Michael McDonagh, real estate lawyer for lamacchia realty, biopic

Fiduciary Duties and Steering in Real Estate

Michael McDonagh, General Counsel for Lamacchia Companies, has written this article titled “Fiduciary Duties and Steering in Real Estate.” to give all real estate professionals clear and accurate information regarding the significant practice changes we are facing.

May 2024

Michael McDonagh is General Counsel for Lamacchia Companies. Previously he spent 17 years working for the Massachusetts Association of REALTORS® serving most recently for six years as their General Counsel and Director of Government Affairs. This article is for informational purposes only and is not intended as legal advice.

Fiduciary Duties and Steering in Real Estate

Introduction

The ongoing antitrust litigation and settlements in the real estate industry have initiated what will be the most significant practice changes in generations. The system of cooperation among brokers and cooperative compensation between brokers in a transaction facilitated by a multiple listing service was found by a jury to violate federal antitrust law. The National Association of REALTORS® has received preliminary approval for a settlement that, among other things, would end cooperative compensation via the MLS. Meanwhile the Department of Justice has signaled, in court filings and public comments, that they would rather prohibit sellers or listing agents from setting or making offers of compensation at all.

At this time, it remains to be seen whether the NAR settlement will receive final court approval. It also remains to be seen whether the changes will accomplish what the plaintiffs have asserted, namely, cost savings to buyers and sellers, an overall reduced cost of housing, and added competition of business models in the industry. While we wait for answers in those areas, the litigation has raised many questions and topics that call for very close analysis. This article intends to do just that for one specific topic that has created confusion- how a real estate agent adheres to their fiduciary duties while navigating cooperative compensation.

Fiduciary Duty and the Concept of Steering

If a real estate agent acting under an agency relationship shows their client property based solely on how much commission is being offered, they are violating their fiduciary duties to that client as well as their ethical duties and likely other requirements under state law. This unlawful practice would be a violation of the fundamental duty that real estate agents have when acting in an agency capacity, the duty of loyalty to the client. By doing this, the agent would be placing their own financial interests ahead of the client. This behavior has no place in our industry and any agent who engages in such behavior should lose their license. The Department of Justice and the Federal Trade Commission refer to this as “steering,” a term that is more commonly used to refer to the illegal practice of steering buyers toward or away from certain properties or neighborhoods based on a protected class such as race, religion, or national origin. The DOJ and FTC now also use the term in the context of “steering” buyers toward or away from properties based on how much commission is being offered or threatening sellers with the fear that buyer agents will “steer” buyers away from their property if they do not offer cooperative compensation.

Most recently, the DOJ discusses steering in their November 2020 complaint against the National Association of REALTORS® and in their Statement of Interest filed in February 2024 in the Nosalek v. MLS PIN case. To read what the DOJ writes is astonishing. One is led to believe that steering, or more specifically, breaking one’s fiduciary duty of loyalty is the default practice for real estate agents. This is a false view, lacking any empirical evidence and instead relying on cherry picked anecdotal evidence. After extensive, multiyear investigations into the residential real estate brokerage industry generally, and steering specifically, the DOJ,[1] the FTC,[2] and the U.S. Government Accountability Office[3] each failed to find systematic steering of buyers based on broker compensation, and only found accusations of steering.  Similarly, in the recent trial against NAR, the Plaintiffs’ economic expert admitted he could not identify any actual steering events.

