How will the Keller Williams – National Association of Realtors (NAR) – HomeServices of America class action lawsuit ruling and similar cases around the country impact title agents’ revenue streams and revenue models?
Will state-by-state regulation make a difference in navigating fallout from these decisions? Are there states or regions that are viewed as being friendlier to title than others in this regard?
These were just a couple of the questions recently answered by title industry professionals during a talk with The Title Report.
Answers point to the true extent of the cases’ impact being difficult to narrow down in the near-term and the importance of preparation in the meantime.
“This is about perception and the transparency of compensation options,” said Linda Grahovec, national agency director of education and marketing for the FNF Family of Companies. “Sellers feel that they have more ways to sell and can choose who they pay to represent them and how much they pay, whereas buyers have limited ways of being represented in a real estate transaction and a buyer’s agent now can’t guarantee that the seller is going to pay the buyer’s side of the commission.
“As a result, seller listing agreements and buyer purchase agreements will need to be completed and discussed differently and in more detail because how the previous models were structured goes back 20-plus years and are no longer sustainable. Transparency was needed, and many brokerages are already rethinking their client conversations versus doing nothing until someone else makes those decisions for them.”
Numerous class-action lawsuits filed nationwide allege anti-competitive practices in policies enforced by entities like NAR. Central to these disputes is the long-standing "cooperative compensation" system, mandating that sellers' agents offer compensation to buyers' agents to list homes on the Realtors' Multiple Listing Service (MLS).
Plaintiffs argue this requirement artificially inflates housing costs, typically resulting in a 5- to 6-percent commission split between agents.
In October, a Missouri federal court ruled that NAR along with brokerage firms Keller Williams and HomeServices of America conspired to maintain current commission levels. The defendants were held liable for $1.8 billion in damages.
In response to these claims, NAR argued that consumers are better served and competition is better under current rules because of how well local broker marketplaces function. The organization stated it would be appealing the verdict and that its cooperative compensation rule “ensures efficient, transparent and equitable local broker marketplaces.”
Significant impact from the lawsuits lies in potential alteration to buyers' agents compensation. This could prompt monumental change to the real estate industry in the form of reshaped commission structures and transaction practices nationwide, broad alteration of MLS operations and enhanced competition among listing services.
“Unfortunately, at first review of the implications and unintended consequences of these pending lawsuits, veterans and first-time homebuyers may be the most affected,” Grahovec said. “Military members or veterans, who use a VA loan, cannot pay and are not allowed to pay a commission. So, if a VA buyer is interested in a house and the seller is not offering to pay the buyer’s commission then that VA buyer may not have the benefit of a Realtor, the buyer’s agent, representing them. Also, in this seller’s market with higher home prices, it is even more difficult for many first-time buyers to afford down payments, closing costs and now add a commission.
“Think about it: according to NAR, first time homebuyers made up 32 percent of the market place, which is up from 26 percent and when the average down payment, according to Bankrate, is 6 percent. There is not a lot of money laying around for buyers to pay their buyer’s agent their negotiated percentage rate of compensation.”
Under this scenario, Grahovec offered advice to real estate brokerages on how to prepare agents for revenue model shifts. These include:
- Getting a commitment from the buyer by showing them the benefits of having a licensed professional Realtor.
- Educating the buyer on the buying process – acting as their trusted advisor and emphasizing their knowledge of local markets.
- Agents providing buyers with an understanding of what they do and then being able to translate that into a benefit to the buyer.
- Agents negotiating for the services they are providing, whether that’s with the seller, the buyer or both. This can be with conversations at introduction, written agreements during the buying cycle or within the sales contract negotiation phase.
Chip Ridge, president of Kentucky-based Millennial Title, said his business is watching NAR lawsuits closely and keeping in close contact with agent referral partners, listening to their concerns over the cases’ impact.
“Millennial Title sees potential for title agents to elevate our services in the sales funnel,” he said. “Depending on the fallout of the buyer’s agent relationship with homebuyers, title agents could be a resource for buyers to provide contract review services and title research products that assist the buyers in their homebuying journey. Title companies need to continue to educate and promote their value proposition to the homebuying public. We need to be careful not to sit back and wait on the real estate agents to determine the workflow moving forward.”
On the seller side, Ridge said Millennial Title continues to promote its title search products as part of the initial listing to introduce itself during earlier home transaction stages.
He added that the title industry should be ready for “margin compression.”
“Millennial Title is preparing for margin compression across the real estate transaction landscape,” he said. “Lenders, real estate agents and title companies will all be under pressure to reduce the cost to a homebuyer to purchase and finance a house. Title agents should leverage new technology such as digital closings and AI to provide consistent services at value engineered pricing. We understand title agents want to protect our value proposition and not discount our value, but we need to seek opportunities to leverage technology to reduce our expenses.”
Grahovec was asked if she expects to see broader federal regulation proposed as the result of NAR case findings.
“I can only speculate on what regulations, if any, would come out of this since it will be years until all these lawsuits play out and any new legislation gets proposed, let alone passed,” she said. “In the meantime, homesellers will still need to sell and homebuyers will still want to buy. The impact on the title industry will probably not be as swift as some believe. Even so, the title industry is nimble and has always risen in market fluctuations or industry earthquakes. From the subprime mortgage crisis that occurred from 2007 to 2010 to the ‘Know Before You Owe’ rule mortgage disclosure rule that took effect in October of 2015. Whether it’s an economic collapse or an entire systems and process change, the title industry will adapt quickly to whatever is throw at us.
“Realtors are not going out of business - it is a pivot. Those leading the charge to change and adoption will benefit the most. Title agents can assist those brokerages and align themselves in their support of those changes. Have those conversations now and see how you can assist in their success.”