Big name real estate brokers and others are accused of ripping off consumers in a class action lawsuit
Sticker shock best describes peoples’ reactions to the commission rates charged by real estate brokers. For all of the gimmicky talk from major real estate firms about their amazing proprietary technology platforms, why aren’t consumers benefiting in the form of lower fees and better service?
These questions apparently got the attention of a Hartford-based law firm which last week filed a class action lawsuit in Massachusetts federal court. The named defendants in the case include MLS Information Network “MLS” (which services much of Massachusetts), Realogy Holdings (the parent company of Sotheby’s International Realty, Coldwell Banker, Century 21, and others), HomeServices of America, RE/MAX, and Keller Williams.
The lawsuit alleges that the defendants violated the Sherman Antitrust Act by engaging in a conspiracy to restrain trade. We won’t go into all of the technicalities of the allegations, but in essence it contends that the real estate brokers conspired to keep fees artificially high via something called the “Buyer-Broker Commission Rule.”
In a typical real estate transaction, the MLS rules require that the seller’s broker, at the time the listing agreement is signed, set the compensation that is offered to the buyer’s broker, hence, the Buyer-Broker Commission Rule. Generally the commission is split equally between the seller’s broker and the buyer’s broker (assuming a 5% commission, each broker gets 2.5%).
From an accounting perspective, at settlement the full sales commission is booked as an expense to the seller and deducted from the proceeds of the sale. The commission is subsequently split between the two brokers. This raises a host of questions including: Why should sellers compensate the broker who negotiated against them? And why should the buyer’s broker fee be fixed by the seller rather than negotiated?
The Wall Street Model
It’s not for us to opine as to the merits of the lawsuit, but coming from the investment industry, where fee compression is a fact of life, it is eye opening how real estate brokerage commissions have bucked pricing trends that have disrupted most other service industries.
On Wall Street, commission rates were fixed until May Day of 1975 when negotiated commissions became law. From that point forward, commission rates started their march downward and competition intensified. Many at the time predicted the quick demise of the pinstriped stockbroker. That’s not how it panned out. To the contrary, securities brokerage firms embraced technology and their businesses thrived.
The benefits for investors went well beyond lower commission rates. Brokerage firms recognized that in the new competitive world, they had to add value if they expected to survive. This manifested itself in the firms providing better and faster trade executions, quality investment research, and most importantly the firms shifted from a sales model to an advisory model.
The Batterymarch Model
We built our firm around the belief that the future of real estate brokerage lies in the Wall Street model. It involves transparent negotiated fees, a la carte pricing, and advisory services. Just like on Wall Street, the emphasis going forward will be on adding value, which is rooted in fundamental advisory services,and not defined by how many social media followers an independent contractor sales agent has.
Negotiated rates and a la carte pricing shouldn’t be confused with a discount brokerage model where the fees are dirt cheap, and little or no service is provided by low paid, inexperienced personnel. To the contrary, we don’t discount our level of service, rather we properly align our pricing with what our clients’ needs and goals are. We are fiduciaries and our relationships are based on transparency and disclosure.
We believe that it’s unreasonable for a broker to collect the same fee for a property that sells the first day it hits the market versus a more complex property that may require months to sell. We offer break points and capped fees and importantly we don’t “buy listings” or use our client’s property as a prop to promote our brand.
When a buyer has identified a property that they would like to buy, they shouldn’t be expected to pay the same fee as a client that conducted a multi year search. Many buyers who have identified a specific property feel compelled to go directly to the listing broker – this is the worst possible thing they can do. Massachusetts allows commission rebating to buyers which means we can refund to the buyer part of our commission (the commission that was set by the seller’s agent). This allows us to properly align our fee with the actual service we provide to our clients.
Out With the Antiquated, Overpriced, Mediocre Product
It’s no surprise that in recent years venture capital and private equity firms have made huge investments in residential real estate brokerage. In our view, these investors are attracted to the cartel- like pricing described in the lawsuit (it should be noted that several nearly identical lawsuits have been filed in other jurisdictions and have survived intense efforts to dismiss). Success or failure aside, by shining a light on these questionable practices, these lawsuits are opening consumers’ eyes to the murky world of real estate brokerage fees.
Our firm was founded on the belief that the incumbent real estate brokerage business model is antiquated and consumers get an overpriced mediocre product riddled with conflicts of interest. We suspect that the Courts will agree with us and that they will dictate the terms of the new business model to these mass market firms.
The good news is that the alternative is here now. Give us a call to learn more about how we can help you.