The DOJ and those who espouse similar arguments of widespread commission-based steering of buyers perhaps know that, according to NAR, 97% of buyers now start their home search online. Buyers now have instantaneous access to data and, as a result of policy changes by NAR, many online portals now publicly display compensation being offered to buyer agents. These changes have brought more transparency for buyers; properties cannot be hidden from buyers and in some cases a buyer may find a property online before their agent. The DOJ and FTC foresaw this when, in 2007, they released a report admitting that the availability of data online would naturally prevent the ability of buyer agents to steer. The report entitled, “Competition in the Real Estate Brokerage Industry,” states, in part:

“If consumers have enough information about the quality of the service they have received, then firms that choose to engage in steering will develop a poor reputation for having done so and will consequently lose future business. Going forward, the Internet offers consumers increased knowledge of homes available for sale and, consequently, may limit the ability of cooperating brokers to steer buyers away from desirable homes listed by discount and fee-for-service brokers. The marketplace is likely to function more efficiently – and provide greater benefits to consumers – when consumers have direct access to more information about those listings.”[4]

Despite holding this view in 2007, the DOJ is not satisfied with how the industry has evolved since that time. In their 2020 complaint against NAR, they again claim that under MLS rules “buyer brokers may, in fact, steer potential home buyers away from properties with low commission offers by filtering out, failing to show, or denigrating homes listed for sale that offer lower commission than other properties in the area.” Perhaps this was possible in the days of printed MLS books and newspaper advertisements of homes when buyers had very limited direct access to information about homes for sale. This is simply not possible in today’s world of instantaneous access to all the homes for sale on the open market.  

The Fiduciary Duty of Disclosure- Working With the Buyer Client

With the practice changes in the proposed settlement, what becomes critically important is making sure the agent keeps their client’s interests as primary while also abiding by  other fiduciary duties, and for purposes of this discussion, the duty of disclosure. Here we are not talking about the obligation to disclose material facts or defects to other parties to the transaction. Instead, we are talking about the duty of the buyer agent to disclose “all relevant and material information that the agent knows and that pertains to the scope of the agency” and more specifically, “information that would affect the buyer’s ability to obtain the property at the lowest price and on the most favorable terms.” Information about whether a seller or listing broker is offering compensation to the buyer agent is highly relevant information for the buyer and would most certainly impact the price and terms of any potential transaction. However, starting in August there will no longer be a consistent and transparent way to convey offers of compensation for those MLS’s that are subject to the NAR settlement. For many listings, the buyer agent likely won’t know whether the seller or listing broker is willing to compensate the buyer agent. But if the buyer agent is aware that the seller and listing broker are unwilling in any way to negotiate compensation for the buyer agent, the buyer must be made aware of this information as soon as the agent becomes aware. Knowing this will certainly impact whether the buyer makes an offer and, if they do, the amount of any offer, all of which must be handled on a case-by-case basis.

This disclosure of information does not mean that the buyer agent is steering buyers toward only those properties that offer compensation or discouraging them in any way from making an offer on certain properties. They are sharing important financial information that will impact the buyer’s decision-making process. This fiduciary duty of disclosure is mainly thought of as a common law duty developed and applied by courts over time in our judicial system. Some states have incorporated this duty into statute or regulation. Massachusetts regulation, for example, declares that it is a false and deceptive act when a real estate agent “fails to disclose to a buyer or prospective buyer any fact, the disclosure of which may have influenced the buyer or prospective buyer not to enter into the transaction.”[5] For REALTOR® members, Article 1 in the Code of Ethics adds that, “the obligation to the client is primary, but it does not relieve REALTORS® of their obligation to treat all parties honestly.”

What the buyer agent is paid will be negotiated up-front in the soon-to-be nationally mandated buyer agreement under the proposed settlement. This requirement of having a written agreement in advance with a buyer, as already required in a number of states, is an improvement for the industry. All buyers will be fully aware of their financial obligations and how their agent will be paid. The agent will be paid the same regardless of whether the seller or listing broker is willing to cover some or all of that cost. In the proposed settlement NAR has eliminated any theoretical steering because a broker will not make more compensation by “steering” a buyer to a particular listing because it has a “higher” offer of compensation. 

