Real Estate

If I Were You…I’d Listen to this Podcast about Residential Real Estate & Antitrust

April 4, 2024 | Bona Law PC

Author: Molly Donovan & Aaron Gott

This Episode Is About: Residential Real Estate and Antitrust

Why: A settlement has been reached between the National Association of Realtors (or NAR) and the class action plaintiffs that would resolve the $1.8 billion verdict out of Missouri finding illegal collusion in the residential real estate industry. But the settlement raises its own antitrust concerns and this podcast provides actionable guidance for avoiding them. You can listen to this podcast here.

Some Background: The Missouri case focused on the NAR’s mandatory commission rule requiring the home seller to pay a non-negotiable commission to the broker representing the buyer. Plaintiffs alleged this resulted in a complete lack of competition for buy-side rates—which were artificially inflated. Before this lawsuit and copycat suits, virtually all brokerages in the industry operated under the rule and were aware that everybody else was operating in the same way.

But under the settlement, the NAR has agreed to implement a new rule prohibiting offers of buy-side compensation to be posted on the MLS (or multiple listing service, where most homes are listed for sale). Individual brokers can pursue buy-side commissions, but only off the MLS through negotiations. Assuming the settlement is approved, this change will go into effect in mid-July 2024.

Here’s what brokerages and local real estate associations need to know:

Bullet #1: Collusion often takes place after major industry disruptions like this one. Competitors panic and seek comfort in knowing how others in the industry plan to cope – we could call them “crisis cartels.” In this case, brokerages who are supposed to be competing should not discuss with one another how they plan to react to the eradication of the mandatory commission rule. Each brokerage should determine by itself how it will compete, what commissions it will seek, and from whom.

Bullet #2: Brokerages need to ensure that there isn’t a reversion back to a de facto mandatory commission rule. While some commentary suggests that disclosing to sellers and buyers that commissions are negotiable may be enough, we think that, in addition to disclosures, there must be an accessible process that prompts and facilitates bona fide arms-length negotiations over commissions. Commission negotiations should not be discouraged in any way. Disclosures to home sellers and buyers that commissions are negotiable should be understandable, easy to find and accompanied by an explanation of the actual process for negotiating.

Bullet #3: Buy-side commissions should be commensurate with the “value add” brought by the buy-side broker. This may require detaching the buy-side commission from the sale price of the home and documenting the rationale behind the final rate chosen. This shows that the rate is competitive and not an “industry-standard” or “fixed” commission.

Bullet #4: No steering. Buy-side brokers should present to clients, equally and fairly, all homes that fall within their specifications. And conversely, sale-side brokers should treat all offers equally notwithstanding commissions. Brokerages must be careful not to steer clients towards dealing with other brokerages that are known to “cooperate” with respect to commission sharing, and must not steer clients away from dealing with brokerages that are “uncooperative,” i.e., taking a unique approach to competition for clients.

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$1.8 Billion Antitrust Verdict Against Realtor Groups Provides Lessons for Brokerages, Realtor Associations, and Multiple Listing Services Nationwide

November 7, 2023 | Bona Law PC

Authors: Molly Donovan & Aaron Gott

A Missouri jury awarded a class of home sellers $1.8 billion dollars in finding that the National Association of Realtors (“NAR”) and some of the nation’s largest real estate brokerages “conspired to require home sellers to pay the broker representing the buyer of their homes in violation of federal antitrust law.”

At the center of the case was NAR’s rule requiring sellers to pay a non-negotiable commission awarded to the buyer’s broker at a transaction’s closing (“Mandatory Payment Rule”). The brokerages then compelled their agents to belong to the NAR and adhere to the NAR’s rules. The resulting lack of competition for buy-side commissions caused inflated prices that were forced upon home sellers. Every brokerage in the industry understood that every other brokerage was behaving in this same way.

