The time-honored tradition of home sellers paying commissions to buyers’ real estate agents 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) and some of the country’s largest real estate brokerage firms violated antitrust laws by conspiring to inflate and maintain artificially high sales commissions. Law. Other brokerage firms face a slew of old and new lawsuits making similar claims.
The lawsuits have resulted in some changes to the agreements sellers sign with real estate agents that set commission-sharing parameters.
But depending on how the case turns out, they could dismantle the NAR’s grip on a system that has long been criticized for setting and maintaining agent commission rates between 5% and 6% of a home’s sales price. Bad for sellers and buyers. It also has a knock-on effect on the entire real estate market.
“This whole practice needs to stop. We just need to get back to the free market,” Patrick Knie, one of the attorneys representing defendants in a recent case filed in South Carolina, told Yahoo Finance.
Rumors of the shakeup intensified on Oct. 31, when eight jurors unanimously concluded that NAR and its broker co-defendants, who are members of NAR Professional Group, had caused $1.79 billion in losses to home sellers since 2015.
NAR said it plans to appeal the verdict. However, similar class action lawsuits have emerged in the past three weeks in Missouri, South Carolina, New York, Illinois and Texas, with at least one older case still awaiting trial in Illinois.
At the center of these lawsuits are NAR rules that defendants’ attorneys argue effectively force sellers to pay commissions to buyers’ agents.
NAR’s Multiple Listing Service (MLS), a database where 88% of sellers listed their homes this year, remains the primary tool for matching home buyers and sellers. Agents who list clients’ properties in the database must also agree to share commissions with other MLS participants.
Defendants in the Missouri case and others argued that the agreement artificially inflated home prices and deprived sellers (and in one case, buyers) of profits.
“Just in our little state of South Carolina, Keller Williams Group… sales in 2022 are basically $940 million. If you just consider that they force sellers to pay a 3% commission on the buyer’s commission, that’s their average The fees imposed on sellers exceeded $28 million in one year,” Knie said.
NAR believes that their committee structure Has been around for over 100 yearsbenefiting consumers.
A Missouri jury disagreed. The ruling gives the trial judge latitude to impose treble or “treble” damages, potentially increasing damages for NAR and its co-defendants to $5 billion.
Apart from According to reports, the Ministry of Justice Legal intervention was also considered. In July 2021, the department stopped moving forward precipitation The agency worked with NAR after concluding that it could impede its ability to protect competition in the marketplace, which “severely affects the financial well-being of Americans.” Appeal The judge ruled against reopening an investigation into two NAR policies.
The threat of the outcome of the Missouri case — coupled with other cases still pending and possible action by the Department of Justice — has impacted the NAR’s influence over home sales.
read more: How to buy a house in 2023
Before the trial, the group changed the wording of its participation agreement, eliminating a rule requiring its selling agents to share commissions. In the revised agreement, NAR’s mandatory buyer’s premium is reduced to $0.
While this change may prevent future antitrust lawsuits arising from commissions paid under the new NAR agreement, it may not be enough to prevent a flood of actions seeking to recover broker fees paid.
Matthew Shealy, another attorney representing South Carolina inmates, told Yahoo Finance: “In our opinion, this is just window dressing. We don’t think it solves the problem…The buyer’s agent will bring the purchase.” Where does home go? “House?” “
At a local level, real estate associations are taking notice, too.
For example, the Real Estate Board of New York (REBNY) announced that starting next year, seller’s agents cannot provide compensation to buyer’s agents or directly compensate buyer’s agents.Must be negotiated and paid directly by the seller, subject to FAQs about the changes.
In California, the Realtors Association last year updated real estate purchase agreements to similarly regulate how buyer’s agents’ commissions are paid.
The new procurement agreement, called RPA, includes aSeller pays buyer’s agent,” which indicates that “the buyer has entered into a written agreement to indemnify [the] Buyer’s Agent. ” It also states that the seller has agreed to pay the obligation.
What happens to commissions?
These recent changes are in line with the view of Hauseit principal agent Nick Oliver, who believes these cases will transform the industry.
“Ultimately, this just brings more transparency in how commission rates are negotiated with sellers and listing agents and how commission rates are actually presented in the listing agreement,” said Oliver, whose company offers “a la carte” services. . Brokerage services bridge NAR’s traditional commission-based sales model with the for-sale-by-owner model. These hybrid services allow sellers to purchase only the listing services they need.
Another potential change is the full block of NAR fee sharing protocols.
“We believe [the Missouri] “This decision raises the possibility that commission sharing will be prohibited,” Jefferies equity analyst John Colantuoni wrote in a note to clients after the verdict.
But when that happens remains to be seen. shareholder letter” Zillow said it could take years for these cases to impact the housing market due to appeals. However, at least Redfin CEO Glenn Kelman wrote an article Blog article Other experts agree that uncertainty surrounding litigation may encourage clients to negotiate better terms to save money.
“I think it’s time to take a more aggressive stance on real estate listing agents and reduce this,” Kevin Fields, associate professor of clinical finance and business economics, told Yahoo Finance.
In the current housing climate, Fields is also curious whether buyers and sellers can negotiate a “uniform 4% across the board,” where the 2% is split equally between the seller and the buyer’s agent.
If that doesn’t work, Fields said the move could be toward “an hourly fee rather than a commission structure with high house prices.”
What this means for the housing market
There is also the question of how a blanket ban on commission sharing or commission reductions would impact the overall property market.
In theory, this should push home prices lower, John Campbell, managing director of equity research at Stephens & Co., told Yahoo Finance.
“From an academic standpoint, that’s what it should be,” Campbell said.
Fields agreed, noting that the commission is now “built into the price of most listings.”
“If the seller has to pay 5 percent in total, then they’re going to increase the purchase price of that home by 5 percent to offset the costs they have to pay,” Fields said. “So in theory it should lower the listing price.” “
This is true in a more normal real estate market. But today’s market is so undersupplied that even a doubling of mortgage rates last year wouldn’t be able to permanently limit rising home prices. In fact, home prices took a hit and mortgage rates hit a 22-year high in August.
As housing affordability worsens, legal challenges could prompt lenders to offer real estate commissions to move their money into borrowers’ mortgages, if buyers are forced to pay their agents’ commissions out of pocket.
read more: Mortgage type: Buying a house in 2023
“This will be a strong push for lenders to start allowing these commissions to be included in mortgages,” Fields said. “Potential buyers would need to come up with a purchase price and a potential commission price, and then also be required to pay whatever closing costs are pushed. to the buyer. It will be a much larger purchase.”
This will lead to “fewer housing transactions in the United States,” he said.