Real estate industry not prepared for commission changes, analyst finds

Real estate industry participants are not likely ready for complying with buyer broker commission payment changes set to be enacted later this summer, a Keefe, Bruyette & Woods report warned.

On April 21, preliminary approval was granted for a settlement with the National Association of Realtors, with a final hearing set for Nov. 26.

But the commission practice changes go into effect on Aug. 17.

"Commentary from industry participants suggest a high degree of uncertainty around how the industry will digest these changes in such short order, including mandated buyer representation agreements and elimination of compensation offers in the MLS," Ryan Tomasello wrote in the latest KBW update on these series of cases. "We believe the industry is largely unprepared and overly optimistic in its consensus view that impacts will be limited."

On May 9, a federal judge in Missouri granted final approval to a settlement with Keller Williams, Anywhere Real Estate and Remax in three legal actions — Burnett, Moehrl and Nosalek. Burnett has also been commonly referred to as Sitzer/Burnett.

But the hearing did not cover settlements with the National Association of Realtors or Homeservices of America. The approval was also granted over the objections of a group of Illinois plaintiffs in a case known as Batton.

However, a separate Massachusetts hearing on the Nosalek case against MLS PIN was held on May 21, and Tomasello pointed out that the Justice Department commented on the settlements for the first time.

Until now, some observers felt the NAR settlement of March 15 would not have gone forward without some tacit approval from the Justice Department.

However, the Massachusetts hearing may have put that to bed, according to Tomasello, as a DOJ attorney said in court that commission compensation offers should not be made anywhere, and certainly not on a multiple listing service.

"This is significant because many industry participants have pointed to off-MLS compensation offers — which are permitted under the current NAR settlement — as an important factor that would limit disruption," Tomasello said. "We believe the DOJ could act by October."

During the May 21 hearing, the Justice Department indicated it had not yet decided whether it would intervene in the NAR settlement, Tomasello reported.

"[A]t a minimum, we believe the DOJ's remarks were made with the intention of warning the industry against maintaining commission practices that are similar to those that have already been determined to enable steering opportunities," Tomasello said.

The next round of responses to the various filings in the Massachusetts case are due by June 21 and might include a joint statement from the plaintiffs, MLS PIN and the Justice Department, according to a May 24 letter to the court from plaintiff's attorney Seth Klein.

Speculation that the DOJ could jump back into the fray has abounded since April, when a 2-to-1 decision from the U.S. Circuit Court of Appeals for the District of Columbia ruled in favor of the government being allowed to reopen its investigation into NAR following its withdrawal from a settlement negotiated during the Trump Administration.

Some are getting around the prohibition by using seller concessions to help the buyer cover part or all of the broker commission costs.

Tomasello points to recent announcements by two of the largest systems, the California Regional MLS and Bright MLS (which covers six Mid-Atlantic states and the District of Columbia) adding fields to their entries for concessions.

CRMLS made the announcement for the change on May 29, and it took effect that day.

The information, known as concession in price, was previously only disclosed on closed listings. The new fields are now directly available in the MLS, and the seller agents can fill them out when adding a listing. Sell-side agents can more easily market listings while those on the buying side receive a clearer idea of financial options, CRMLS said.

"We're always looking for ways to improve user experience, and, considering the fact that data shows an extensive use of concessions in CRMLS's closed listings, these new concessions in price fields at the listing level seemed like no-brainers," said CRMLS chief executive Art Carter in a press release. "By providing new fields that clearly specify a seller's willingness to consider concessions, we can better foster communication between all our users to make finding the right property that much easier."

A May 30 posting on the Bright MLS website said it would introduce the capability on June 12. It will add four editable field options to define how the concession was used at closing, including one labeled specifically "amount paid by seller for buyer's broker costs."

As part of its compliance with the NAR settlement, Bright will be removing compensation fields by Aug. 14, the website added.

But as a workaround, seller concessions could have their own problems, Tomasello said.

These new MLS fields "appear to technically comply with the proposed NAR settlement," as long as the seller concessions are not explicitly designated to cover the buyer commission payment. But they also run the risk of creating additional legal and/or regulatory scrutiny, Tomasello explained, who then added, "If it looks like a duck, walks like a duck, and quacks like a duck, it's a duck."