In addition to inflated buy-side rates, the scheme was reinforced by other anticompetitive practices, including “steering”—where buyer brokers “steer” their clients toward homes attached to a non-negotiable buy-side commission—as opposed to homes for-sale-by owner where an automatic buy-side commission may not be offered.

Another resulting problem is that small brokerages looking to attract buyers have a tough time competing. Most importantly, there’s no opportunity to compete on price because the local NAR groups have locked prices in with the following of the major brokerages. Because of that rule—and other NAR rules—innovations with respect to process or pricing have been very difficult to achieve.

So, why has the scheme worked if it’s so bad for consumers and innovators? Because the NAR has near-exclusive control over the MLS or multiple-listing service.

The MLS is an essential database for listing homes because most homes sold in the United States are found there. If a broker does not belong to NAR and/or does not follow the NAR’s rules, it cannot access the MLS and, therefore, cannot effectively compete for selling or buying clients.

This is of antitrust concern in its own right. And certainly, the Mandatory Payment Rule is not the only rule in the industry that has—or could—draw antitrust scrutiny. Rules against buying/selling homes that are “coming soon,” for example, are also restraints of trade that could be a problem. So are rules that fix any of the terms or conditions of selling or buying a home.

Many predict the entire industry will change as a result of the Missouri verdict, the ongoing competition-law litigations and investigations, and the reality that today, home buyers can do their own legwork to find homes without needing a broker’s access or market knowledge. A buyer broker’s role can sometimes be relegated to accessing lock boxes, providing fill-and-sign access to standard forms, and collecting the check.

So what can a brokerage do now to anticipate the changes and guard against future antitrust concerns? Here is some high-level guidance that brokerages ought to consider:

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Five Antitrust Concerns for Real-Estate Professionals

March 4, 2020 | Bona Law PC

Author: Jarod Bona

I am an antitrust attorney and CEO of a growing business, but my wife loves real estate and we have been investors over the years. You may have seen our real-estate investing website. So when antitrust and real-estate issues combine, I pay close attention. Not surprisingly, we receive a lot of calls about antitrust violations or issues in the real-estate industry. In fact, the Department of Justice and FTC have recently been studying antitrust/real-estate issues.

Antitrust law is especially relevant to real-estate professionals like brokers and salespeople because (1) competitor brokers both compete and cooperate on a daily basis; (2) prices and commission splits are often announced and well-known; (3) there is a history of tension and battles between a traditional business model and new business models (this can create antitrust litigation in any market); (4) associations and cooperative Multiple-Listing Services (MLS) play large roles in the industry; (5) US antitrust enforcers, like the Department of Justice and FTC, have seriously scrutinized the real-estate industry.

Here are five antitrust issues that real-estate professionals should understand: Continue reading →

The Antitrust Laws Do Not Allow Real Estate Agents to Jointly Fix or Set Prices or Commissions

June 19, 2017 | Bona Law PC

If you have sold or purchased a home recently, you might be under the impression that real estate commissions—the price to engage a real estate broker—are fixed or otherwise set by law in different geographic markets. They aren’t—to do so amounts to price-fixing, which is a per se violation of the antitrust laws.

Like any other competitor—professional or not—real estate brokers and agents must compete for customer business on price, quality, and everything else. If competing professionals were to join together to fix commissions at a set price, they would violate the antitrust laws. And since it would be a per se violation, there are potential criminal penalties.

In fact, the U.S. Department of Justice, Antitrust Division, is engaged in prosecuting some other real-estate participants for per se antitrust violations—bid rigging: Several Northern California real-estate investors have pled guilty for bid rigging public real estate foreclosure auctions. Similar bid rigging of foreclosure auctions apparently occurred in Georgia, as well. We wrote about these bid rigging investigations long ago when DOJ’s antitrust activity was in its early stages.

