And if, in fact, you just honor that fiduciary ability and you ignore all of your listings and look for the property that would best suit the buyer, you're then violating your fiduciary responsibilities to the seller. Exclusive buyer brokerage has recognized that conflict of interest. And so people like yourself  who said, look, we can't really represent both, so we're just going to represent buyers. And I very much hope that in the future, exclusive buyer brokerage will stabilize and grow, and that buyers end up routinely using exclusive buyer brokers. That's my hope.

Victoria:  Yeah, and I appreciate that. With the decoupling of commissions, I am really worried about a couple of people that I'm thinking of that I helped this year. She was scraping money together, borrowing money from parents, and pulling it together. And I got, you know, a condo for her under list price with a 3% seller subsidy to help with closing costs. And I was overjoyed, you know, I was just so elated to be able to do this. This woman would not have been able to pay my co-op, my commission out of pocket. My concern is that, you know, that the unintended consequences of decoupling the commissions could have ramifications that could impact the industry for decades.

Steve:  I think that to preserve exclusive buyer brokerage and to rationalize the market, you're going to have to allow the buyers to finance the buyer agent commission. But what people are talking about right now, and you actually alluded to it ear early in our discussion, is a concession by the seller. And I think that that's what we're going to see as a transitional stage. And that eventually will lead to the mortgage financing of the commission. But that's the way to basically ease this transition.

Victoria:  How is what you're suggesting different from what's already in play? How is it that in this whole scenario the person who, or the real estate agent, and in my case, the exclusive buyer broker who is essentially doing, I think it's well understood that the person who represents the buyer is doing a lot of work. How is it that this person has become the bad guy in this whole scenario? 

Steve:  They're not. Well, they're not the bad guy. I mean, the listing agent is really the one who was discussing the compensation and justifying the 5 to 6%. It's not the buyer agents because we're, with a few exceptions, the buyers and the buyer agents aren't having that conversation. You know, it's true. The system has existed basically for 80 to 90 years, and it functions to the extent that homes get sold and purchase. But the problem is the industry is very inefficient; consumers overpay, or at least quite a few of them, overpay. There's no relationship between agent compensation, or very little relationship between agent compensation and the services that they provide.

Victoria:  As an exclusive buyer broker, I want people to be educated. I want buyers to understand this whole process. And I also know that I can speak for the members of Neva in saying that, you know, we advocate for buyers a hundred percent, we could probably be making double what we make if we did listings and if we worked for buyers, and if we did dual agency and designated agency, but we drew a line in the sand and said, we're not functioning that way.

Steve:  Well, CFA has recognized that for decades, and we commend exclusive buyer brokers who really are trying to offer good value to consumers without the kind of conflicts of interest that exists throughout the rest of the industry. So, more power to exclusive buyer brokers.

Victoria:  Yeah. We appreciate your support. Steve Brobeck, has served as the Executive Director of the Consumer Federation of America from 1980 to mid-2018, and now he holds the position of Senior Fellow at CFA and he's been researching real estate issues since the 1990s. 

Steve, you know, it's such a pleasure to always talk to you, and I'm inviting you back because we've only scratched the surface in this particular podcast.

Steve:  Well, thank you, Vic. 

Victoria:  Thank you.

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Commissions Lawsuit Impact on the Real Estate Industry

By
Victoria Ray Henderson
December 22, 2023
Commissions Lawsuit Impact on the Real Estate Industry
Commissions Lawsuit Impact on the Real Estate Industry
Commissions Lawsuit Impact on the Real Estate Industry
Commissions Lawsuit Impact on the Real Estate Industry

Steve Brobeck is a Senior Fellow with the Consumer Federation of America and served as the executive director of the Consumer Federation of America from 1980 to mid 2018.

Mr. Brobeck is a guest on the NAEBA podcast, Listen Up Home Buyers! He talks about the impact of the October 2023 lawsuit and verdict that could reshape the real estate industry in America.

Transcript of the podcast:

Victoria: Hello and welcome to the podcast, Listen Up Home Buyers. I'm Victoria Ray Henderson, and today's guest is Steve Brobeck. 

Mr. Brobeck served as the Executive Director of the Consumer Federation of America from 1980 to mid-2018, and he now holds the position of Senior Fellow, where he has researched real estate issues since the 1990s. 

Steve, welcome to Listen Up Home Buyers.

Steve:  It's great to join you, Vic.

