The long tradition of home sellers collecting commissions from buyers’ real estate agents may soon be a thing of the past.
A recent multi-billion dollar class action judgment in Missouri alleges that the National Association of Realtors (NAR) and several of the nation’s largest real estate brokerages conspired to artificially inflate and maintain sales commissions. It was found that the ban had been violated. NAR and other intermediaries face numerous new and old lawsuits with similar allegations.
Already, the lawsuit has led to some changes to the agreements sellers sign with real estate agents that set commission-sharing parameters.
However, depending on the final development of the lawsuit, NAR’s decision to set and maintain brokerage commission rates between 5% and 6% of a home’s sales price, a system that has long been criticized for putting buyers and sellers at a disadvantage, could There is a possibility of dismantling the stronghold of This will also have a ripple effect on the housing market as a whole.
“This whole practice needs to stop,” Patrick Nee, one of the attorneys representing the plaintiffs in a recent lawsuit in South Carolina, told Yahoo Finance. “We just need to get back to the free market.”
case study
On October 31, an eight-member jury unanimously concluded that NAR and its co-defendants, brokers affiliated with NAR’s professional organization, have awarded home sellers $1.79 billion in damages since 2015. , the commotion grew even stronger.
NAR said it plans to appeal the ruling. But similar class action lawsuits have continued in Missouri, South Carolina, New York, Illinois and Texas over the past three weeks, with at least one additional older case still awaiting trial in Illinois. .
At the center of these lawsuits is NAR’s rules, which plaintiffs’ lawyers argue effectively force sellers to pay fees to buyer agents.
NAR’s Multiple Listing Service (MLS), the database where 88% of sellers listed their homes this year, continues to be the primary tool for matching home buyers and sellers. A broker who enters a client’s properties into the database must also agree to share commissions with her other MLS participants.
Plaintiffs in the Missouri lawsuit claim the agreements artificially inflate home prices and deprive sellers and, in some cases, buyers of profits.
“In our little state of South Carolina alone, Keller Williams Group…2022 sales were basically $940 million. And they forced sellers to pay a buyer’s fee of 3%. If you only take into account the fees, this is their average amount, which is $28 million plus in one year if forced on sellers,” Cuney said.
NAR maintains that the fee structure that has been in place for more than 100 years benefits consumers.
A Missouri jury disagreed. The ruling gives the judge presiding over the case the discretion to award treble, or “treble,” damages, potentially increasing damages to NAR and its co-defendants to $5 billion.
Additionally, the Justice Department is reportedly considering legal intervention. In July 2021, the department concluded that NAR could impede the ability to protect competition in markets that “significantly impact the economic well-being of Americans,” and discouraged progress on a settlement with NAR. Canceled. Since then, the agency has appealed a judge’s ruling that barred it from reopening investigations into two NAR policies.
It’s already changing
The threat of an outcome in the Missouri case, as well as other ongoing cases and possible actions by the Department of Justice, are already impacting the NAR’s influence over home sales.
read more: How to buy a house in 2023
Ahead of the trial, the group changed the language in its participation agreement to remove a provision that required selling brokers to pay commissions. The revised agreement reduces NAR’s mandatory buyer fee to $0.
While this change may prevent future antitrust lawsuits arising from fees paid under the new NAR agreement, it will not be enough to stop a flood of lawsuits seeking to recover brokerage fees already paid. Maybe.
“In our opinion, it’s just window dressing,” Matthew Seeley, another South Carolina attorney representing the plaintiffs, told Yahoo Finance. “I don’t think that’s going to solve the problem…What buyer’s agent is going to take the buyer to the house?”
At the local level, real estate associations are also paying attention.
For example, the Real Estate Board of New York (REBNY) announced that starting next year, seller’s agents will not be able to make offers of compensation or compensate buyer’s agents directly. Instead, compensation from the seller to the buyer’s real estate agent must be negotiated and paid directly by the seller, according to the FAQ regarding the changes.
Similarly, in California, the real estate agent association last year updated real estate purchase agreements regarding how commissions are paid to buyer agents.
The new purchase and sale agreement, known as an RPA, includes a section titled “Seller’s Payments to Buyer’s Broker,” which indicates that “Buyer has entered into a written agreement to indemnify.” [the] Buyer’s intermediary. ” It also states that the seller has agreed to pay the debt.
What does the commission include?
These recent changes are in line with how Nick Oliver, principal broker at Howsate, believes the incident will revolutionize the industry.
“Ultimately, this will only increase transparency in how commission rates are negotiated with sellers and listing agents, and how they are actually written into the listing agreement,” the company said. à la carte,” said Oliver. A brokerage service that bridges NAR’s traditional commission-based sales model and sales-by-owner model. These hybrid services allow sellers to purchase only the listing services they need.
Another potential change is a complete block on NAR’s fee-sharing agreements.
“We think [the Missouri] This decision increases the likelihood that fee sharing will be prohibited,” Jefferies equity analyst John Colantuoni wrote in a note to clients following the ruling.
But when that will happen remains to be seen. Zillow said in his letter to shareholders that the lawsuit could take years to impact the real estate market because of appeals. Still, at least Redfin CEO Glenn Kelman said in a blog post that the uncertainty surrounding the lawsuit could encourage customers to negotiate better terms to save money. Stated. Other experts agree.
“I think it’s time to be more aggressive with real estate listing agents and ease the requirements,” Kevin Fields, an associate professor of clinical finance and business economics, told Yahoo Finance.
Mr. Fields is also interested in whether under the current housing situation, buyers and sellers would negotiate a “flat rate of 4%,” with the seller’s and buyer’s agents splitting the 2%.
If that doesn’t work, Fields said they could move to “hourly fee compensation rather than a fee structure that takes into account high home prices.”
What it means for the housing market
There is also the question of what kind of impact a complete ban on paying fees or a reduction in fees would have on the housing market as a whole.
In theory, that should lower home prices, John Campbell, managing director of equity research at Stevens, told Yahoo Finance.
“From an academic standpoint, that’s the way it should be,” Campbell said.
Fields agreed, noting that fees are now “built into most listing prices.”
“If the total amount that the seller has to pay is 5%, they will increase the purchase price of the home by 5% to offset the cost they have to pay to purchase the home.” Fields said. “So, in theory, the listing price should be lower.”
This also applies to the more normal housing market. But today’s market is so short on supply that even a doubling of mortgage rates over the past year could not permanently halt the rise in home prices. In fact, home prices hit an even higher record in August, when mortgage rates hit a 22-year high.
As housing affordability worsens, this legal challenge could provide an incentive for lenders to offer to roll real estate commissions into borrowers’ mortgages if buyers are forced to pay out-of-pocket agent fees. There is a possibility that it will happen.
read more: Mortgage type: Buy a home in 2023
“This will be a strong push for lenders to start allowing these fees to be included in mortgages,” Fields said. “Prospective purchasers will need to offer both the purchase price and the potential commission price, as well as any transaction costs imposed on the purchaser. The purchase price will likely be significantly higher.”
That would lead to “less housing transactions in the U.S.,” he said.
Alexis Keenan is a legal reporter at Yahoo Finance. Follow Alexis on Twitter @alexiskweed. Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
Click here for real estate and housing market news, reports and analysis to help you make investment decisions.