The long tradition of home sellers paying their buyers’ real estate agents’ commissions may soon be a thing of the past.
A recent multibillion-dollar class action verdict in Missouri found that the National Association of Realtors (NAR), along with some of the nation’s largest real estate brokerage firms, violated antitrust laws by conspiring to artificially inflate and maintain sales commissions. The NAR and other brokerage firms face a number of new and older lawsuits making similar claims.
The lawsuits have already brought some changes to agreements that sellers enter into with their real estate agents and set parameters for how commissions are split.
But depending on how the cases ultimately unfold, they could shatter NAR’s dominance over a system that has long been criticized for penalizing sellers and buyers by setting broker commission rates between 5% and 6% of a home’s sales price and maintains. This would also have an impact on the entire real estate market.
“This whole practice needs to stop,” Patrick Knie, one of the lawyers representing plaintiffs in a recent case filed in South Carolina, told Yahoo Finance. “We just have to get back to a free market.”
A home for sale in Austin, Texas will be shown on October 16th. (Photo by Brandon Bell/Getty Images) (Brandon Bell via Getty Images)
The cases
On October 31, the furore surrounding this shakeup intensified when a unanimous eight-judge jury concluded that NAR and its co-defendants, as brokers affiliated with NAR’s professional organization, had caused $1.79 billion in damages to home sellers since 2015. dollars caused.
NAR said it plans to appeal the ruling. However, similar class action lawsuits have followed in the last three weeks in Missouri, South Carolina, New York, Illinois and Texas, leaving at least one older case in Illinois still awaiting trial.
At the heart of these lawsuits are NAR rules that plaintiffs’ attorneys allege effectively forced sellers to pay commissions to buyers’ agents.
NAR’s Multiple Listing Service (MLS), a database in which 88% of sellers have listed their homes this year, remains an important tool for connecting home buyers and sellers. Agents who list their clients’ properties in the database must also agree to share their commissions with other MLS participants.
The story goes on
This arrangement, the plaintiffs in the Missouri case and others argue, artificially inflates real estate prices and deprives sellers and, in one case, buyers of profits.
“In our small state of South Carolina alone, Keller Williams Group…essentially had $940 million in revenue in 2022. And if you just take the 3% commission that they imposed on the seller as a buyer’s commission, that’s the average that they made.” “If you impose something on the seller, that’s more than $28 million in a year said Knie.
NAR, in turn, claims that their commission structure, which has been in place for over 100 years, benefits consumers.
The Missouri jury disagreed. This ruling, which gives the judge presiding over the case leeway to award treble or “triple” damages, could increase the damages against NAR and its co-defendants to $5 billion.
Additionally, the Justice Department has also reportedly considered legal intervention. In July 2021, the department halted a settlement with NAR after concluding that it could harm its ability to protect competition in the marketplace, “profoundly affecting the financial well-being of Americans.” The agency has since appealed a judge’s order barring it from reopening investigations into two NAR policies.
Changes already
The threat of the outcome of the Missouri case — plus the others still in the pipeline and possible DOJ action — has already impacted the NAR’s influence on home buying and selling.
Read more: How to buy a house in 2023
Ahead of the trial, the organization changed the wording of its participation agreement to remove the rule that required its salespeople to split commissions. In the revised agreement, NAR’s mandatory buyer’s commissions will be reduced to $0.
While the change could prevent future antitrust lawsuits related to commissions paid out under the new NAR agreement, it may not be enough to stop the flood of lawsuits seeking to recover brokerage fees already paid.
“This is just window dressing in our opinion,” Matthew Shealy, another attorney representing the South Carolina plaintiffs, told Yahoo Finance. “We don’t think that solves the problem… Which buyer’s agent is going to bring a buyer to this house?”
Prospective home buyer Jessica Doctoroff talks with her real estate agent Stephen Bremis while looking at a condo for sale in Somerville, Massachusetts, April 2, 2009. (Portal/Brian Snyder) (Brian Snyder / Portal)
Real estate associations have also taken note at the local level.
For example, the Real Estate Board of New York (REBNY) announced that starting next year, seller’s agents will no longer be able to make an offer of compensation or directly compensate a buyer’s agent. Instead, any compensation from the seller to the buyer’s real estate agent must be negotiated and paid directly by the seller, the FAQ on the changes states.
In California, the real estate association there also updated its real estate purchase agreement last year to reflect how buyer agents receive their commissions.
The new purchase agreement, called RPA, contains a section called “Payment by Seller to Buyer’s Agent,” which indicates that “Buyer has entered into a written agreement for indemnification.” [the] The buyer’s broker.” It also states that the seller has agreed to pay the obligation.
What about commissions?
These latest changes fit with how Nick Oliver, principal broker at Hauseit, believes the cases will transform the industry.
“Ultimately, it will just lead to more transparency around how commission rates are negotiated with a seller and a listing agent and how they are actually represented in a listing agreement,” said Oliver, whose firm offers “à la carte.” Brokerage services that combine NAR’s traditional commission-based sales model and the for-sale-by-owner model. These hybrid services allow sellers to purchase only the listing services they need.
Another possible change is a complete block on NAR’s fee-sharing agreements.
“We think [the Missouri] “The decision increases the likelihood of a ban on commission sharing,” Jefferies equity analyst John Colantuoni wrote in a note to clients after the ruling.
But when that would happen remains to be seen. In a letter to shareholders, Zillow said that because of appeals, it could take years for the cases to impact the real estate market. At least Redfin CEO Glenn Kelman wrote in a blog post that the uncertainty surrounding the lawsuits could encourage customers to negotiate better terms to save money. Other experts agree.
“I think now would be the time to be more aggressive with the real estate agent and reduce that requirement,” Kevin Fields, associate professor of clinical finance and business administration, told Yahoo Finance.
Given the current real estate landscape, Fields is also curious whether buyers and sellers are negotiating a “flat 4% flat,” which would split 2% between the seller’s and buyer’s agent.
If that doesn’t work, Fields said, the move could be toward “hourly fee compensation rather than a commission structure with the high cost of home prices.”
What this means for the housing market
A man looks at real estate listings and homes for sale in Florida. (Jeffrey Greenberg/Universal Images Group via Getty Images) (Jeff Greenberg via Getty Images)
And the question arises as to how either a complete ban on commission sharing or reduced commissions would impact the entire real estate market.
In theory, this should lead to a decline in real estate prices, John Campbell, managing director of equity research at Stephens Inc., told Yahoo Finance.
“From an academic perspective, that’s how it should be,” Campbell said.
Fields agreed, noting that the commission is now “incorporated into most list prices.”
“If the seller has to pay a total of 5%, then they’re going to increase the purchase price of the house by 5% to offset the costs they have to pay for commissions,” Fields said. “So in theory, list prices should go down.”
This would be true in a more normal real estate market. But today’s market is so tight on supply that even the doubling of mortgage rates last year hasn’t been able to permanently slow the rise in home prices. In fact, home values hit another peak in August as mortgage rates hit a 22-year high.
As housing affordability worsens, the legal challenges could prompt lenders to offer real estate commissions that are paid into a borrower’s mortgage if the buyer is forced to pay their agent’s commission out of pocket.
Read more: Types of Mortgage Loans: Buying a Home in 2023
“This will be a strong push for lenders to start allowing these commissions to be included in mortgages,” Fields said. “The potential buyer would have to set both a purchase price and the potential commission price and then also pay the costs of the transaction that were forced on the buyer. The purchase will be a significantly larger part.”
This, he said, would result in “fewer home transactions in the United States.”
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed. Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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