Victoria:  Yeah, thank you. So we have so many things that we could talk about and that we have talked…But the one thing I'd love to talk about today is the Real Estate Agent Commissions, and specifically that recent verdict by the Federal Jury in Missouri, which ruled that the National Association of Realtors and several brokerages had conspired to fix prices by setting a standard where seller pays the listing agent a commission. And that is split with the buyer's agent. And that decision found the defendants liable for $1.8 billion in damages. And of course, this verdict is just sweeping through the country, could dramatically change the real estate industry. So, I'll start with what are your thoughts on the verdict?

Steve:  Well I'm not surprised at all; the jury hardly deliberated at all. When they went into that jury room, they had made up their mind. They spent a couple of hours deciding on the damages. Yes, they decided on 1.8 billion, but in fact, with the trouble damages, the cost to the industry could be over $5 billion. And that is just essentially in the State of Missouri, if you project it out to the whole country, you're looking at awards that would bankrupt the industry two or three times over. But that is not what the industry eventually is going to have to pay.

Victoria:  Yeah. When you heard about this verdict, what did you hope would come from it?

Steve:  Well, essentially, prices have been set by the industry for 80 to 90 years. And what we'd like to see, and what we believe in at CFA is price competition. And we believe that if there were effective price competition, you would see a much more diverse marketplace. The commissions on average would come down. We predicted 3 to 4%, but just as importantly, there would be different rates for different agents. Those that are really good at what they do, have a lot of experience would be able to charge more than those who just received their license. I just in fact, received a sales license in DC, and I do not deserve 3%, you know, for facilitating a sale.

Victoria:  Congratulations. And you're always welcome to join my brokerage if you…We offer a great training program. But the reason that I bring that point up is because you mentioned that 3%, or whatever the commission would be. And you know that you as a newbie; newbies never make their full commission, they're always either working on the team, under the tutelage of, you know, somebody and they should be supervised and should be getting some training.

Steve:  Well, the thing is, yes, maybe they're only receiving one and a half percent. Two reports on this whole problem of training. It's very easy in almost every state for someone to get a real estate license. Yet, this is actually…Practicing brokerage is complicated or it should be complicated and demands a lot of skill and knowledge. And unfortunately, one of our reports documented how incompetent so many agents are. They're often bailed out either by their broker or in many cases they're bailed out by the agent for the other party in the sale. That's just not the way an industry should function. You have to go back historically. 

Back in the 1920s, even earlier, the industry tried to set prices and force all members of the industry to charge the same price. The Department of Justice in the 1940s sued them about that, and they retreated and they made those price schedules voluntary. The Department of Justice sued them again, and they backtracked again. Then they engaged the industry in widespread collusion. Discounters have tried to offer lower rates and they failed. What the litigation tries to do, and what the jury clearly understood the industry is trying to do is, or should do, is to completely separate the listing agent and the buyer agent commissions. And if that's done, there actually is a chance for there to be real price competition, which by the way we believe would help the most confident agents. 

Right now, there's a glut of agents. Our current research shows that nearly half of all agents sold no or one property in the last year, and that essentially then puts huge pressure on the successful agents to continue and maintain the 5 to 6% rates.

Victoria:  I often find, and the reason that many of these newbies don't have sales is because they're working as secretarial duties. They're on teams where they're following people around, and so they won't have a lot of sales. Now, I'm not arguing for…You know, I agree with you there are a lot of agents, and too many, but so many of them are used as support staff. So, I think, you know…

Steve:  That's right. But remember, their aspiration is to be an agent; to sell property and collect commissions. And when they can, yes, some of them, and we've actually documented in the study that we're going to release early next year, but they end up working as admin staff to successful brokers. That's true.

Victoria:  Yeah. Just in the beginning of the month, The Association of Independent Mortgage Experts, they release this open letter, and they're really concerned about the decoupling of the commissions. And the main reason is, you and I have discussed this before about putting additional finances onto the buyer, and specifically they're talking about vets; veterans, and first time home buyers, and they're saying that they could be adversely affected. VA guidelines, they prevent people from being able to finance a buyer's agent. So what we would end up doing in that situation, if it was decoupled, is asking the seller for a credit to pay the cooperative commission or the commission for the buyer's agent. 

And then there’s the issue of the appraisal. What happens if to the appraisal when, you know, if the mortgage industry did end up being able to do this, which I don't think that they're going to agree to, the home value would then be impacted. So what are your thoughts on that?

