Real estate industry facing pushback to longstanding rules setting agent commissions on home sales

LOS ANGELES (AP) — A series of court challenges seek to upend longstanding real estate industry practices that determine the commissions agents receive on the sale of a home — and who foots the bill.

A federal jury in one of those cases on Tuesday ordered the National Association of Realtors along with some of the nation’s biggest real estate brokerages to pay almost $1.8 billion in damages, after finding they artificially inflated commissions paid to real estate agents.

The class-action lawsuit was filed in 2019 on behalf of 500,000 home sellers in Missouri and some border towns. The verdict stated that the defendants “conspired to require home sellers to pay the broker representing the buyer of their homes in violation of federal antitrust law.”

If treble damages — which allows plaintiffs to potentially receive up to three times actual or compensatory damages — are awarded, then the defendants may have to pay more than $5 billion.

“This matter is not close to being final as we will appeal the jury’s verdict,” Mantill Williams, a spokesman for the NAR, said in a statement. “In the interim, we will ask the court to reduce the damages awarded by the jury.”

Williams said it will likely be several years before the case is resolved.

But already the NAR and several real estate brokerages are facing another lawsuit over agent commission rules. Fresh off winning the verdict in the 2019 case, the lawyers filed a new class-action lawsuit in the U.S. District Court for the Western District of Missouri that seeks class-action status covering anyone in the U.S. who sold a home in the last five years. It names the trade association and seven brokerage companies, including Redfin Corp., Weichert Realtors and Compass Inc.

“What’s at issue nationwide is costing Americans about $60 billion in extra real estate commissions,” said Michael Ketchmark, one of the attorneys representing the plaintiffs in the lawsuits.

The focus of the lawsuits is an NAR rule that requires that home sellers offer to pay the commission for the agent representing the homebuyer when they advertise their property on a local Multiple Listings Service, where a majority of U.S. homes are listed for sale. This is in addition to also having to cover the commission for their listing agent or broker.

The NAR’s rules also prohibit a buyer’s agent from making home purchase offers contingent on the reduction of their commission, according to the complaint.

“Defendants’ conspiracy forces home sellers to pay a cost that, in a competitive market and were it not for defendants’ anticompetitive restraint, would be paid by the buyer,” the plaintiffs argued in the lawsuit filed Tuesday.

Plaintiffs also claim that the NAR requirement effectively keeps commissions for a homebuyer’s agent artificially high.

If NAR’s “Mandatory Offer of Compensation Rule” were not in place, then homebuyers would foot the bill for their agent’s commission, which would open the door for competition — and lower commissions — among agents vying to represent a homebuyer, the plaintiffs contend.

The NAR argues that the practice of listing brokers making offers of compensation to buyer brokers is best for consumers.

“It gives the greatest number of buyers a chance to afford a home and professional representation, while also giving sellers access to the greatest number of buyers,” Williams said.

The NAR spokesman also noted that the trade association’s policies have always required that an offer of agent compensation be made without specifying an amount, adding that it could be as little as $1 or even a penny.

In July, the independent Bright MLS, which covers some states in the eastern part of the country, changed the rules so that it’s OK for a home listed in that region’s MLS to not include an offer of agent compensation at all. That still falls within NAR’s guidelines.

“In addition, regardless of the offer, those offers are always negotiable,” Williams said.

As home prices have soared in recent years, pushing the national median sales price to $394,300 as of September, so have agents’ commissions.

“Today, what effectively happens is the buyer agent’s commissions are added to the sale price of the house, inflating the sale price,” said Stephen Brobeck, senior fellow at the Consumer Federation of America. “If sellers no longer had to pay the buyer agents, there wouldn’t be that inflation and buyers could negotiate the commission down and they would end up paying less money.”

Typically, the home seller pays their listing agent, who then splits the commission with the buyer’s agent according to the NAR rules. Traditionally, that works out to a 5% to 6% commission split roughly evenly between the buyer’s and seller’s agents.

Such commissions are justified, given the professionalism agents offer their clients and the hefty expenses they often incur in preparing to sell a home, including costs for staging, marketing, photography, lock boxes and even cleaning, said Matthew Shelton, a Kansas City area real estate agent.

“Never have I had a seller even bat an eye or question a commission,” he said. “If somebody takes control and limits what commissions can be charged that would be more concerning, you know, if they put a cap on anything. I don’t think that that’s accurate or correct.”

The 2019 lawsuit originally also included Anywhere Real Estate Inc. and Re/Max, but the two companies reached a settlement agreement, which included Anywhere paying $83.5 million, Re/Max paying $55 million, and the pair agreeing to pull back on their relationships with NAR.

Homebuyers and sellers aren’t likely to see any immediate change in the way agent commissions for homes listed on the MLS are typically handled, as the NAR has vowed to appeal Tuesday’s verdict.

However, the industry will be watching for what the court will do next now that the jury has spoken.

“What’s critical is how far the court orders the industry to restructure their compensation and offers,” Brobeck said. “The real solution is for buyers to be able to finance the buyer-agent commissions as part of their mortgages …. But there are regulatory barriers to that occurring right now — regulatory barriers that are strongly supported by the industry.”

In a blog post Tuesday, Redfin CEO Glenn Kelman noted that it may take days or weeks for the judge to decide what structural changes the jury’s verdict will entail, and possibly years of court appeals.

“For now, the initial size of the damages alone will ensure major change,” he wrote.

Last month, Redfin announced it would mandate that its brokers and agents withdraw from NAR membership, citing partly the trade association’s requirement of a fee for the buyer’s agent on all listings.

The agent commission lawsuits aren’t the first time that the residential real estate industry has drawn scrutiny about the impact its rules have on competition.

The Justice Department filed a complaint in 2020 against the NAR, alleging it established and enforced rules and policies that illegally restrained competition in residential real estate services. The government withdrew a proposed settlement agreement in 2021, saying the move would allow it to conduct a broader investigation of NAR’s rules and conduct.