Fiduciary Duty of Disclosure: Working With the Seller Client

Listing agents working under an agency relationship also have a fiduciary duty to make disclosures to the seller in the same way the buyer agent is obligated to the buyer. Here the listing broker must disclose to the seller, information that might affect the seller’s ability to obtain the highest price and the best terms in the sale of his property.” As part of this obligation, a listing agent must make a seller aware of their options and the impact their decisions will have on the behavior of buyers. Every listing is unique and thus the approach to cooperative compensation must be made on a case-by-case basis.

Depending on supply and demand and specific market conditions, it may make more sense for sellers to be proactive and in some way offer compensation to cooperating brokers to help attract more buyers, knowing that buyers may very well make the informed decision to prioritize listings where the seller or listing broker is open to or openly offering compensation. However, under other market conditions, the seller may choose to not proactively offer compensation to cooperating brokers and instead wait for buyers to submit offers that may or may not have a request for compensation. The choice belongs to the seller. However, it is the duty of the broker to inform the client of these choices and discuss how each approach will impact their goals as a seller. The seller should be informed that by not offering compensation or having a willingness to negotiate (again depending on market conditions) the seller’s decision may impact their ability to obtain the best price for the property.

The DOJ statements suggest that a listing agent might steer and therefore violate their fiduciary duty of loyalty when having these conversations. They say, “fear of having potential home buyers steered away from a property is a strong deterrent to sellers who would otherwise offer lower buyer broker commissions, which further contributes to higher prices for buyer broker services.” There is no question that a listing broker must inform the seller about costs the buyer will incur, how the buyer might react to those costs, and how the seller can market a house considering the buyer’s costs. This is not steering; it is the disclosure of important information that will impact the seller financially.

The duty of loyalty and the duty of disclosure should not be viewed as competing duties. One does not violate their duty of loyalty by disclosing information that has to do with how much compensation the agent may receive from a transaction. Instead, making the disclosure brings transparency and allows the client to make a more informed decision.

Where Does This Leave Us?

There are those who claim the new system will help buyers by ‘saving them money’ or ‘lowering the price of homes.’ That viewpoint forgets that some buyers will now decide to go it alone out of fear that they cannot afford to pay an agent out of pocket. It also doesn’t take into consideration the buyer who now feels they lost out in a bidding war because they asked the seller to pay their buyer agent – putting them at a competitive disadvantage. And without a buyer representative, who will negotiate on behalf of the buyer? Without an advocate trying to get the best price and terms for the buyer, the seller and listing broker will have the clear upper hand in negotiations. The buyer’s choice may soon be reduced to either going it alone, coming out of pocket, or risking losing in a multiple bid situation simply because they have a buyer agent. Unfortunately, some of those who advocated for buyer representation in the 1990s now suggest that buyers will be better off under the new practice changes and will face only “modest” and “short-term” additional costs.

In the end, the result of all this litigation will hurt home buyers, particularly first-time homebuyers. It will make it more difficult to hire an agent. For anyone who claims a buyer agent can be replaced by a search engine, ask yourself why that hasn’t happened in the last 20 years. Or better yet, try walking a mile in the shoes of a professional buyer agent. Then maybe you will understand that buyer agents are in the business of helping people- helping them navigate the most complex and emotional transaction that they will ever experience. Having a trusted advisor in that process is essential and it is the agency relationship and the fiduciary duties that provide the foundation for the relationship. It is unfortunate that this foundation seems to be somewhat forgotten.

[1] https://www.ftc.gov/sites/default/files/documents/reports/competition-real-estate-brokerage-industry-report-federal-trade-commission-and-u.s.department-justice/v050015.pdf

[2] Id. and https://www.scribd.com/document/589936946/The-Residential-Real-Estate-Brokerage-Industry-1983-The-Butters-Report

[3] https://www.gao.gov/assets/gao-05-947.pdf

[4] https://www.ftc.gov/sites/default/files/documents/reports/competition-real-estate-brokerage-industry-report-federal-trade-commission-and-u.s.department-justice/v050015.pdf

[5] 940 Mass. Code Regs. 3.16

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