When the Department of Justice (DOJ) revealed last week the changes it would like to see in how real estate agents and brokers are compensated through its statement of interest filed in the MLS Property Information Network commission lawsuit, few in the real estate industry were surprised by the agency’s desire to decouple commissions.
In early September 2023, Steve Murray, the co-founder of RealTrends Consulting, told HousingWire that he believed this was a possible outcome.
“Worst-case scenario, the broker representing the buyer will have to negotiate their own fee with their client and the seller can no longer be compelled to make a blanket offer of compensation in order to list on the MLS,” Murray said.
Nearly six months later, Murray stands by this assertion.
“If the court and the judge accept this, it is the worst possible outcome for the industry,” Murray said. “It is also the worst possible outcome for millions of homebuyers.”
As outlined in its statement of interest, the DOJ’s battle with the real estate industry over commissions goes back decades. Murray, who has testified in many of the lawsuits filed over the years, says that the DOJ does not seem to understand how the current system works.
“The outcome the DOJ wants would only reduce costs for sellers, but it Is going to put buyers in a hole,” Murray said. “They have gone through all of this and it will end up being punitive to buyers. They seem to think that the benefits to sellers, who are the only beneficiaries of this, outweigh all the downside.”
Under the DOJ’s proposal, the practice of cooperative compensation — in which the listing agent makes an offer of compensation to the buyer’s agent in the MLS — would be illegal.
“Preventing sellers and listing agents from setting buyer-broker commissions would promote greater price competition and innovation in the market for brokers’ services,” the DOJ wrote in the filing.
“If buyers set the compensation for their own brokers directly, some buyer brokers might choose to offer flat fees or hourly rates in lieu of percentage commissions, since the amount of time and effort required by a buyer broker has a weak correlation, if any, to the ultimate sales price of the house. And most, if not all, buyers would likely prefer a fee structure that does not reward their broker for helping them to pay more for a home.”
Despite its clear desire to move away from seller compensation of buyer agents, the DOJ noted that while some buyers may choose to pay for representation out of pocket, others could choose to request that the seller pay a specified amount to the buyer broker in their offer letter, similar to when asking the seller to help cover things like closing costs.
The DOJ said it supported this method as it makes it “straightforward for a seller to compare offers that include a request for the seller to pay the buyer’s broker with offers that do not include such a request.”
Ted Tozer, the former president of Ginnie Mae and current nonresident fellow at the Urban Institute’s Housing Finance Policy Center, shares a similar opinion. In Tozer’s experience, the level of service provided by buyer agents often varies by individual, as well as the level of service needed by the client.
“The key thing is that, to some degree, I agree with the Department of Justice that it should be part of the negotiation process,” Tozer said. “You as a buyer should be able to decide what kind of service level you want from your broker.
“Are you someone buying your 25th house and you just need someone to submit your offer, or are you a first-time homebuyer and you need somebody to walk you through the process?”
As Tozer sees it, this enables buyers and sellers to negotiate their agent’s compensation independently before coming together to negotiate the sale of a house. At that point, they may choose to revisit agent compensation if the buyer asks the seller to pay their agent fees.
“This way it is all part of the sales contract, and the buyer doesn’t have to come out of pocket to actually pay the broker, just like it is today,” Tozer said. “In the lawsuits, the sellers are upset that they had no control over having to pay the buyer’s broker, so my point is, let’s give them a say. Don’t change the overall process or where the money comes from, but give them more transparency.”
But Tozer also sees potential problems with this, including sellers who refuse to negotiate and will not cover any of a buyer’s agent fees.
“In doing that they may lop off half of their potential buyers, so I don’t think they will do that, but it may be part of the negotiation situation,” Tozer said.
Although Tozer doesn’t believe it to be likely, if there comes a time when buyers have to pay their own broker fees, he said it will be devastating for first-time buyers.
“First-time homebuyers are going to stop existing,” Tozer said. “Right now, first-time buyers have enough of a problem trying to come up with a 3.5% down payment for an FHA loan. If you are going to throw on top of that, that they have to pay another 3% to their broker, you are just going to set them up to fail.”
Gary Acosta, the co-founder and CEO of the National Association of Hispanic Real Estate Professionals (NAHREP), agrees with Tozer.
“This is going to have a significant impact on them,” Acosta said of first-time buyers. “They are going to push out their pursuit of homeownership until they can come up with the extra money that is going to be necessary, or they are going to go without representation, and that holds enormous risk for those buyers.”
For Acosta, the current system of cooperative compensation works because it gives buyers, especially first-timers, financial help when they need it the most. In the future, when they go to sell their home, they’ll most likely be in a more financially secure position, and they’ll pay it back by helping the next wave of homebuyers.
“The system has been in place for about 100 years, and with all of its flaws and imperfections, the net results have actually been pretty good,” Acosta said.
Acosta added that data from the Urban Institute and other think tanks have predicted that, for the first time, the overwhelming majority of new homeowners over the next 20 years will come from Black and Brown communities, which already have lower homeownership rates.
Although the DOJ’s statement of interest only pertains to MLS PIN’s settlement in the Nosalek commission suit, industry participants anticipate the judge’s ruling on the DOJ’s proposal to have a massive impact on agents nationwide, as it would change agent compensation rules across the country. Additionally, the judge overseeing the Sitzer/Burnett trial could use the statement to guide his final ruling, which is expected in May 2024.
Despite the potentially wide-reaching ramifications of the DOJ’s proposal, the National Association of Realtors (NAR) did not wish to comment on the DOJ’s filing, since it is not a party in the Nosalek commission lawsuit.
The trade group and the government agency are currently locked in their own legal battle over whether the DOJ can investigate NAR after the agency backed out of a settlement reached in 2020.
