The huge commissions that home sellers pay to real estate agents may soon disappear

The huge commissions that home sellers pay to real estate agents may soon disappear

The long tradition of home sellers paying real estate agent commissions to buyers may soon be a thing of the past.

A recent multi-billion-dollar class action ruling 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 inflate sales commissions and keep them artificially high. NAR and other brokerage firms are facing a slew of new and old lawsuits with similar claims.

Already, the lawsuits have made some changes to the agreements that sellers sign with real estate agents that set commission-sharing standards.

But depending on how these cases ultimately play out, they could dismantle the NAR’s stronghold on a system that has long been criticized for harming sellers and buyers by setting and maintaining broker commission rates between 5% and 6% of the home’s sale price. . It will also have ripple effects on the overall housing market.

“This entire practice needs to stop,” Patrick Knee, one of the attorneys representing plaintiffs in a recent case filed in South Carolina, told Yahoo Finance. “We just need to get back to the free market.”

AUSTIN, TX – OCTOBER 16: A home is listed for sale on October 16, 2023 in Austin, Texas.  Home sales have slowed as the cost of borrowing increases and the country continues to see high mortgage rates.  (Photo by Brandon Bell/Getty Images)

A home is available for sale on October 16 in Austin, Texas. (Photo by Brandon Bell/Getty Images) (Brandon Bell via Getty Images)

Cases

Rumblings of that change intensified on Oct. 31 when a unanimous eight-member jury concluded that since 2015, NAR and mediation co-defendants who belong to the NAR professional organization had caused $1.79 billion in damages to home sellers.

NAR said it plans to appeal the ruling. However, similar class actions have followed in the past three weeks in Missouri, South Carolina, New York, Illinois and Texas, as well as at least one older case in Illinois that is still awaiting trial.

At the heart of these lawsuits are NAR rules that plaintiffs’ lawyers say 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 an essential tool for matching home buyers with sellers. Brokers who list their clients’ properties in the database must also agree to share their commissions with other MLS participants.

The plaintiffs in the Missouri case and others allege that this agreement artificially raises home prices and deprives sellers, and in one case buyers, of a profit.

“Just in our little state of South Carolina, Keller Williams Group… did $940 million in sales in 2022. And if you just take the 3% commission they forced the seller to pay versus the buyer’s commission, which is the average they earned,” Kenny said. “It’s coercive to the seller, that’s over $28 million in one year.”

NAR, for its part, asserts that its commission structure, which has been in place for more than 100 years, benefits consumers.

The jury in Missouri disagreed. The ruling, which gives the judge presiding over the case the freedom to impose treble or “treble” damages, could increase damages to $5 billion against NAR and the other defendants.

Additionally, the Justice Department has reportedly considered legal intervention as well. In July 2021, the Department stopped moving forward with the settlement with NAR after concluding that it could inhibit its ability to protect market competition, which “profoundly impacts the financial well-being of Americans.” The agency has since filed an appeal of a judge’s ruling that barred it from reopening the investigation into two of NAR’s policies.

Changes already

The threat of the outcome of the Missouri case — as well as other cases still in the works and potential Justice Department actions — has already had an impact on the NAR’s influence over housing buying and selling.

Read more: How to buy a house in 2023

Before the trial, the organization changed the wording of its participation agreement to remove the rule requiring seller-brokers to split commissions. In the revised agreement, NAR’s mandatory buyer’s commissions were reduced to $0.

While this change may prevent future antitrust lawsuits stemming from commissions paid under the new NAR agreement, it may not be enough to stop the flow of actions seeking to recover broker fees already paid.

“This is just window dressing in our opinion,” Matthew Shelley, another attorney representing the plaintiffs in South Carolina, told Yahoo Finance. “We don’t think that solves the problem… Who’s the buyer’s agent that’s going to take the buyer to that house?”

Prospective homebuyer Jessica Doctoroff talks with her real estate agent Stephen Bremis (right) while viewing an apartment for sale in Somerville, Massachusetts on April 2, 2009. Pending home sales in the United States rose modestly in February but the market remains weak in the face of a continuing decline. In home values ​​and recession, according to the National Association of Realtors' Pending Home Sales Index (Reuters/Brian Snyder) (US)

Prospective homebuyer Jessica Doctoroff talks to her real estate agent Stephen Bremis while listing a condo for sale in Somerville, Massachusetts, April 2, 2009. (Reuters/Brian Snyder) (Brian Snyder/Reuters)

At the local level, real estate associations have also taken notice.

