The residential Real Estate industry prepares for its day of reckoning

I rarely write about bearish trends or companies that I believe are destined to fail, but not because I’m anti-short selling. It’s just more fun to be bullish, and, in my experience, it’s a lot easier to make money on the long side than the short side. 

However, earlier this month I stumbled onto a story about a group of exceptionally successful class-action litigators that want to disrupt the residential real estate industry by ending the decades-old practice of requiring home sellers to pay for the broker representing the buyer of their home. Suffice it to say if this class-action lawsuit goes the plaintiff’s way, the residential real estate industry will be turned upside down. And better yet, the next time you decide to sell your house, you could walk away with a whole lot more money in your pocket.

Now, if you’ve ever sold a home, you know how big a figure 6% can be. Between the 3% you pay your agent for representing you on the sell side, and the 3% you’re obligated to pay the buyer’s agent, you’re likely shelling out around $30,000 in commission fees if your home sells for around $500,000.

I, for one, would rather not have to pay thousands of dollars to the guy that’s negotiating against me and trying to get me to sell my house for less than I’m asking. And, if you’re buying a home but only need help filling out the home purchase agreement, is it necessary to pay a buyer’s agent $5,000, $10,000, or even $15,000?

The bottom line is we could be on the cusp of a radical shift in the costs associated with selling a home. And while this would likely benefit every American selling a home, it could take a painful bite out of the profits of public companies like Realogy Holdings Corp (NYSE: RLGY) and Re/Max Holdings (NYSE: RMAX), and radically change the ways homebuyers go about buying their next home.

The Lawsuit

On March 6, 2019 a class action lawsuit was filed with the US District Court for The Northern District of Illinois that lists Christopher Moehrl, and all others similarly situated as plaintiffs, and The National Association of Realtors (NAR), Realogy Holdings Corp (NYSE: RLGY), HomeServices of America — a Berkshire Hathaway (NYSE:BRK.A, BRK.B) Affiliate — Re/Max Holdings (NYSE: RMAX), and Keller Williams Realty as defendants.

The lawsuit, which is being spearheaded by Cohen Milstein Sellers & Toll PLLC and Hagens Berman Sobol Shapiro LLP, claims that the defendants conspired “to require home sellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount in violation of federal antitrust law.”

The 30-page lawsuit filed by Cohen Milstein and Hagens Berman allege that the conspiracy “has centered around NAR’s adoption and implementation of a [1996] rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation (the “Buyer Broker Commission Rule”) when listing a property on a Multiple Listing Service (MLS).”

Here’s what Steve Berman, managing partner of Hagens Berman had to say about the suit:

“When you compare commission rates in these affected housing markets to those in countries with competitive real-estate broker markets, the numbers tell a very clear story. We believe that NAR and Big Four have devised a series of checks on broker commission rates to all but guarantee their goal of price-fixing, costing home sellers thousands in excessive commissions paid on each sale.”

While most licensed real estate agents would have you believe that this lawsuit, like others before it, is without merit and destined to be thrown out of court, there’s something you need to know about the two lead law firms in this case.

Steve Berman, the managing partner of Hagens Berman, is considered one of the fiercest attorneys when it comes to class-action lawsuits. Berman served as special assistant attorney general for 13 states in the late-1990s when the tobacco industry was ordered to pay the states $206 billion – the largest civil settlement in history. Hagens Berman was also successful in securing a $1.6 billion settlement in the Toyota Unintended Acceleration Litigation in (originally filed on March 15, 2010 and settled on December 26, 2012).

Cohen Milstein’s laundry list of courtroom settlements include:

1. A $400 million antitrust settlement in the 2014 eBooks price-fixing suit against Apple (NASDA:AAPL).
2. $175 million stemming from a lawsuit that alleged British Petroleum (NYSE:BP) and two of its senior executives misled investors about the extent of the oil spill that resulted from the Deepwater Horizon explosion.
3. An $835 million verdict against some of the largest chemical companies in the world for conspiring to fix the prices for certain chemicals used in the manufacturing of polyurethanes.

The takeaway here is neither Hagens Berman nor Cohen Milstein are poorly funded ambulance chasers.

These two firms have been awarded billions-of-dollars for their clients. And unlike many smaller class-action firms operating on a shoestring budget, Hagens Berman and Cohen Milstein aren’t strapped for cash. These two firms have the human resources and the money to see this lawsuit through to the bitter end.

Winners & Losers

While it’s difficult to say how this case ultimately plays out, there’s no denying that the buy-side of the real estate industry has been, and remains, ripe for disruption.

Think about the last time you were working with a real estate agent to buy a home. Your agent probably provided you with information on the current market conditions in your desired area, helped you figure out how much house you can afford, and researched homes for you using the MLS.

Well, thanks to the internet, sites like Redfin (NASDAQ:RDFN), Zillow (NASDAQ:Z), and Bankrate.com, you can do all that work on your own. And if you need to find information on school districts, tax rates, utility costs, and local zoning ordinances, that too is easily found on the internet.

All that’s left is price negotiation.

In my experience, buyers’ agents are great at relaying your offer price to the seller’s agent. Despite what you see on Property Brothers, House Hunters, and Million Dollar Listing, I don’t hear too many real-life stories of agents telling their buyers the exact price they should offer.

So, how much should a buyers’ agent expect to be paid for telling his clients to make an offer they’re comfortable with and is within their budget? I’d argue not much.

Now, while we are likely years away from receiving a verdict in this case, if Moehrl v. NAR, et al. goes the distance and a jury finds in favor of the plaintiffs, I’d expect the shares of RMAX and RLGY to take a substantial hit from what I believe will be a massive reduction in buyer-agent revenues.

Just as we saw when Amazon.com Inc (NASDAQ:AMZN)  disrupted bricks and mortar, Netflix (NASDAQ:NFLX) upended Blockbuster, and Uber took a bite out of the taxi industry, established business rarely welcome disruptive innovation. And while full-service real estate firms may view Moehrl v. NAR, et al. as nothing more than a frivolous lawsuit aimed at breaking up the old guard, the bottom line is Cohen Milstein, and Hagens Berman represent disruptive innovation. And I do not doubt that innovative entrepreneurs will be ready to pounce before the ink dries on this verdict. 

–At the time of publication, Byrne had no positions in the stocks mentioned–

Contact Bob Byrne: [email protected]

Follow him on Twitter @PCYeti

Story by ProactiveInvestors