Townsend: Real estate agents should embrace change under new rulings

Recent legal developments have dropped a bomb on how residential real estate has been bought and sold in the United States for the past century, specifically how agents are compensated.

This change has been brought on by a $1.78 billion jury verdict in an antitrust class action in a Missouri federal court in October 2023, last month’s landmark $418 million settlement by the National Association of Realtors, and various other large settlements by large national brokerages (Re/MAX settled for $55 million, Keller Williams settled for $70 million, Anywhere Real Estate settled for $83.5 million, Compass settled for $57.5 million, among others). Anywhere Real Estate is the parent company of Coldwell Banker, Century 21, Sotheby’s International Realty and Corcoran.

It cannot be overstated how important it is for brokerages to obtain competent legal counsel from residential real estate lawyers to plan for the inevitable future developments, in addition to addressing the emergency issues at hand.

The wide-ranging national association settlement includes overhauling the cooperative compensation rules governing how real estate commissions have been traditionally earned in residential real estate transactions. These have defined the industry for decades via the National Association of Realtors’ Multiple Listing Service.

The association is an iconic, historic trade organization founded in 1908, and in 1913, it adopted the Code of Ethics with the Golden Rule as its theme.

On Oct. 31, 2023, a federal jury in the Western District of Missouri, comprised of regular, average Missouri citizens, unanimously concluded, after hearing evidence for several weeks and spending only a few hours in deliberations, that the entire industry had colluded or conspired to inflate commissions in an anti-competitive manner and inflated home prices. The $1.78 billion judgment was also subject to automatic trebling under antitrust laws, so the judgment is valued in excess of $5 billion.

The national association’s settlement occurred just over three months later and has yet to be approved by the court.

The U.S. Department of Justice has now weighed in on the residential real estate brokerage compensation structure. In a court filing in Massachusetts, the DOJ has requested a federal district court to reject a consumer settlement that DOJ contends does not adequately protect consumers from industry practices that allegedly inflate real estate brokerage fees.

In addition, the U.S. Circuit Court of Appeals for the District of Columbia announced earlier this month that DOJ could reopen its antitrust probe with an investigation into the national association’s policies just three years after the association settled related claims with DOJ.

Now, what does this mean for the real estate industry? How will this historic jury verdict, unprecedented settlement, the associated cases in federal court, and the inevitable future settlements by other big brokerage companies impact the industry?

There will be a period of change where transparency will be created for consumers as to how real estate agents (particularly buyer’s agents) are compensated, who they represent, who is paying them, and what they are obligated to do, as well as with the assorted fees paid in conjunction with standard real estate transactions.

One requirement of the national association settlement is a signed buyer-broker contract. The state of Indiana is already at the head of the pack, as Gov. Eric Holcomb recently signed House Bill 1068, a law instituting listing and buyer agency agreements requirements.

Rep. Ed Clere of New Albany introduced House Bill 1068 in January. It is a relatively simple legislative change, requiring only a buyer’s agency contract in writing for a specific set term or period. As of July 1, 2024, under Indiana law, the buyer’s agency, in a simple contract, will be mandatory for all real estate brokers.

This is just one more step in the evolution of Indiana’s real estate agency law requirements, which supplement common law agency principles and comprise a statutory framework that began with the Indiana Real Estate Statute formulated in 1994 by the Indiana General Assembly.

The Indiana Real Estate Statute was later revised in 1999 and now will include the buyer’s agency contract requirements. While these changes are significant developments to buyer agency law, they are only an additional step in the evolution away from sub-agency and only seller agency, where buyers have no representation, and both agents represent and owe duties to the seller. This practice was widespread even before the 1970s.

The national association’s settlement affects multi-listing affiliates and association members.

The settlement prohibits agents from making blanket offers of cooperative compensation offers to buyers’ brokers from sellers or listing brokers. A listing broker will no longer compensate other buyer’s broker through the multi-listing apparatus.

Cooperative compensation is the practice of a seller or a listing broker offering or agreeing to pay the compensation of a buyer’s broker or another representative working with a buyer.

