LEGAL CORNER: The Real Estate Industry Under Attack: Major Legal, Economic Obstacles Agents Will Need to Overcome

The real estate industry has certainly been facing significant legal and economic headwinds in the past few months. On October 31, 2023, the real estate industry was dealt a major blow when a Missouri jury issued a $5-billion verdict against the National Association of Realtors, Inc., Keller Williams, Anywhere, RE/MAX and HomeServices of America (including two of its subsidiaries, HSF Affiliates and BHH Affiliates) in the Burnett-Sitzer case [see https://bit.ly/3Sutacn]. The jury found that these defendants were involved in a conspiracy in violation of antitrust law which had the “effect of raising, inflating, or stabilizing broker commission rates paid by home sellers.” The industry and the defendants did not expect this result.

The New Lawsuit Filed After Burnett-Sitzer

Immediately after the jury in the Burnett-Sitzer case issued its verdict, Inman reported that another class action lawsuit was filed by new plaintiffs against NAR and seven additional defendants, namely Compass, eXp, Redfin, Weichert Realtors, United Real Estate, Howard Hanna Real Estate Services, and Douglas Elliman, Inc. [see https://bit.ly/40s3hMk]. The plaintiffs in this new lawsuit are suing the defendants “for agreeing, combining, and conspiring to impose and enforce an anticompetitive restraint that requires home sellers to pay the broker representing the buyer of their homes, and to pay an inflated amount, in violation of federal antitrust law.” Clearly, the attorneys for the plaintiffs in Burnett-Sitzer took the opportunity to file this new lawsuit in the hope of achieving a similar result. While the defendants in the Burnett-Sitzer case have indicated their intention to appeal, any appeal could take many months or years.

The Economic Headwinds

In addition to the significant legal obstacles faced by the real estate industry, the economic headwinds are just as imposing. The real estate market has experienced a significant downturn in 2023. On October 19^, interest rates on the 30-year fixed mortgage rose to a multi-decade high of 8.03% [see https://bit.ly/40rDELE]. Rates have not reached levels in excess of 8% since 1999 and 2000. In addition to the lack of inventory, which continues to be an issue, these higher interest rates have clearly stunted the real estate market which experienced unprecedented growth in 2021 and 2022. While the rates have come off of the October 19^th high (i.e., 7.46% as of November 7^th), they still remain elevated, and many buyers may not want to risk locking in their rates due to the increased fluctuations in mortgage rates. In fact, many may decide against proceeding with a purchase altogether and simply wait it out.

Additionally, historically low inventory levels are likely being affected by the high-interest rates. Sellers, who may want to sell their homes, are holding off because they are locked into mortgages with significantly lower interest rates. It is hard to imagine that it was December 2020 when the 30-year mortgage rates were at a historic low of 2.80% according to Mortgage News Daily [see https://bit.ly/40rDELE].

Unemployment Rate on the Rise, Recession Risk Heightens

Another economic obstacle is the rise of the unemployment rate. On November 3, Inman, citing Chief Economist Ian Shepherdson of Pantheon Macroeconomics, reported that “looking at the longer-term trend, the unemployment rate is ‘creeping higher and is on course to breach the 4.0 percent mark soon,’ Shepherdson noted. ‘That would represent a half-point increase from the cycle low; if sustained for three months, this will trigger the Sahm Rule [see https://bit.ly/463K70n], which notes that every time unemployment rises by a half-point, the NBER [National Bureau of Economic Research] subsequently declares that the economy was in recession at that time.’” [see https://bit.ly/3QtURj9]. Therefore, while not absolutely certain, the risk of a recession in the coming months has increased.

Inman reported that while the unemployment numbers reported by the Bureau of Labor Statistics only slightly changed from September to October, they were notably higher than recent lows posted in April 2023. Inman noted that the unemployment rate of 3.9 % was up by .50% and the 6.5 million unemployed was up by 849,000. While increased unemployment may raise the risk of recession, it also reduces the risk that the Federal Reserve will raise interest rates. In fact, Inman points out that the futures market predicts that there may actually be a rate cut in the spring of 2024. A rate cut will certainly bode well for the real estate and banking industries.

The Antitrust Lawsuits and the Attack on the Buyer’s Agent

In reading the newly filed complaint against NAR and other defendants [see https://bit.ly/40s3hMk] one section stuck out in particular. In Paragraph 19, the complaint alleges that “Defendants’ conspiracy has kept buyer broker commissions in the 2.5% to 3.0% range for many years despite the diminishing role of buyer brokers. Many home buyers no longer search for prospective homes with the assistance of a broker, but rather independently through online services. Prospective home buyers increasingly retain a buyer broker after the client has already found the home the client wishes to buy. Despite this diminishing role for buyer brokers, their percentage of commission has remained steady, due to Defendants’ conspiracy.” However, the allegations made in the complaint are not based in reality.

The Role of the Buyer’s Agent has not ‘Diminished

The role of the buyer’s agent clearly has not diminished as the plaintiffs allege. In fact, the buyer’s agent’s role has become more critical throughout the past decades. With the increased enactment of legislation relating to the real estate industry, the real estate brokerage industry, fair housing and discrimination, property disclosure issues, and much more, the services buyer’s agents provide are needed now more than ever. While buyers do have the ability to search properties online, and while they may initially search for properties that they may be interested in, many choose to engage a buyer’s agent because of expertise and wide range of critical services a buyer’s agent provides.