But let’s return to real estate brokers and commissions: It is true that in most geographic regions, you see commissions at around the same level, no matter who you hire as a real estate agent. That will sometimes happen in a market; there is a rate that is around the market rate and most will price around that rate. We wrote a prior article about this situation, where real estate commissions ended up at the same level, but not due to any agreement. This was not an antitrust violation.

For some reason, however, there is an impression with real estate commissions that there is a “standard” or “legal” rate that real estate agents must price. If you are a consumer in this industry, it is important that you know that this is absolutely incorrect. If your real estate broker tells you otherwise, have them read one of our most popular articles: Five Antitrust Concerns for Real Estate Professionals.

Then, go ahead and negotiate. That is your right. You don’t have a right to win the negotiation, but real estate agents don’t have a right to agree among each other on prices either.

If you are a competitor for real estate services, it is particularly important that you understand that you can’t fix prices with other agents. If you do, you might find yourself on the wrong side of an antitrust lawsuit—possibly even brought by Bona Law—as we receive a lot of calls and emails about these issues. Or, worse, you could receive a call from a Department of Justice lawyer that opened an investigation into you or your company.

My interest in this issue goes beyond my role running a boutique antitrust law firm: I am also a long time real estate investor and I have a California real estate license. To capitalize on that background, we recently started a new blog directed at real estate investors, called Titles & Deeds. If you want to learn more, you can read about our real estate blog here.

This, of course, leads us to Kansas. I bet you didn’t see that coming. Let me explain.

Are the Kansas Real Estate Commission and its Members About to Violate the Antitrust Laws?

On June 16, 2017, Andrew Finch, Acting Assistant Attorney General for DOJ, wrote a letter to the Kansas Real Estate Commission expressing concern about a regulation the Commission is considering that would make it easier to fix prices by forbidding real estate brokers from competing on price by offering gift cards or similar items.

Apparently, according to the DOJ law, Kansas state law forbids real estate brokers from offering rebates, but doesn’t define the term “rebates.” The Kansas state ban, of course, is highly anticompetitive. It directly restricts price competition and harms consumers in Kansas. The Kansas government has unfortunately chosen to protect profits in the real estate profession over the well-being of its citizens.

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Takings and the Supreme Court’s Decision in Koontz v. St. Johns River Management District

February 12, 2015 | Bona Law PC

If you read The Antitrust Attorney Blog regularly, you might have noticed that I think that the governments—federal, state, and local—tend to overreach into our business, our pursuits, and our lives. And I have strongly advocated that we apply the federal antitrust laws to counter the bloating influence of governments everywhere into our markets.

You may have also noticed my interest in property and real estate. Part of that is personal—I believe that real-estate investing is a great idea. There are many advantages to it. And my wife and I are real-estate investors. Besides antitrust, my firm offers real-estate litigation (in addition to appeals, business litigation, and challenges to government conduct).

Well, these interests have collided into a massive project that I just completed with Luke A. Wake of the National Federation of Independent (NFIB) Small Business Legal Center. We finished the initial version of a law review article entitled Legislative Exactions After Koontz v. St. Johns River Management District.

Update: We are excited to announce that the Georgetown International Environmental Law Review published our article.

This isn’t the first time that Luke Wake and I have written something together. Last year, we published an antitrust article entitled The Market-Participant Exception to State-Action Immunity. Back when I was with DLA Piper, we also worked on an amicus brief together for the NFIB in the U.S. Supreme Court case of FTC v. Phoebe Putney Health System, Inc. Luke is a rising star in the legal world, so you should remember his name.

Koontz v. St. Johns River Management District

In 2013, the Supreme Court enhanced property rights in the United States when it decided Koontz. It was a sharply split decision that included an expertly written dissent by Justice Elena Kagan, who in my view is coming close to equaling Justice Antonin Scalia as the Supreme Court’s top writer.

As an aside, Justice Kagan (then Professor Kagan) was my Administrative Law professor at Harvard Law School and the wit that you see in her opinions was on full display in class. (She did, by the way, mention one day in class that Justice Scalia was her favorite Justice; I don’t think she meant that from an ideological perspective).

