Powerful Realtor group settles lawsuits over sales commissions

SPOKANE — American homeowners could see a significant drop in the cost of selling their homes after a real estate trade group agreed to a landmark deal related to the bedrock of the industry — the 6% sales commission.

The National Association of Realtors, the organization that has set the guidelines for home sales for decades, has agreed to settle a series of lawsuits by paying $418 million in damages and by eliminating its rules on commissions. Legal counsel for NAR approved the agreement early Friday morning, and the New York Times obtained a copy of the signed document.

However, Tom Hormel, the recent past president of Spokane Realtors who also sits on the national board of directors, said he does not believe the decision will fundamentally change how home buyers and sellers work with the agents who spend the time, resources and expertise in getting their homes in front of the most possible eyes.

The settlement only changes how sellers report how much they will cover for commissions for the buyer’s real estate agent commissions when the sellers list their homes on what’s known as the Multiple Listing Service, or MLS, which allows agents to see homes available for sale, Hormel said. The real estate commissions are not going away.

“Sellers are not all of the sudden going to drop their prices 2 or 3 or 4%. The appraised value of a house is not based on commissions,” he said. “The cost of business is still the cost of doing business.”

When owners want to sell their home, they typically contact a real estate agent, who then charges them a percentage of the overall sale price of the home. Under that agreement, the agent then lists the home, organizes visits, places photographs on websites and generally helps the sellers get the best deals.

Buyers’ agents do the same thing, except for those folks who want to buy a new home. While Hormel said all the percentages are always negotiable, the industry standard for commissions, based on several publications, is about 6%.

That means a median-priced home, which was $400,000 in Spokane for February, the seller would pay about $24,000. Of that, $12,000 typically goes to the seller agent and $12,000 goes to the buyer’s agent, unless otherwise negotiated.

Before the lawsuit settlement, sellers specified in writing what percentage of commissions they were willing to pay before their homes were listed on the MLS. Now, once the changes are formalized in a few months, those new homes will not include that sales commission information, Hormel said.

But, that doesn’t mean the commissions are going away, he said.

“Before, it didn’t matter if it was one penny or $10, (what the seller was willing to pay for buyer agent commission) was listed on the MLS. I could see that,” Hormel said. “Now, because of this settlement, it can’t be listed.”

Now the matter must be handled with a phone call, he said.

“If I’m working with a buyer and want to show a house, I need to call the agent and ask, ‘Is your seller offering a buyer agent commission?’” Hormel said. “If they say yes or no, I move forward accordingly.”

What’s more, a new Washington law took effect in January, requiring home buyers to sign a brokerage service agreement, which had already been required of sellers. Hormel said most agents did that anyway, but the new law made it mandatory, like it already had been in Idaho.

“You are not supposed to be working with that agent and the agent is not supposed to be working with the buyer without a contract,” Hormel said. “It’s just so the buyer knows up front from the first meeting what their broker is going to charge them.”

The deal, which lawyers anticipate will be filed within weeks and still needs a federal court’s approval, would end a multitude of legal claims from home sellers who argued that the rules forced them to pay excessive fees.

In a statement released Friday morning, Nykia Wright, the interim chief executive of the national Realtor’s group, said, “It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals.”

Housing experts said the deal, and the expected savings for homeowners, could trigger one of the most significant jolts in the U.S. housing market in 100 years. “This will blow up the market and would force a new business model,” said Norm Miller, a professor emeritus of real estate at the University of San Diego.

Americans pay roughly $100 billion in real estate commissions annually, and real estate agents in the United States have some of the highest standard commissions in the world.

In many other countries, commission rates hover between 1% and 3%. In the United States, most agents specify a commission of 5% or 6%, paid by the seller.

Economists estimate that commissions could now be reduced by 30%, driving down home prices across the board. The opening of a free market for Realtor compensation could mirror the shake-up that occurred in the travel industry with the emergence of online broker sites such as Expedia and Kayak.

“The forces of competition will be let loose,” said Benjamin Brown, co-chair of the antitrust practice at Cohen Milstein and one of the lawyers who hammered out the settlement. “You’ll see some new pricing models, and some new and creative ways to provide services to homebuyers. It’ll be a really exciting time for the industry.”

The original lawsuit, filed in April 2019 by a group of Missouri home sellers, ended in a verdict of $1.8 billion in October.

Because the suit included accusations of antitrust violations, plaintiffs could have been eligible for triple damages of up to $5.4 billion.

In exchange for the reduction in damages, the association gave up its right to appeal.

Hormel noted that the Realtors association did not admit wrongdoing. He said the decision to settle largely was based on avoiding years more of litigation, which could have cost even more.

“We settled the case because we wanted to move forward,” he said. “These blood sucking attorneys. They force settlement because they have all the time and energy in the world to create more billable hours for them when the average person would say, ‘Just settle and be done with it.’

“Even if I may 100% feel I’m right and they are wrong, the cost to prove that is more than the $400 million.”

Under the settlement, tens of millions of home sellers will likely be eligible to receive a small piece of a consolidated class-action payout.

The legal loss struck a blow to the power wielded by the organization, which has long been considered untouchable, insulated by its influence. Founded in 1908, the National Association of Realtors has more than $1 billion in assets, 1.3 million members and a political action committee that pours millions into the coffers of candidates across the political spectrum.

The antitrust division of the Department of Justice is continuing its investigation of the organization’s practices, including the organization’s oversight of databases for home listings.

The MLS sites are owned and operated by the association’s local affiliates. For decades, the Justice Department has questioned whether these databases stifle competition and whether some rules foster price-fixing on commissions.

With Friday’s settlement, the process of buying and selling a home is now in for another historical change.

“This will be a really fundamental shift in how Americans buy, search for, and purchase and sell their housing. It will absolutely transform the real estate industry,” said Max Besbris, an associate professor of sociology at the University of Wisconsin-Madison and the author of “Upsold,” a book exploring the link between housing prices and the real estate business. “It will prompt one of the biggest transformations to the housing market since New Deal-era regulations were put in place.”

When told of Besbris view of the settlement, Hormel scoffed.

“The professor (Besbris) should continue to be a professor from Wisconsin and stay out of real estate,” Hormel said. “For them to be quoting some professor from Wisconsin who doesn’t practice real estate, about what the real estate industry is going to look like, is ridiculous.”

In January, the Realtors association’s new president, Tracy Kasper, who had stepped into the role early with a pledge of reshaping the organization’s culture and fighting the lawsuits at all costs, announced her own sudden exit after NAR said Kasper was the target of blackmail.

Despite the organization’s turbulence over the last several months, however, there was one constant: their insistence that the lawsuits were flawed and they intended to appeal. With Friday’s settlement agreement, they gave up the fight.

The settlement includes many significant rule changes. It bans the organization from establishing any sort of rules that would allow a seller’s agent to set compensation for a buyer’s agent, a practice that critics say has long led to “steering,” in which buyers’ agents direct their clients to pricier homes in a bid to collect a bigger commission check.

“The reset button on the sale of homes was hit today,” said Michael Ketchmark, the Kansas City lawyer who represented the home sellers in the main lawsuit. “Anyone who owns a home or dreams of owning one will benefit tremendously from this settlement.”