A Fiduciary of the Buyer

Most importantly, a buyer’s agent is a legal fiduciary of the buyer. Fiduciaries include guardians, trustees, executors, officers, directors, attorneys, and persons acting in an agency capacity, such as real estate agents and agents acting under a Power of Attorney. The “fiduciary duty” is a critical element of successful day-to-day business operations and interactions in the real estate industry.

Section 443 of the Real Property Law of the State of New York defines fiduciary duties as requiring reasonable care, undivided loyalty, confidentiality, full disclosure, obedience and a duty to account. The law of agency strictly governs the responsibilities of the agent to the principal, so that a relationship of trust and confidence can be built. A fiduciary is a person or entity who or which acts on behalf of another and is a role having one of the highest standards known in law. While a buyer may certainly choose to forgo the right to engage a buyer’s agent, it is strongly recommended that buyers engage a buyer’s agent to represent and look out for their best interest.

Like all fiduciaries, real estate agents have the duties of undivided loyalty (except in the instance of a dual agency relationship), confidentiality, full disclosure, obedience and the duty to account. A real estate agent acting in a fiduciary capacity is required to act in good faith and exercise a prudent “duty of care, skill and diligence” when acting on behalf of the individual being served.

The True Services of a Buyer’s Agent

In any given real estate transaction, a buyer’s agent will show dozens of properties to their buyer clients. A buyer’s agent will many times pick up their clients at train stations or at their homes and drive them to see multiple prospective properties each day. They will spend countless hours researching locations, schools, restaurants, available shopping, available commuting options, and many other aspects of a particular property or neighborhood. Many times, all the work mentioned above will have to be done again and again, especially in the current market where often times buyers are outbid and lose properties on which they have made offers. The complaint fails to point out that a buyer’s agent does not get paid unless a transaction actually closes.

An Agent Plays an Integral Role in Providing Required Disclosures

A buyer’s agent is the person who often provides buyers with many of the legally required disclosures, such as those that explain their fiduciary duties and agency status under Section 443 of the New York Real Property Law [see https://bit.ly/3Mv4jBu], disclosures required under the Property Condition Disclosure Statement Act [see https://bit.ly/3FeUEem], agricultural district disclosures [see https://bit.ly/3MzzBHl], and truth in heating disclosures [see https://bit.ly/3QObqqf], to name a few.

A Buyer’s Agent Plays a Pivotal Role in Research and General Assistance

A buyer’s agent at a moment’s notice and upon request will visit the local tax assessor’s office or building department to research a property’s tax and certificate of occupancy history. In connection with co-op and condominium purchases, a buyer’s agent will, when asked, visit the co-op or condo transfer agent’s or management agent’s office to obtain copies of the bylaws (and any amendments), offering plan, rules and regulations, the purchaser’s application packet, and any other important information. Other services a buyer’s agent customarily provides to a buyer are assistance with completing the co-op’s or condo’s application and gathering the required financial documentation.

The Buyer’s Agent’s Role in Recommending Inspections

A buyer’s agent will advise the buyer of the types of inspections that are recommended in connection with any purchase. Particularly in a “Buyer Beware” jurisdiction, a buyer’s agent will ensure that the buyer is made aware of the risks of not completing any of the required inspections, such as physical and engineering, radon, oil tank, termite, well testing and others. The buyer’s agent will recommend a licensed inspection professional expeditiously so that a buyer does not risk losing out on a desired property. In the current environment, the speed with which a buyer conducts all of the required inspections can make the difference in whether a buyer’s offer is accepted.

A Buyer’s Agent’s Role is Critical in Recommending Legal and Lending Professionals

A buyer’s agent may also recommend the buyer to attorneys, lenders and mortgage brokers. It is critical for a buyer to engage a lender or mortgage broker as early as possible in the real estate transaction. The buyer’s agent will recommend a buyer to one or more lenders or mortgage brokers, who can assist the buyer with providing a pre-approval letter that a seller may require at the initial offer stage.

Additionally, the buyer’s agent, particularly one who is knowledgeable about mortgage products, interest rates and other aspects of the mortgage process, is able to advise the buyer regarding the various loan products that may be available, down payment assistance programs for first-time homebuyers, interest rate lock-ins and other closing timeframe issues.

The buyer’s agent will also customarily recommend one or more attorneys to a buyer so that the buyer is able to discuss any legal issues directly with the attorney as soon as possible. The buyer’s agent may refer the buyer to an attorney who is trusted and is knowledgeable about real estate transactions and is familiar with the variety of legal issues that may arise.

All Real Estate Agents Must Battle Through the Obstacles

Throughout the past several decades, the real estate industry has gone through its share of critical events, market crashes, banking failures, economic downturns, market bubbles, the economic crisis of 2008, the COVID pandemic, and now, there are new obstacles. Tough times require added resilience and fortitude. Whatever the ultimate results are of these lawsuits and after the economic headwinds have subsided, which eventually they always do, the real estate industry will still be there and the buyer’s and seller’s agents representing ready, willing and able buyers and sellers will always be right there as well, providing the guidance and support to the market, which has made them into the consummate and resolute professionals they are.