For example, the Real Estate Board of New York, or REBNY, announced that starting next year, seller’s agents cannot offer compensation or compensate a buyer’s agent directly. Instead, any compensation from the seller to the buyer’s real estate agent must be negotiated and paid directly by the seller, according to the FAQ about the changes.

Likewise in California, the Realtors Association there updated its real estate purchase agreement last year on how buyer agents are paid commissions.

The new purchase agreement called the RPA includes a section called “Seller Payment to Buyer’s Broker,” which states that “the buyer has entered into a written agreement to compensate the buyer’s broker.” It also indicates that the seller has agreed to pay the obligation.

What will come on commissions?

These latest changes fit with how Nick Oliver, principal broker at Hauseit, believes these issues will change the industry.

“Ultimately, this will lead to more transparency in terms of how commission rates are negotiated with the seller and listing agent, and how they are actually presented in the listing agreement,” said Oliver, whose company offers “a la carte” listings. Brokerage services that bridge NAR’s traditional commission-based sales model and the sale-by-owner model. These hybrid services allow sellers to purchase only the listing services they need.

Another potential change is the entire block of NAR fee-sharing agreements.

“We believe the (Missouri) decision increases the chances of a ban on commission-sharing,” John Colantoni, an equity analyst at Jefferies, wrote in a note to clients after the ruling.

But when that will happen remains to be seen. In a letter to shareholders, Zillow said that because of the appeals, it could be years before the cases impact the real estate market. However, at least Redfin CEO Glenn Kellman 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 is the time to be more aggressive with your real estate listing agent and reduce that requirement,” Kevin Fields, assistant professor of clinical finance and business economics, told Yahoo Finance.

Given the current housing landscape, Fields is also curious if buyers and sellers negotiate a “flat 4% across the board,” which would result in a 2% split between the buyer’s and seller’s agent.

If that doesn’t work, Fields said the move could be toward “offsetting hourly fees rather than a commission structure as home prices become more expensive.”

What does this mean for the housing market

Punta Gorda, Florida, Coldwell Banker, Real Estate Office, Man looks at real estate listings and homes for sale.  (Photo by: Jeffrey Greenberg/Global Image Collection via Getty Images)

A man looks at real estate listings and homes for sale in Florida. (Jeffrey Greenberg/Global Image Collection via Getty Images) (Jeff Greenberg via Getty Images)

There is a question about how a complete ban on commission sharing or a reduction in commissions will affect the housing market in general.

In theory, this should lead to lower home prices, John Campbell, managing director of equity research at Stevens, told Yahoo Finance.

“From an academic standpoint, it should be that way,” Campbell said.

Fields agreed, noting that commission is now “included in most listing prices.”

“If the total amount the seller has to pay is 5%, well, they will increase the purchase price of that home by 5% to offset the cost they will have to pay for the home.” Fields said. “So in theory, it should lower listing prices.”

This would be true in a more normal housing market. But today’s market is so undersupplied that even the doubling of mortgage rates over the past year has not been able to permanently put a stop to home price increases. In fact, home values ​​hit another high in August when mortgage interest rates reached their highest level in 22 years.

As housing affordability gets worse, legal challenges could prompt lenders to offer real estate commissions to fund into a borrower’s mortgage if the buyer has to pay their agent’s commission out of pocket.

Read more: Types of real estate loans: Buying a home in 2023

“That would be a big boost to get lenders to start allowing those commissions to be included in mortgages,” Fields said. “The potential buyer will need to determine the purchase price and potential commission rate, and then also pay for any transaction costs that are billed to the buyer. The purchase will be a much larger portion.”

He said this would lead to “fewer transactions in the United States.”

Alexis Keenan is a legal correspondent for Yahoo Finance. Follow Alexis on Twitter @alexiskweed. Danny Romero is a Yahoo Finance correspondent. Follow her on Twitter @daniromerotv.

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