Real estate agents have fiduciary duties to their clients, obligating them to prioritize their clients’ interests above their own. Yet certain segments of the real estate industry appear to prioritize sustaining commissions at historical levels at the expense of innovation and price competition. This trend is particularly evident today, leading the Department of Justice (DOJ) to concentrate on the fundamental transaction structures commonly employed in the real estate industry.

A quick look at how the industry is reacting to the numerous anti-trust/commission collusion cases and the significant judgment against Realtors^® in the Sitzer/Burnett v. National Association of Realtors (“Sitzer”) class action case reveals a flawed system. Initially, many in the industry argued that the case was wrongly decided and would be overturned on appeal, yet they ultimately agreed to unprecedently large settlements rather than pursuing an appeal. Subsequently, some argued that the safeguards in place in California shielded California Realtors^® and the state and local Realtor^® associations from legal action, only to find themselves named in multiple lawsuits within a few months. Some agents then argued that nothing would change, insisting that sellers still had to offer 2.5% to the buyer’s agent in the listing agreement. Now, the National Association of Realtors (NAR) agreed that sellers won’t even be permitted to offer compensation to buyer’s agents in the MLS beginning in July.

Despite the abovementioned developments, there are reports that some real estate agents are telling potential sellers that “other” agents will boycott, or not show, any listing that offers less than the “standard” 2.5% buyer’s-side commission. This claim, however, lacks credibility, especially given the widespread use of consumer platforms like Zillow, Trulia, Realtor.com, and many others. The fact that local agents are keenly aware of the DeLeon Team’s success in bringing many homes to the market with the sellers offering only $10,000 or $20,000 to the buyer’s agent, resulting in numerous offers and final sales prices well above reasonable expectations, further illustrates the fallacy of these arguments.

It is crystal clear that this small but vocal group of agents are banking on the fear factor, hoping that some sellers will still agree to offer 2.5% (equivalent to $100,000 on a $4 million property) to the agent who submits the buyer’s offer. This behavior vividly demonstrates a potential violation of the Sherman Act and other antitrust regulations, and serves as an illustration as to why the DOJ is closely monitoring the real estate industry. Put bluntly, the unethical and illegal comments by a minority of agents are casting the entire industry in a bad light and greatly increasing the industry’s exposure to further legal action and damages. Plus, it is a clear violation of the client’s trust.

On the other hand, some may argue that DeLeon Realty’s undeniable success in reducing sellers’ commissions, while enhancing included services, shows that the industry is not operating in lockstep. In other words, the multiple offers that we attract, and remarkable sales prices we’ve achieved, should inspire confidence that nothing is inhibiting free competition. This argument rests on the premise that DeLeon Realty’s resilience against industry pressure indicates that others could adopt similar consumer-friendly business models.

However, the DeLeon Team is unique. We are widely recognized and respected throughout Silicon Valley and possess an unparalleled, multi-million-dollar marketing budget for our listings. Most notably, we are the only major local brokerage offering a commission-free alternative for buyers if any buyer’s agents are unwilling to submit an offer for, let’s say, “only” $20,000. Plus, our buyer’s agents receive generous salaries, ensuring they are compensated even if we waive the entire buyer-side commission. Simply put, our prominence and reputation make it impossible for anyone to boycott our listings. Furthermore, any agent attempting such a move would find that their buyer could directly approach us, resulting in neither the buyer nor the seller paying any buyer-side commission.

Agents who choose not to submit an offer on one of our listings may face another possible consequence: many buyers would simply submit the offer through Ken DeLeon and his buyer’s team. Ken, renowned for his expertise and with graduate degrees from both Berkeley School of Law and Stanford’s Graduate School of Business, has been a respected agent for over two decades.

The DOJ’s Involvement

The DOJ is taking a two-pronged approach in addressing Realtor^® collusion. First, on February 15, 2024, they filed a Statement of Interest in Nosalek v. MLS PIN, et al., urging the court to reject the proposed settlements of lawsuits targeting the real estate industry. The DOJ asserted that simply making substantial settlement payments would do little to protect the consumers if the real estate industry retains the ability to strong-arm or scare sellers into offering inflated, unilateral, non-negotiable compensation to the buyer’s agent.

At its core, the DOJ contends that the commission for the buyer’s agent should be subject to free negotiation between the buyer and their agent. This cannot occur if the seller is contractually obligated to pay a predetermined amount to the buyer’s agent.

Additionally, the DOJ asserts that any compensation offered by the seller to the buyer’s agent serves as an incentive for the buyer’s agent to breach their fiduciary duty and steer buyers toward listings with the highest compensation offers. As previously mentioned, it has come to my attention that numerous agents are explicitly using this argument to pressure sellers into paying 2.5% or more to the buyer’s agent.

Case in point, if one were to agree with the notion that homes offering lower commissions to buyer’s agents may be boycotted by a significant number of agents and consequently sell for lower prices (assuming the listing agent does not offer a buyer’s-side commission-free way for buyers to purchase these listings), then an agent genuinely prioritizing the buyer’s best interests would concentrate on these listings due to their comparative value rather than avoid them. Similarly, all buyers should focus on finding these types of properties.

On another front, the United States Court of Appeals for the District of Columbia Circuit granted the DOJ the authority to reopen the antitrust probe into NAR on Friday, April 5, 2024. Previously, NAR had settled with the DOJ during the Trump administration, but the Biden administration rejected the settlement and opted to continue the investigation until a lower court halted its progress in 2023. The recent court decision ruled that the case’s prior closure did not prevent it from being reopened, enabling the DOJ to proceed with its investigation into potential antitrust violations.

A recent statement released by assistant attorney general of the DOJ Antitrust Division, Jonathan Kanter, stated, “[r]eal-estate commissions in the United States greatly exceed those in any other developed economy, and this decision restores the Antitrust Division’s ability to investigate potentially unlawful conduct by NAR that may be contributing to this problem.” He further added, “[t]he Antitrust Division is committed to fighting to lower the cost of buying and selling a home. I would like to commend the staff of the Antitrust Division and our colleagues in the department for achieving this important result.”

Realtor’s Response to the Proposed NAR Settlement

The industry’s response to NAR’s proposed settlement has been mixed. While some agents are exploring ways for buyer’s agents to enhance services and lower costs to gain a competitive advantage and attract more buyers, others are focused on finding loopholes in the settlement in an effort to recreate the system that has been found objectionable and damaging to the public.

By way of example, some agents argue that they can still persuade sellers to pay 5% commission as part of the listing agreement if they simply forego listing the property on the MLS. It should be noted that keeping the property off the MLS also means the agent would be prohibited from any other public marketing, as per the Clear Cooperation Rule. Put another way, this approach could be summarized as telling the sellers, “if I dramatically limit your home’s marketing and exposure, along with reducing my advertising expense, I could charge you more.” Is that really fair, or even logical?

Another loophole proposed is to include buyer’s commission in the listing agreement and then post this commission on a website separate from the MLS. That way, the buyer’s agents could check this additional website (or even the listing agent’s website) before deciding which properties to show or promote. However, it should be noted that buyers may not be aware of these ancillary websites, so they may not understand why the agent is favoring one home over another.

If the real estate industry continues along this path of looking for loopholes, the lawsuits and DOJ scrutiny we have witnessed so far will likely be just the beginning.

by Michael Repka, Esq.