NAR Lawsuit: After $1.8B Verdict, Clock Is Ticking on 6% Real Estate Commission

Washington, DC
CNN
—

Using a travel agent to buy a plane ticket or a stockbroker to trade stocks seems like relics of the past. However, every day people across America hire a real estate agent to help them sell a home. It’s one of the few industries that has largely managed to avoid the disruption that has helped consumers cut costs in the Internet age.

This is largely due to the power of the National Association of Realtors, America’s largest professional organization and a major lobbying group for the real estate industry.

But a ruling Tuesday by a Missouri court, which found NAR and two brokerage firms, Homeservices of America and Keller Williams Realty, liable for $1.8 billion in damages for conspiring to keep commissions artificially high, may mark the beginning of the apocalypse. How homes are bought and sold.

Two other companies were initially named in the lawsuits filed by home sellers – re/max And Anywhere real estate, formerly known as Realogy – the parent company of Coldwell Banker, 21st Century, Sotheby’s International Realty and Corcoran – settled out of court for a total of $140 million. As one of the terms of the settlement, each declared a commitment to making changes in their business practices — including no longer requiring agents to be members of NAR.

While state governments license real estate agents, the NAR has an extensive code of ethics that it expects members to adhere to.

NAR and the brokerage firms have vowed to appeal the ruling, meaning real estate commissions won’t go anywhere immediately.

NAR has been battling antitrust officials and lawsuits in the United States for years regarding anti-competitive practices and this ruling is the association’s biggest setback to date.

The ruling is just one of several lawsuits currently filed against NAR, which is also facing scrutiny from the U.S. Department of Justice.

NAR has already had a tough year, putting aside governance and a turbulent housing market.

In August, the head of the NAR, an agent member named Kenny Parcell, She resigned amid sexual harassment allegations. Last month Redfin, an online real estate company, has left the union.

Regarding the committees, NAR said it would appeal the ruling and that the case would not be resolved for years.

“This matter is not about to become final because we will appeal the jury’s verdict,” said Mantel Williams, NAR’s vice president of communications. He added: “In the meantime, we will ask the court to reduce the damages awarded by the jury.”

“This is not the end,” Keller Williams spokesman Darrell Frost said.

The cornerstone of the plaintiff’s argument is that NAR forces home sellers to pay an inflated commission that is then split between their agent and the buyer’s agent. Home sellers argued that commission splitting as a condition of access to the Multiple Listing Service was unfair and kept commissions artificially high.

Typically, when a home is put on the market for sale, the seller offers the broker a set commission. For decades, the commission has been around 6% of the sale price, usually split 3% between the buyer’s agent and the seller.

Home sellers claim that in a competitive market, the cost of a buyer’s agent’s commission would not be paid by the seller, but rather by the buyer who received the service. Sellers said buyers should be able to negotiate fees with their agent, and that sellers should not be on the hook to pay them.

NAR and the other defendants argued in court that their commissions were always negotiable. They also said the system of the seller’s agent splitting the commission with the buyer’s agent allows buyers, already burdened with expenses like the down payment, closing costs, inspections and appraisals, to avoid the added expense of having to pay an agent. also.

Consumer advocates celebrated the ruling and expressed hope that the plaintiffs would also receive their request that the judge order changes in how commissions are structured in the industry.

Although the award is already large, it could grow even more — to a total of $5 billion, depending on what the judge decides.

Stephen Brubeck, a senior fellow at the Consumer Federation of America, said the jury clearly saw that the industry had restricted price competition to the point where it could guarantee roughly uniform commissions of 5% to 6%. He added that the jurors made their decision quickly, deliberating for only a few hours.

“The extent of injunctive relief decided by the court will strongly influence whether a price competitive system is developed that reduces consumer costs and increases the quality of services,” Brubeck said. “We hope that the court will sever the ties between the listing agent and buyer agent compensation, freeing sellers from the obligation and need to compensate buyer agents.”

The effect of commissions on buyers and sellers

Agents say not much is expected to change in the near term regarding how commissions are set.

The long-term effect of the ruling may be to eventually separate the buyer’s agent’s commission and the seller’s agent’s commission.

Analysts from Keefe, Bruyette & Woods, an investment banking firm, said in a report released before the ruling that the NAR lawsuit and related government actions are likely to reshape the commission structure of the residential brokerage industry, by eliminating the broker-buyer commission rule, and in End is the practice of listing agents and sellers and setting and paying buyer’s agent commissions.

Since the commission paid to the agent is typically included in the price of the home, if it is reduced or becomes more negotiable, home prices may decline as well, they said.

“Nothing changes in the short term,” said Gene Davis, a Keller Williams agent with Holt Homes Group, in Springfield, Missouri. “Commissions have always been negotiable. It will continue to be that way.”

But she said there could be unintended consequences if changes occur.

“There are buyers who won’t know the steps to buying a home,” Davis said. “They have to pay a down payment, closing costs, appraisals, and inspections. If they also have to come up with money to pay for a buyer’s agent, some won’t do it and will get their heads out or won’t buy at all. Not having representation will make the market less inclusive.”