The settlement imposes requirements and limitations on real estate agents by prohibiting not only offers of cooperative compensation in the multi-listing service but also using the data to make offers of cooperative compensation even off the multi-listing (for instance, via Zillow or other platforms).

Real estate brokerage companies may still list their sellers’ listings and make offers of compensation for a buyer’s agent on their websites and yard signs. Realistically, sellers may consider offering reasonable compensation to maximize the sales price and pool of available buyers.

Certainly, the multi-listing service is a remarkable platform featuring listings for homes for sale with a plethora of detailed, indispensable information. The system is a beautiful invention that revolutionized the home-buying process with an unparalleled impact on the entire U.S. economy.

The large volume and breadth of information provided in a straightforward place for consumers to access and compare with other available homes is unparalleled. The cooperative compensation system is just one facet of the overall multi-listing framework that can be improved. Still, the system should be preserved, given the immense value derived by consumers.

The main concern is how this will function or work in practice. Sellers no longer need to offer to pay the buyer’s agent. Buyers can decide if they want to hire a real estate agent, how much they will pay them, or if they would instead hire an attorney to assist them with transaction documents or perhaps an appraiser to determine the proper sales price (or pay an agent for an essential, inexpensive comparative market analysis).

There will still be ways for first-time buyers or modest means buyers to have agent representation – the buyer’s agent fee will be factored into the negotiations with sellers as to what, how, and who will compensate the buyer’s realtor (and not automatically via the current multi-listing coop percentage offered) and the overall sales price.

Rather than resisting change, real estate agents should embrace it. Brokerage companies and trade organizations support raising the bar for professionalism in the industry. The progression of buyer’s agency law is a positive development, providing consumers with more transparency in business and compensation practices in a simple, understandable manner.

It highlights the value that real estate agent representation offers to the consumer both for sellers in maximizing home sales prices, buyers in negotiating the best value, and all of the indispensable work a real estate broker does in every transaction behind the scenes to get a transaction to the closing table.

Indiana is the home of many remarkable independent, locally-owned, and family-owned brokerages. These brokers are embracing these developments as creating room for innovations to improve and showcase the extraordinary services they offer to their clients in the home sales process.

It must be clear that the individual real estate agents are not at fault for this multi-listing service cooperative compensation system, which is a condition of their membership in real estate agent trade organizations.

You may know some of these fine professionals as they are in and among your communities and social circles. These outstanding individuals earn a modest living to support their families and are honest, conscientious, well-meaning, taxpaying citizens who have heavily invested in their professional training and devoted their careers to helping others purchase the most significant investment they will likely ever make.

After all, homeownership is the number one way to build wealth in America. If your idea of the American Dream involves greater freedom, security, and prosperity, homeownership may be the key to realizing that dream.

For these reasons, the value that real estate agents bring to the selling and buying process cannot be overstated.

If by chance you are a real estate attorney intimately familiar with title work, lender requirements, closing statements, appraisal issues, inspection reports and responses, contractor repair coordination and reasonable pricing, covenants and restrictions, and so much more, consider that not all of your fellow citizens have your advantage.

The average homebuyer needs someone knowledgeable to help them navigate what can often be an intimidating, confusing, and overwhelming process for purchasers and sellers. Real estate agents provide detailed, intimate knowledge concerning the local communities they serve.

Most agents are honest, accomplished, and dedicated professionals who do precisely what their national association’s code of ethics requires. They follow the Golden Rule. They do not lie, cheat or steal. They have simply been operating under an multi-listing system they did not invent, manage or control but were required to use as a condition of national association membership. Real estate agents seek to help their fellow Hoosiers achieve the American Dream of homeownership.

Without a doubt, change will come, and consumers will be protected. However, we must remember that having someone on our behalf to negotiate, advocate for us and protect us during the buying or selling process is essential, and real estate agents will always continue to play a central role in that process.•

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Ellen Townsend is a partner at Goodin Abernathy LLP, specializing in real estate and corporate law. Opinions expressed are those of the author.