Jim Flynn

Jim Flynn, Money & the Law

For a long time now, the U.S. Department of Justice has been chasing after the National Association of Realtors, accusing it of various practices DOJ considers anti-competitive and in violation of the Sherman Act, the federal law that prohibits monopolies and other anti-trust activities.

DOJ has now finally scored points in this skirmish through a lawsuit brought against NAR in the U.S. District Court for the District of Columbia. In an unusual move, at the same time DOJ announced the filing of the lawsuit (Nov. 19), it also announced a settlement, wherein NAR has agreed to change certain of its policies and practices, as DOJ was demanding.

By way of background, the National Association of Realtors is a powerful nationwide trade association that substantially controls how residential real estate is bought and sold. It exercises this control by requiring 1,400-plus local real estate broker associations who belong to it, and the individual brokers who belong to those associations, to play by its rules. Not playing by those rules risks expulsion, in which event the benefits NAR provides to its members (for example, a malpractice insurance program) could be lost.

To understand the effect of the DOJ/NAR settlement, it’s necessary to understand that real estate brokers representing buyers are normally paid by real estate brokers representing sellers. It works this way: The seller agrees to pay the seller’s broker a commission equal to a percentage of the price at which the property is sold. The seller’s broker in turn agrees to pay a broker representing a buyer a share of that commission. Thus, if the seller agrees to pay the seller’s broker a 6% commission, the seller’s broker could agree to pay a broker who produces a buyer half that amount — 3%.

This arrangement, per the DOJ lawsuit, has led to abuses. For example, brokers representing buyers have been known to tell buyers they are working for “free,” since the buyer will have no legal obligation to pay the broker a commission. Also, per the DOJ lawsuit, brokers representing buyers have been known to game the multilist systems operated by local real estate broker associations (under strict rules established by NAR) by only showing buyers properties having the highest commissions payable to a broker representing a buyer. So, for example, buyers would only be shown properties where the buyers’ broker will be paid 3% of the purchase price; properties offering a 2% commission to the buyers’ broker would not be shown.

Also, per the DOJ lawsuit, local associations, under NAR rules, might facilitate this practice of “steering” by allowing buyers’ brokers (but not buyers themselves) to filter multilist entries based on the amount the seller’s broker is offering to pay a buyers’ broker. Buyers’ brokers can use this filtering tool to find the properties with the highest commissions being offered to a buyer’s broker and only show those properties to buyers.

Under the DOJ/NAR settlement, these practices are to stop. In addition, under the settlement, a local real estate broker association will not be able to limit lock box access to its members. Licensed brokers will be able to open a lock box in pursuit of showing a property.

There is now a 60-day public comment period in place, after which the judge handling the case will sign a final order of judgment and the parties will begin implementing the settlement in accordance with a schedule set forth in the order.

Of brief note here is the fact that, in Colorado at least, real estate brokers are highly trained and perform a wide range of services for buyers and sellers, largely eliminating the need for lawyers to be involved in the purchase and sale of a home. This takes some of the sting out of the commissions real estate brokers receive.

Jim Flynn is with the Colorado Springs firm of Flynn & Wright. You can contact him at moneylaw@jtflynn.com.

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