Koontz arose in the context of what is called the unconstitutional conditions doctrine, as applied to Takings law. If you don’t know what a Taking is, you can read this short article distinguishing eminent domain and inverse condemnation (takings).

First, some quick background. In 1987, the Supreme Court held in the case of Nollan v. California Coastal Commission that governments cannot attach conditions to permit requirements unless the condition bears a “nexus” to the impact of the proposed project. In 1994, the Supreme Court in Dolan v. City of Tigard further held that such conditions must also bear a rough proportionality to the harm from the proposed project.

The names of the plaintiffs in these cases conveniently rhyme, so people in the takings arena refer to this doctrine as the Nollan and Dolan requirements.

Here is what happened: Coy Koontz, an entrepreneur in the Orlando, Florida area, sought to develop some property that he held. Sounds reasonable enough. The property was zoned commercial and he sought a permit for its development.

Florida, however, had enacted comprehensive environmental restrictions that required a state agency to review any such applications to determine whether the proposed project will reduce wetlands. So, in this case, Mr. Koontz couldn’t develop his land unless the St. Johns River Management District blessed the project.

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Do Real-Estate Brokers Violate the Antitrust Laws By Charging Identical Commissions?

December 7, 2014 | Bona Law PC

I’ve often written about real estate on this blog. There are two reasons for this.

The first and most important reason is because my wife and I invest in real estate and thus talk about real estate, so it is on my mind. In fact, I have my California real-estate license. Bona Law PC also offers real-estate litigation services.

The second reason is that real-estate, in addition to its many advantages, creates many unique competition issues. Real-estate agents often engage in cut-throat competition with each other, sometimes even within the same brokerage firm. Yet, the nature of their job requires them to work together for almost every transaction.

In addition, the markets to sell real-estate are primarily local, even though national brokerage firms may dominate each individual geographic area. Within each locality, there are often a handful of large brokerage firms.

Finally, the market for real-estate services and commissions suggests some supra-competitive pricing in that most firms in a certain area will charge approximately the same commission. And the splits between the buying and selling agents are often equal as well. In the Minneapolis, Minnesota area for example, at least as of a few years ago, selling agents would often receive 3.3% and buying agents 2.7% of the purchase price. In my current market, a small village in North San Diego County, the buying and selling agents typically split the 5% commission.

Suspiciously, while technology and other competition has reduced relative prices for many professionals, commission percentages have held relatively steady for real-estate agents, despite the fact that buyers and sellers (especially buyers) can do much of their own homework online. How many of you have purchased a house without spending a lot of time online yourself looking at listings?

So does that mean that real-estate brokerage firms and agents are violating the antitrust laws all over the country? Should we coordinate a dramatic—made for the movies—event whereby federal agents knock down the doors of real-estate firms all over the country one morning, handcuffing and booking the agents that would do anything to get you in their car to show you some houses?

Probably not yet.

In November of this year, the Sixth Circuit decided a case called Hyland v. Homeservices of America, Inc. that nicely illustrates the line between antitrust violation and what is often called conscious parallelism or oligopolistic price coordination.

In Hyland, a class of people who sold residential real estate in Kentucky and used certain real-estate agents sued several real-estate brokerages as a class action under Section 1 of the Sherman Act. Plaintiffs alleged that defendants participated in a horizontal conspiracy to fix the commissions charged in Kentucky real-estate transactions at an anticompetitive rate.

Like agents in many localities, defendants each charged a typical or standard commission rate of 6%, and mostly resist any attempts to negotiate a lower rate. The buying agent’s commission is typically 3%. These numbers may look familiar to you if you bought or sold real estate recently, as real-estate services for most residential real-estate markets are similarly priced.

