Propmodo Daily

By Franco Faraudo · Mar. 18, 2024

Greetings!

You have likely heard by now that the National Association of Realtors has settled their commission split lawsuit. There has already been a lot written about the settlement and its possible impacts on the real estate industry. But even though the lawsuit is over for the vast majority of brokerages, one firm is still fighting. In today’s email, we look at how and why Berkshire Hathaway’s HomeServices has been left out of the settlement and will attempt to take the case to the Supreme Court.

Also, empty offices are a problem in cities across the country, but could they hold the key to solving the housing crisis? Cities are getting creative with financial incentives to encourage developers to make the transformation. Be sure to check out our new guide to many of the office-to-residential conversion incentives being offered across the U.S.

Plus, this week Propmodo Technology is focusing on valuation and underwriting technology with our sponsor Valcre, an innovative appraisal platform for the commercial real estate industry. We’re exploring the potential of automated valuation models, how cutting-edge data and tech are helping identify and mitigate risk, and how the industry can prepare for the coming wave of commercial property revaluation.

Now, let's dig in!

NAR’s Lawsuit Settlement Leaves One Defendant To Fight the Case Alone

The big news in real estate last week was that the National Association of Realtors (NAR) decided to settle the landmark Sitzer/Burnett case. Instead of fighting and potentially paying the $1.8 billion settlement and continuing to battle copycat lawsuits, NAR's leadership determined it was best to settle for $418 million. The settlement still needs to be approved by a federal court, but if accepted, it would change how buyer agents' commissions are negotiated.

In a letter, NAR explained, "NAR would pay $418 million over approximately four years. This is a substantial sum, and it will be incumbent on NAR to use our remaining resources in the most effective way possible to continue delivering on our core mission. NAR's membership dues for 2024 will not change because of this payment."

This was a bold move by NAR, who had previously stated that they planned to fight the ruling. Some sources indicated that NAR was running out of its legal defense funds, which might have led to the reversal. It could also be a show of strength for the organization. The case has left many questioning why NAR has so much power over the multiple listing services across the country and, therefore, the American residential real estate industry as a whole. If NAR fought and lost, it would cast doubt on the need for the trade group altogether. By paying the settlement, they prove the importance of pooling resources to protect the industry's interests.

There was one company that NAR was not able to include in the settlement. Berkshire Hathaway’s HomeServices of America was not released from the lawsuit and has instead decided to take the issue to the Supreme Court. In Berkshire Hathaway’s most recent annual report they addressed the lawsuit: “HomeServices intends to vigorously appeal on multiple grounds the jury’s findings and damage award. The appeals process and further actions could take several years. Based on available information to date, HomeServices believes losses are likely to occur as a result of the jury verdict in the Burnett case and that such damages could be up to $5.4 billion, excluding attorney’s fees, prejudgment interest, and other costs subject to determination by the court.”

HomeServices argument actually has less to do with the legality of commission split agreements and more to do with arbitration laws. "That trial should never have occurred because the plaintiffs are required to arbitrate their claims — and their arguments opposing arbitration must be resolved by the arbitrator, not a court,” HomeServices lawyers have argued in court documents.

Chris Kelly, executive vice president at HomeServices, explained it like this in a statement: "Our appeal is rooted in the principles of the Federal Arbitration Act, which clearly mandates that arbitration agreements be honored as they are written, including clauses that delegate interpretative authority to arbitrators. This appeal highlights a substantial inconsistency among circuit courts regarding the interpretation of arbitration agreements and delegation clauses."

Now that the case is settled, we will start to see how a new commission structure will change the way agents get paid. Some think it will lead to much lower commissions and hurt the real estate industry in the long run. Others believe the industry norms that have kept commissions around 6 percent will persist, and not much will change. Either way, the rest of the industry will forge ahead while HomeServices continues to go it alone by not settling. Not settling is a risky move, but if HomeServices prevails in court, it will once again cast doubt on NAR's ability to protect its members.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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