👋 Happy Friday! This Sunday will be National Make a 🦮 Dog’s 🐕‍🦺 Day. Subaru created the day to remind us to adopt, don’t shop when it comes time to let a dog pick you as its human.

1 big thing: 1 million fewer Realtors?

Chaos is wracking the National Association of Realtors leadership, and two class action suits are facing the Association that could lead to billions of dollars in damages.

Why it matters: The lawsuits could end the longstanding custom and NAR requirement that the listing agent share sales commissions with the cooperating buyer’s agent.

Not only did the NAR president recently step down amid multiple sexual harassment allegations, but the powerful trade organization is battling two massive class actions over their requirement that listing agents pay buyer agents a commission on each sale.

Plaintiffs argue that buyer agent commissions have been artificially inflated due to NAR rules requiring home sellers to compensate the buyer-broker.

What they’re saying: NAR argues that the rule has been in place for 100 years and helps consumers.

RE/MAX and Anywhere Real Estate, also named defendants in the lawsuits, have settled with the plaintiffs. As part of that settlement, the companies can no longer:

Require franchisees or agents to join NAR.
Comply with NAR’s “Participation Rule,” under which sellers pay for 1) buyer-broker commissions and 2) access to the local real estate board’s Multiple Listing Service (MLS).

Situation Awareness: If the class action courts decide to mirror the settlements and issue an injunction prohibiting sellers and listing agents from paying buyer-broker commissions, REALTORs could start leaving the profession in droves.

According to analysts at Keefe Bruyette Woods (KBW), the injunction could:

Shrink the annual commission pool worth $100 billion by 30 percent as consumers start negotiating their own contracts with buyer brokers.
Shrink commission rates by 200 basis points.
Drive as many as 1 million brokers out of the industry.

By the numbers:

The top 20% of agents are responsible for 80-90% of transactions. In comparison, the top 10% of agents are responsible for about two-thirds of transactions, according to KBW analyst conversations with brokerage industry participants.
The agent count in the U.S. could decrease to an estimated 300,000 to 600,000, based on the current NAR membership of 1.6 million.

A twist in the story: In early October, just two weeks before the trial began, NAR announced a change in its interpretation of the Participation Rule:

Listing brokers can now offer zero commission to buying brokers and remain in compliance, a sharp about-face for an organization that has insisted for decades that a compensation offer of zero did not comply with the rule.

What’s next: The first class action trial began on October 16. We’ll keep you up-to-date on any new developments.

2. Title Companies and Real Estate Agencies: Beware of Regulatory Crack-Down

Regulatory authorities at the state and federal levels are cracking down on illegitimate joint ventures formed by title insurance firms and real estate agencies.

Why it matters: Joint ventures between title agencies and real estate companies aren’t illegal.

However, authorities have found that many such collaborations are sham operations that don’t meet regulatory standards.
If regulators find that your joint venture doesn’t follow regulations, you could be in serious legal trouble.

The Real Estate Settlement Procedures Act (RESPA), the Consumer Financial Protection Act (CFPA), and specific state regulations prohibit settlement service providers, such as title agencies, from offering kickbacks to real estate agencies who refer work to them.

To get around this prohibition, some title firms and real estate agencies create a joint venture (JV), which allows them to streamline the settlement process and share in the profits. However, some JVs are little more than shell corporations used to funnel financial rewards to real estate agencies for referrals illegally.

A comprehensive white paper by McGuire Woods law firm states that a legitimate JV between a title company and a real estate agency must satisfy three statutory conditions:

The company must make specific disclosures to consumers who are being referred.
Consumers must not be required to use any particular settlement–services provider.
The referring party may only receive a return on ownership interest.

Deviations from this third point are of most significant interest to regulators. According to McGuire Woods, certain illegitimate joint ventures “contribute nominal or even no capital in exchange for their ownership interests in the JV,” leaving the venture wholly undercapitalized for the services it claims to provide. The law firm also posits that such businesses often show profit dividends that are “wildly disproportionate” to their investments and that business models like these increase costs and stifle competition.

Other signs that a JV is not legitimate include a failure to have dedicated office space (i.e. a separate exterior door and lobby), employees, insurance, or other operational necessities.

The bottom line: RESPA, CFPA, and state regulators are spotlighting JVs between title agencies and real estate companies. If your company is involved in a joint venture with a settlement service provider, comply with all federal and state regulations.

Go deeper: Housingwire

3. Catch up fast

Foreclosure filings are up nationwide by 28% over last quarter and 34% over last year at the same time. DSNews
New home listings are up 2% since the beginning of September. National Mortgage Professional
Mortgage bankers expect the average 30-year mortgage rate to drop to 6.1% by the end of 2024. Realtor
Home sales are on track for the slowest year since the Great Recession. WSJ
Orlando area home sales fell another 8.4% in September from the month before. Orlando Sentinel
At the end of the largest tax audit in U.S. history, Microsoft has been ordered to pay $28.9 billion in back taxes, penalties, and interest for trying to shunt profits through a small Puerto Rican factory. ProPublica
The Fall housing market cooled faster and more than usual this year. DSNews

4. Pic of the day

Embrace the shake Photo: Ryan Stone (http://ryanstonephotography.com)

Constraints are powerful change agents for business.

Why it matters: Whether you’re a Realtor who focuses on buyers or you’re a title agent who uses JV agreements to ensure you have a full pipeline of closings, based on the stories above, you’re facing some significant constraints coming your way.

If your main source of income is from listing brokers paying a portion of the overall sales commission to you, and NAR’s rules do away with that century-old way of doing business, what do you do?
If your main source of referrals is from Realtors who own an interest in your title agency so they can share in the profits, but it is found to be out of compliance with the regulations, requiring you to shut it down, how do you keep the Realtors coming back?
If your title agency relies on buyers’ Realtors referring business to your title agency, but buyers’ agents leave the profession because they no longer get paid a part of the commission, how do you survive as a title agency or as a Realtor who relied on those distributions?

What if I’d asked you in October 2019 to imagine a pandemic shutting down all businesses worldwide so no one can leave their homes to work? What solutions would you have devised to survive?

What solutions did you come up with?

Constraints come at business owners in the form of new technology (think AI), changes in the law or regulations, employee resignations, and new competitors.

Those constraints can be seen as obstacles that cause us to give up, or they can be taken as challenges to improve how we do what we do.

💭 Joe’s thought bubble: Business is always changing with new constraints. Exercising our organizational brains to prepare for constraints is necessary to be ready to roll with the punches.

SWOT analyses and focusing on our visions and core values are two things we can use everyday to be prepared when the Ch-Ch-Ch-Changes like these pop up.

Go deeper: The power of constraints: Phil Hansen at TEDxKC