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Monopoly, Antitrust, and Making Money

September 15, 2014 | Bona Law PC

You may have noticed Peter Thiel’s provocatively titled article “Competition is for Losers” in the Review section of last weekend’s Wall Street Journal. Since we extol the virtues of competition here at The Antitrust Attorney Blog, perhaps you are bracing yourself for me to rip into his article?

No way! It is a great article. And his discussion is not only a good antitrust primer—without the jargon—but is also absolutely accurate. Thom Lambert at the excellent blog, Truth on the Market, seems to agree.

Of course, you have to read beyond the headline, which is, like most headlines, meant to grab your attention. Peter Thiel in his book “Zero to One,” makes a lot of great points, from both the macro and micro level. I’ll focus on the micro level here.

Thiel contrasts perfect competition with monopoly. In the typical perfect-competition scenario, many firms will sell the exact same product, like a commodity. The market, at least theoretically, will achieve equilibrium, and there is no market power. The market sets the price. The profits for the sellers are minimal—zero if you are talking about economic profit (which assumes a modest rate of return).

In a typical monopoly market, by contrast, the seller is the primary or only firm that offers the product and can determine its own price and quantity produced (of course, even a monopolist can often reach the edge of its own relevant market by setting a price too high). A monopolist usually has a high-profit margin and very healthy profits.

Of course, perfect competition and monopoly are endpoints on a continuum, with lots of room between.

There is a lot to say about the article, but I am going to limit myself to the micro level—the perspective of the individual business not the overall economy.

Thiel develops the unremarkable proposition that it is much better to go into business as a fancy monopolist than a perfect-competition soldier. Thiel says “If you want to create and capture lasting value, don’t build an undifferentiated commodity business.” That’s right.

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We Filed an Amicus Brief to the Minnesota Supreme Court in a Property Rights Case

June 29, 2014 | Bona Law PC

We are proud to announce that we filed an amicus curiae brief with the Minnesota Supreme Court on behalf of the Minnesota Vacation Rental Association last week in Dean et al. v. City of Winona, a case concerning municipal power and the right to rent out one’s residential property.

Four property owners represented by the Institute for Justice Minnesota Chapter challenged a City of Winona, Minnesota ordinance that caps the number of rental licenses per residential block to thirty percent (“the thirty-percent rule”). In other words, if you live in one of Winona’s low-density residential districts, your right to rent your home is subject to your neighbors’ exercise of theirs.

Here’s the background:

The City of Winona, Minnesota was unhappy with parking, density, and aesthetic issues in the residential areas near the Winona State University campus. Rather than enforce existing laws against problem residents (students), the City of Winona decided to expropriate its residents’ property rights by restricting the number of homes that could be rented out to 30% of the houses on a given block.

Thus, if six houses comprise your block, owners of only two houses on the block could obtain a license to rent to tenants.

Four homeowners challenged the thirty-percent rule after facing ruinous financial consequences as a result of the rule. One homeowner, who was deployed to Iraq, almost lost his home because the city wouldn’t let him rent it, thus depriving him of rental income to cover the mortgage payment.

Another couple bought a home in Winona for their daughter to live in while she was in college and as an investment that would provide rental income. After their daughter left, the home sat empty on the market because they couldn’t rent it and interested buyers backed out when told of the rental restriction.

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Even Individual Real-Estate Investors Can Violate The Antitrust Laws

January 6, 2014 | Bona Law PC

When you think about a government antitrust investigation, you probably picture monopoly accusations against large companies like Microsoft in the 90’s and early 2000’s or AT&T in the 70’s and 80’s. Or perhaps you imagine a global price-fixing cartel like that depicted in the movie The Informant.

In any event, the target in your mind is a big company, along with their officers and executives, and perhaps some sales people.

The Department of Justice actions against individual real-estate investors in Northern California should shatter those preconceptions. Over the last few weeks, the Antitrust Division of the DOJ has announced a series of plea agreements arising out of its antitrust investigations into bid rigging at real-estate-foreclosure auctions for certain Northern California counties.

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