Buyer Broker Commission Rule – MLS Blinks
Massachusetts MLS Aims to Settle Litigation, Brokers Fight On
Buyer Broker Commission Rule – MLS Blinks
MLS Property Information Network (MLS PIN), New England’s largest Multiple Listing Service, has entered into a settlement agreement relating to an ongoing lawsuit. The litigation is centered around what is known as the “Buyer Broker Commission Rule.” In essence, the Rule requires that property sellers offer predetermined compensation to brokers who represent the buyers of the property.
While MLS PIN is poised to settle the matter, their co-defendants, a who’s who of large real estate brokerage firms, are not part of the settlement – they have vowed to fight on. Many of the brokerage firms are also defendants in a handful of similar cases pending throughout the country.
By way of background, the Buyer Broker Commission Rule came into being in the 1990s. Prior to the Rule, all real estate brokers and their sales agents represented only the sellers of properties – there was no such thing as buyer representation.
In a nutshell, the Rule goes something like this. The seller’s listing agreement typically outlines the sales commission brokers receive - in our market it’s normally 5%. The agreement also provides for how much of the fee gets paid to the broker representing the buyer, the split is normally 50/50. The MLS PIN Rule also mandates that the buyer’s broker compensation is unconditional.
At the risk of oversimplifying, the Plaintiffs (who sold properties) contend that the Rule is unfair as it forced them to pay the buyer’s fee. In their Complaint, the Plaintiffs outline a litany of reasons why the Rule is illegal, and they specifically allege that the “Defendants have engaged in a continuing contract, combination, or conspiracy to unreasonably restrain trade and commerce in violation of Section 1 of the Sherman Act, 15.”
Proposed Settlement – Much Ado About Nothing
Under the proposed settlement, MLS PIN will no longer require sellers to offer compensation to the buyer’s broker, and if sellers do offer buyer broker compensation, that compensation may be subject to negotiation, e.g., it will no longer be unconditional.
On the surface this is good news, particularly for sellers. But how this plays out in practice will likely be a very different story. Importantly, the new rule doesn’t eliminate buyer broker commissions, rather it only requires the listing broker to “notify” the seller that they are not required to offer compensation to the buyer’s broker.
Notwithstanding the settlement, we suspect that it will be business as usual. Why? “Steering.”
When we think about steering in real estate, we tend to think about it in terms of the Fair Housing Act where sales agents profile buyers and steer them to certain neighborhoods. The kind of steering we’re talking about relates to conflicts of interests, where the buyer’s agent steers buyers to the properties that offer the agent the highest compensation.
Beyond the obvious conflicts of interest, we see “compensation steering” as the number one reason that real estate commissions have remained stubbornly high. In the process of securing property listings, the listing agents explain to sellers that commissions are split with the broker representing the buyers. The listing agents put the fear of God into their clients (the sellers) by telling them that buyer’s agents will steer buyers to the properties offering the highest compensation.
We’ve attached below an exhibit from the Plaintiffs’ Complaint that illustrates this. This sales script is directly from one of the Defendant’s training manuals. It’s crystal clear that selling your property boils down to a pay-to-play exercise.
If the Court approves the settlement, we expect that listing brokers will bury their notification requirement in the fine print. If a seller questions why they should pay the buyer’s broker fee, we have no doubt that listing agents will pull out the same old canned sales script. Sellers will be terrified that their property will be blackballed by the realtor community – it’s a mild form of extortion.
The proposed settlement also requires MLS PIN to pay the plaintiff’s $3 million. The monetary portion of the settlement may seem small relative to the scope of the potential damages, but much of that money is going into a war chest to fund the continued litigation against the brokerage firms who are fighting on.
We’re not surprised that MLS PIN settled the case - they had no upside even if they prevailed, and unlike the brokers they don’t have deep pockets. The brokers will continue to fight this tooth and nail. They fully understand that the Buyer Broker Compensation Rule is critical to maintaining their business model and their ability to charge punitively high fees. We went into this in our report “The Boston Real Estate Oligopoly – Stubbornly High Fees & Other Consumer Harm.”
If you’ve bought or sold real estate recently, at some point in the process you probably found yourself scratching your head, wondering “how do these brokers get away with such a racket?” You’re not imagining it; the real estate brokerage industry is chronically on the receiving end of anti-trust lawsuits. We’ll keep you posted.
About Batterymarch Group LLC – Batterymarch Group is an independent full service real estate brokerage and advisory firm focused on the downtown Boston high-end residential market. We represent both sellers and buyers with a sharp focus on valuation. We also offer sub-advisory and owner’s representation services to financial institutions, family offices, and trustees.
About Andrew Haigney – A 25-year Wall Street veteran, Andrew held senior positions at leading global investment banking institutions where he routinely valued and negotiated complex securities transactions on behalf of institutional clients. Andrew has been an outspoken advocate of a universal fiduciary standard. In founding Batterymarch Group, Andrew brings that same discipline and passion to real estate brokerage.