Washington, D.C. CNN –
Buying a plane ticket through a travel agent or trading stocks through a stock broker seem to be relics of the past. And yet, every day, people across America hire a real estate agent to help them sell a home. It is one of the few industries that has largely avoided the disruptions that have helped consumers cut costs in the Internet age.
And that’s largely because of the power of the National Association of Realtors, the largest professional organization in America and a major lobbying group for the real estate industry.
But Tuesday’s verdict in a Missouri court found that NAR and two brokerage firms, Homeservices of America and Keller Williams Realty, were liable for $1.8 billion in damages because they conspired to Keeping commissions artificially high could mark the beginning of the end for how houses are bought and sold.
Two other companies originally named in the home sellers’ lawsuits – Re/Max and Anywhere Real Estate, formerly known as Realogy, the parent company of Coldwell Banker, Century 21, Sotheby’s International Realty and Corcoran – have settled out of court for a combined $140 million -Dollar. As a condition of the settlement, they each announced a commitment to make changes to their business practices – including requiring their agents to be members of the NAR.
While state governments license real estate agents, NAR has a comprehensive code of ethics that members must adhere to.
NAR and the brokerage firms have vowed to appeal the ruling, meaning the real estate commissions won’t disappear immediately.
NAR has been battling U.S. antitrust regulators and litigation over anticompetitive practices for years, and this ruling is the association’s biggest setback to date.
This ruling is just one of several lawsuits currently filed against NAR, which are also being reviewed by the U.S. Department of Justice.
Aside from the ruling and the choppy real estate market, NAR has already had a difficult year.
In August, the NAR president, a member agent named Kenny Parcell, resigned amid allegations of sexual harassment. Last month, Redfin, an Internet real estate company, left the association.
As for the commissions, NAR has said it will appeal the ruling and that the issue will take years to resolve.
“This matter is far from final as we will appeal the jury’s verdict,” said Mantill Williams, NAR vice president of communications. “In the meantime, we will ask the court to reduce the damages awarded by the jury.”
“This is not the end,” said Keller Williams spokesman Darryl Frost.
The cornerstone of the plaintiff’s argument is that NAR forces home sellers to pay an excessive commission, which is then split between their agent and the buyer’s agent. The home sellers argued that splitting commissions as a requirement for access to the Multiple Listing Service was unfair and kept commissions artificially high.
When a home is listed for sale, the seller typically offers their agent a fixed commission. The commission has been consistent for decades at about 6% of the sales price, typically with a 3% split between buyer and seller agents.
In a competitive market, home sellers argue, the cost of the buyer’s agent’s commission would be paid not by the seller but by the buyer who received the service. The sellers said buyers should be able to negotiate the fee with their agent and that sellers should not be required to pay the fee.
NAR and the other defendants argued in court that their commissions were always negotiable. They also said the system, in which the seller’s agent splits the commission with the buyer’s agent, allows buyers who are already burdened with costs such as down payment, closing costs, inspections and appraisals to avoid the additional costs incurred by the payment of a broker arises as well.
Consumer advocates welcomed the ruling and hoped that the plaintiffs would also receive their request that the judge order changes to the commission structure in the industry.
Although the award is already large, it could rise even further – to a total of $5 billion, depending on what the judge decides.
The jury clearly saw that the industry had limited price competition to the point where it could ensure near-uniform commissions of 5 to 6 percent, said Stephen Brobeck, senior fellow at the Consumer Federation of America. The jury made its decision quickly, he said, and only thought about it for a few hours.
“The scope of the injunctive relief decided by the court will have a major impact on whether a price-competitive system develops that reduces consumer costs and increases the quality of services,” said Brobeck. “We hope the court will sever the connection between listing agent and buyer agent compensation and relieve sellers of the obligation and need to compensate buyer agents.”
Effects of Commissions on Buyers and Sellers
The way commissions are set isn’t expected to change much in the short term, brokers say.
The longer-term impact of the ruling could be that the pairing of the buyer’s agent’s commission and the seller’s agent’s commission will eventually be separated.
Analysts at Keefe, Bruyette & Woods, an investment banking firm, said in a report released before the ruling that the NAR litigation and related government actions are likely to disrupt the residential brokerage industry’s commission structure by eliminating the buyer-broker system. Commission Rule will ultimately reshape the practice of listing brokers and sellers and setting and paying broker commissions for the buyer.
And since the commission paid to an agent is typically built into the price of the property, property prices could also fall if they were reduced or became more negotiable, they said.
“Nothing changes in the short term,” said Jen Davis, a Keller-Williams agent with Holt Homes Group in Springfield, Missouri. “Commissions have always been negotiable. This will continue to be the case.”
However, there could be unintended consequences if changes were made, she said.
“There are buyers who don’t know how to buy a home,” Davis said. “You have to pay a down payment, closing costs, appraisals and inspections. If they also have to come up with money to pay an agent, some people simply don’t do it and get in over their head, or they don’t buy at all. If there is no representation, the market will be less inclusive.”