Steve:  If the industry decided that they wanted to remove those barriers, and I've talked to many people in the industry about this, it could get fixed and it could get fixed without even going to Congress. If, in fact, the real estate industry, and I think the mortgage industry and the consumer groups and housing groups would join them as well and go to the regulators and said, look, you’ve got to tweak these regulations to allow essentially a price competitive market to take place lowering the costs for buyers and sellers that would occur. 

Vic, I have talked to hundreds of realtors over the last 30 years, all of whom I consider to be professionals; they're the full-timers with experience. And quite a few of them complain that the industry will never be a profession until you have professional standards, which would greatly reduce the number of agents and give exclusive buyers like yourself a better opportunity to recruit clients.

Victoria:  I agree with you that real estate standards need to be higher. And I will say that the National Association of Exclusive Buyer Agents, are specific real estate brokers and agents who are consumer oriented with a focus only working with buyers. What is your opinion of exclusive buyer brokerage in general?

Steve:  Well, I'm glad you asked me that question because I am a strong believer in exclusive buyer brokerage. What the exclusive buyer brokers recognize, and I understood this when I first started to study the industry back in the nineties, is they recognize there's a fundamental conflict of interest in the industry. You basically cannot, without exposing that conflict of interest, list properties and sell properties. So you list properties and then you have a buyer. Now, who's your obligation to, is it to the, the sellers whose properties you've listed to show them the properties first? If not, then you are actually violating your fiduciary duty to the buyer. 

And if, in fact, you just honor that fiduciary ability and you ignore all of your listings and look for the property that would best suit the buyer, you're then violating your fiduciary responsibilities to the seller. Exclusive buyer brokerage has recognized that conflict of interest. And so people like yourself  who said, look, we can't really represent both, so we're just going to represent buyers. And I very much hope that in the future, exclusive buyer brokerage will stabilize and grow, and that buyers end up routinely using exclusive buyer brokers. That's my hope.

Victoria:  Yeah, and I appreciate that. With the decoupling of commissions, I am really worried about a couple of people that I'm thinking of that I helped this year. She was scraping money together, borrowing money from parents, and pulling it together. And I got, you know, a condo for her under list price with a 3% seller subsidy to help with closing costs. And I was overjoyed, you know, I was just so elated to be able to do this. This woman would not have been able to pay my co-op, my commission out of pocket. My concern is that, you know, that the unintended consequences of decoupling the commissions could have ramifications that could impact the industry for decades.

Steve:  I think that to preserve exclusive buyer brokerage and to rationalize the market, you're going to have to allow the buyers to finance the buyer agent commission. But what people are talking about right now, and you actually alluded to it ear early in our discussion, is a concession by the seller. And I think that that's what we're going to see as a transitional stage. And that eventually will lead to the mortgage financing of the commission. But that's the way to basically ease this transition.

Victoria:  How is what you're suggesting different from what's already in play? How is it that in this whole scenario the person who, or the real estate agent, and in my case, the exclusive buyer broker who is essentially doing, I think it's well understood that the person who represents the buyer is doing a lot of work. How is it that this person has become the bad guy in this whole scenario? 

Steve:  They're not. Well, they're not the bad guy. I mean, the listing agent is really the one who was discussing the compensation and justifying the 5 to 6%. It's not the buyer agents because we're, with a few exceptions, the buyers and the buyer agents aren't having that conversation. You know, it's true. The system has existed basically for 80 to 90 years, and it functions to the extent that homes get sold and purchase. But the problem is the industry is very inefficient; consumers overpay, or at least quite a few of them, overpay. There's no relationship between agent compensation, or very little relationship between agent compensation and the services that they provide.

Victoria:  As an exclusive buyer broker, I want people to be educated. I want buyers to understand this whole process. And I also know that I can speak for the members of Neva in saying that, you know, we advocate for buyers a hundred percent, we could probably be making double what we make if we did listings and if we worked for buyers, and if we did dual agency and designated agency, but we drew a line in the sand and said, we're not functioning that way.

Steve:  Well, CFA has recognized that for decades, and we commend exclusive buyer brokers who really are trying to offer good value to consumers without the kind of conflicts of interest that exists throughout the rest of the industry. So, more power to exclusive buyer brokers.

Victoria:  Yeah. We appreciate your support. Steve Brobeck, has served as the Executive Director of the Consumer Federation of America from 1980 to mid-2018, and now he holds the position of Senior Fellow at CFA and he's been researching real estate issues since the 1990s. 

Steve, you know, it's such a pleasure to always talk to you, and I'm inviting you back because we've only scratched the surface in this particular podcast.

Steve:  Well, thank you, Vic. 

Victoria:  Thank you.

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