In March the National Association of Realtors (NAR) settled a 4-year lawsuit called Sitzer-Burnett vs. NAR et al and agreed to not only pay $413 million in damages to the plaintiffs, but also change fundamentally how they practice real estate. This article explores the potential impact on real estate sales, property management and how a politically diminished NAR might impact real estate.
First, let me provide brief history and the origins of the lawsuit. The Department of Justice (DOJ) and the Federal Trade Commission (FTC) have long targeted the real estate industry in general and NAR in particular. For the better part of 20 years, the DOJ has been investigating and trying to modify some of the business practices of the largest trade organization in the country with over 1.5 million members who maintained a large influence over organized real estate: NAR.
They have longed believed that since NAR regulated the Multiple Listing Services (MLS) in the country, and the professional activities of their members, this organization had caused inflated commissions with their “anti-trust” activities. The DOJ filed a complaint against NAR in 2005 and settled that issue in 2008 by having NAR change home listing sites. In 2020, the DOJ filed another complaint and NAR agreed to allow $0 compensation in the MLS as opposed to the $1 previously required.
The DOJ decided to take a wait and see stance as the Sitzer-Burnett vs. NAR (and a few large real estate brokerages) wended its way through the courts system. Filed in Missouri, it claimed that the named plaintiffs, through anti-trust activities, had intentionally inflated commission by having the listing agent pay for the buyer’s agent commission. Essentially, a seller paid for both the commission of the agent representing their interests, and the agent representing the buyer. After a short trial, the jury found in favor of the plaintiffs, and awarded $1.78 billion to the name home sellers. Because this was an anti-trust case, the judge had the right to treble (triple) the total damages to over 5.3 billion.
Even though all the plaintiffs vowed to appeal and fight the verdict, the dominoes fell very quickly on settlements far below the potential billions mandated by a judge. Anywhere (formerly Realogy) and ReMax settled for $83.5 million and $55 million respectively to limit their financial exposure. Keller Williams settled in February and then NAR settled in March for $418 million, which provided legal immunity to all brokerages who closed less than $2 billion annually as well as all the MLSs under their control. More importantly than the financial settlement, NAR agreed to change their business practices starting August 17, 2024.
You might think, this settlement is real estate brokerage problem, and the property management sector will not feel any ill effects. Let’s review the potential threats.
Brokerages and Individuals Start Property Management – Already on the east coast, real estate brokerages are opening property management business channels. They can’t compete on brand, experience, systems, and business models but they can compete on price, i.e., offer to manage properties for less. They may price more aggressively to grow the business and will encourage their agent to use their company and not refer out management leads. Most brokerages don’t want or allow their agents to manage properties, but this won’t stop hungry and enterprising agents from disregarding their broker’s wish and striking out on their own.
The Real Estate Division Feels the Pinch – The majority of property management companies either have a real estate division or capture the sale of property they manage when an owner decides to sell rather than rent. Both seller and buyer commission may be compressed and there will be less profit from this division. New business models may emerge such as flat fee or “by the hour” further eroding margins.
DOJ “Creep” into Property Management – It would be delusional to think the DOJ or the FTC on their quest to ferret out “junk fees” or elevated commissions will stop at real estate. State legislatures are rushing to the aid of tenants, particularly in states with a high percentage of renters, to eliminate all fees that add to the high cost of rent. Already Oregon and Washington state have eliminated all tenant fees other than “opt out” liability insurance, and California is on the same quest by requiring opt out for all tenant programs, “reasonable” charges for all fees, and a proposal for not denying pets without charging additional pet fees.
Yes, we have threats, but we also have subscription businesses we have meticulously built while real estate was booming the past 10 years. This settlement affords great opportunities for our industry:
Build a Flywheel – We have been preparing for the real estate downturn for years, and this lawsuit development only exacerbated this change. Here is our flywheel: we add agents; who manage both residential properties and associations for us; use our maintenance company for repairs, improvements and projects for their owners and boards; sell real estate; and when they do, use our escrow company. Each part of the “wheel” propels the other spokes.
Offer New Business Models – Why wait for change when you can instigate it? We recruit and train real estate agents who like the lifestyle of the “Independent Contractor” but need stable monthly income to achieve it, to become Property and Community Managers. We provide the properties and communities for them to manage, and they provide superior customer service. You can even start a flat bee brokerage, a low-cost brokerage or anything that attracts more buyers and sellers for your agents.
Pivot from Tenant Revenue to Owner Protection – At least in our state, the days of tenant fees and programs are numbered. But our owners typically have ample equity, with a low mortgage rate and property tax base. They love the asset but loathe self-managing in an increasing hostile investor environment. A friend of mine who managed properties in the epicenter of rent control, San Francisco, told me she was not in the property management business, she was in the property maintenance one. Tenants remained longer in her properties, but their list of property issues was unabated. We have rolled out a Preventative Maintenance Program to owners to great success (annual check of the HVAC, furnace, and water heater with unlimited pest control) and will be rolling out an Owner Benefits Package (insurance against loss of rent, damage, eviction protection, etc.). We are the Asset Protector for our owners.
We have sold real estate for the past 50 plus years in largely the same way and starting in July (or so) it will be a different experience. I fear there may be some unintended consequences as there always are when you have a seismic shift in business practices as this is. If NAR loses a good chunk of their members, and the state organizations as well, we might see our elected officials, who were largely kept in check from entertaining laws and policies that were detrimental to real estate, feel more emboldened. Could the mortgage interest deduction, capitals gains and the 1031 tax exchange be on the chopping block to help with the growing federal deficit? Could tenants become a protected class as they are in Australia and the time spent managing difficult tenants increase? Regardless of the unintended consequences, we will focus on our business decisions and strategies to continue to help our owners enjoy the fruits of their decision to own an investment property in our market area.