November 2023

The Verdict Is In and Its Not Good For Brokers

Leave a Comment / Legal Awareness / By Sean Bukowski

A huge victory for home sellers in federal court may completely change the residential real estate market.
A jury awarded home sellers a $1.8 billion verdict against their brokers.
This verdict could also affect commercial real estate brokers.

There was a pretty huge lawsuit verdict a couple of weeks ago that affects the real estate world. And while the lawsuit focused on residential real estate sales, there’s little doubt that it could potentially have a big effect on commercial as well.

So lets talk about it.

Lawsuit Against Residential Brokers

On October 31, a jury in Missouri handed down a landmark $1.8 billion verdict against the National Association of Realtors (NAR) and two of the nation’s largest real estate brokerages, Keller Williams Realty and HomeServices of America. The plaintiffs, a class of Missouri home sellers, alleged that the defendants conspired to artificially inflate real estate commissions, resulting in overcharges to home sellers.

The plaintiffs’ case rested on two primary legal theories: antitrust violations and breach of fiduciary duty.

Antitrust Violations

The plaintiffs argued that the NAR and the two brokerages engaged in anticompetitive behavior by colluding to maintain artificially high commission rates. Specifically, they alleged that the defendants used their control over multiple listing services (MLSs) to enforce a policy of “co-brokering,” which requires sellers to pay a commission to the buyer’s agent even if they do not use one.

Breach of Fiduciary Duty

The plaintiffs also alleged that the defendants breached their fiduciary duty to act in their clients’ best interests. They argued that the defendants failed to disclose the full impact of the co-brokering policy on commission rates, thereby depriving them of the information they needed to make informed decisions about their home sales.

Implications for Residential Brokers

This case actually went to trial. And at the end, the jurors returned a stunning verdict for the plaintiffs – $1.8 billion. The Defendants have said that they will ask the court to reduce the verdict. And undoubtedly they will appeal. So this case will likely go on for a while. But that does not mean it won’t have a profound effect on the real estate industry.

So what will it all mean for buyers, sellers, and brokers? It will undoubtedly be more difficult for brokers to demand the customary six percent fee that they usually command now. Buyers and sellers will have more transparency and a better idea of what options are available. And I think its likely that you will see buyers and sellers each become responsible for their own broker’s fee. As you probably know, now it is customary for the seller to pay both buyer and seller brokers.

I think this is likely going to drive home prices down some. And perhaps buyers will be less likely to hire a buyer broker to help them find a house. And that could, potentially, lead to a lot of agents exiting the business.

Implications for Commercial Brokers

While the verdict was focused on residential real estate, it could also have ramifications for commercial brokers. Commercial real estate transactions typically have a similar system to residential transactions in that the buyer pays both the seller and buyer broker. Its possible that could be adjusted after this lawsuit. Having said that, commercial transactions are usually conducted by well-informed parties who are both represented by lawyers. And the agreements that commercial parties reach are often more likely to be upheld by a court. While there may be some fallout on the commercial side, therefore, its possible it will not have a great influence.

Having said that, commercial brokers should be prepared for increased scrutiny of their commission rates and may need to adapt their business models to remain competitive in the post-verdict landscape.

The $1.8 billion verdict is a stark reminder that the real estate industry is not immune to legal challenges. As the industry evolves and technology plays an increasingly prominent role, it is likely that the traditional commission structure will continue to face scrutiny.

Real estate brokers, both residential and commercial, will need to stay abreast of legal developments and be prepared to adapt their practices to ensure compliance with the law and meet the changing expectations of consumers.

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Another Step in the Right Direction

Leave a Comment / Real Estate Development / By Sean Bukowski

The new Austin City Council has made some very encouraging decisions to address housing affordability lately.
Last week, Austin became the largest city in the country to eliminate parking minimums.
This should help affordability by decreasing the overall cost of new developments.

I have written a couple times in this blog that the last Austin City Council election was very encouraging for housing advocates. At least three new councilmembers who appear to be pro-housing were elected to the Council. When you combine them with the previous makeup of the Council, there was legitimate optimism that we could move in the right direction and properly address affordability.

Well the last couple of weeks have seen that optimism put into action with a couple of decisions that have the chance of having a huge positive impact on our City. The first was step one in some significant changes to the land use code. I will talk about that possibility in a later blog entry.

This week, I want to talk about Austin becoming the biggest city in the country to eliminate minimum parking requirements for new developments. So lets do it.

Austin Eliminates Minimum Parking Requirements

In a landmark decision, the Austin City Council recently voted to eliminate parking minimum requirements for all new developments in the city. Thus in new buildings, developers will not be required to put in any parking if they choose not to. This decision is a major victory for housing affordability, public transportation, and the environment.

Parking requirements are a major driver of housing costs. When developers are required to build a certain number of parking spaces, it adds to the cost of construction and development. This cost is ultimately passed on to homeowners and renters.

Some studies show that a surface parking spot can cost a developer between $5,000 – $10,000 in extra costs to the development. And a spot in a parking garage can cost between $25,000 – $65,000. Which can increase rent for by up to $200 per month for each apartment unit. This is a significant increase, especially in a city like Austin where housing prices are already high.

By eliminating parking minimums, the Austin City Council is taking a step to make housing more affordable for all residents. Developers will have more flexibility to build more housing units on the same piece of land, and they will not have to pass on the cost of parking to homeowners and renters.

This is especially important for low-income residents, who are often disproportionately burdened by the high cost of housing. Eliminating parking minimums will help to make housing more affordable for all Austinites.

Eliminating parking minimums will promote public transportation

In addition to running up the costs of development, parking minimums also discourage people from using public transportation. When people know that they will be able to find free and convenient parking at their destination, they are more likely to drive.

Eliminating parking minimums will make it easier for people to use public transportation, walk, or bike. This will reduce traffic congestion and make it easier for people to get around the city.

Thus by reducing the number of cars on the road, eliminating parking minimums will benefit the environment. This change has the possibility of making Austin a more walkable, livable city where you can live, work, and play.

Conclusion

The Austin City Council’s decision to eliminate parking minimum requirements is a major victory for housing affordability, public transportation, and the environment. This decision will help to make housing more affordable for all residents, reduce traffic congestion, and improve air quality.

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The Unencumbered Joy of Buying Free and Clear

Leave a Comment / Property Purchase Process / By Sean Bukowski

When a buyer acquires commercial real estate, he or she takes it subject to any leases or encumbrances on the property.
It is very important, therefore, to have a title search done prior to acquisition to know what encumbrances are present.
And to have a plan to deal with the lienholders after the purchase.

During my work week, I sometimes get reminded of interesting issues that commercial real estate owners may face. And I think – this would make a good blog idea. This happened to me recently when I was reminded of the challenges that owners face when dealing with leases and other encumbrances on properties they are purchasing. Obviously these can significantly impact a project, and it is important for owners to understand their rights and obligations under these agreements.

So that’s what we are going to talk about this week.

Leases can be a Burden to an Acquisition

Clouds on title can come in many forms. And one of those, of course, is a lease. A lease is a contract between a landlord and a tenant that gives the tenant the right to occupy and use the landlord’s property for a specified period in exchange for rent.

When a buyer purchases a property that is currently leased to tenants, the buyer is required to honor the terms of any existing leases. He or she takes the property subject to the leases. This means that the buyer cannot evict the tenants or change the terms of the leases without the tenant’s consent.

If the buyer wants to terminate a lease early, he or she will need to negotiate with the tenant to reach an agreement. This may involve paying the tenant a buyout fee or offering them a new lease on different terms. This can, therefore, increase the cost of the project for the buyer.

Buyers Should be Aware of Other Encumbrances Also

But leases are not the only type of encumbrance that can cloud title. There are also easements, liens, and restrictive covenants, etc. All of these will limit the owner’s rights in the property.

Easements are the right of one party to use another party’s property for a specific purpose. For example, a utility company may have an easement on a property to lay underground pipes.

Liens are claims against a property to secure a debt. For example, a construction company may have a lien on a property to secure payment for work that it has done.

Restrictive covenants are limitations on the use of a property. For example, a restrictive covenant may prohibit the construction of certain types of buildings on a property.

When a buyer purchases a property with encumbrances, it is also required to take the property subject to those encumbrances. So once again, to get title cleared, the buyer could have to negotiate with the lienholders.

Negotiating with Tenants and Encumbrance Holders

Negotiating with tenants and encumbrance holders can be a complex and challenging process. It is important for owners to have a clear understanding of their rights and obligations under the existing encumbrances.

This shows why title insurance is so important when acquiring commercial real estate. A title commitment will highlight any clouds on title and your lawyer can make sure they are dealt with before closing. And if the encumbrances do not show up, then the title company is responsible for it post-closing.

We recommend, therefore, that before purchasing a commercial real estate property, you:

Conduct a thorough title search to identify all of the leases and encumbrances on the property.
Have an experienced commercial real estate attorney review all of the leases and encumbrances identified.
Develop a plan for negotiating with tenants and encumbrance holders.
Be prepared to offer tenants and encumbrance holders fair compensation in exchange for their consent to terminate or modify the leases or encumbrances.
Be patient and persistent. Negotiating with tenants and encumbrance holders can take time and effort.

Leases and encumbrances can be a challenge for commercial real estate owners, but they can be overcome with careful planning and negotiation. By working with an experienced commercial real estate lawyer, developers can minimize the risks associated with leases and encumbrances and maximize their chances of success.

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