Jury finds realtors conspired to keep commissions high

A federal jury on Tuesday found the National Association of Realtors and large residential brokerages liable for about $1.8 billion in damages after determining they conspired to keep commissions for home sales artificially high. Two major real estate companies have already settled. What is in the lawsuit regarding real estate commissions? How will this lawsuit, if successful, radically alter the real estate industry for buyers, sellers, and realtors?

What is in the lawsuit against real estate commissions?

There are two separate lawsuits. The first suit in Kansas was recently decided by a jury in favor of homeowners. The verdict could lead to industrywide upheaval by changing decades-old rules that have helped lock in commission rates even as home prices have skyrocketed—which has allowed real-estate agents to collect ever-larger sums. It comes in the first of two antitrust lawsuits arguing that unlawful industry practices have left consumers unable to lower their costs even though internet-era innovations have allowed many buyers to find homes themselves online. The first lawsuit is not good for the realtors association, but the second one is where the industry is radically altered.

The second lawsuit:

A federal judge in Chicago ruled that home sellers accusing the National Association of Realtors and a group of real estate brokerages of conspiring to inflate commission rates can move forward as a class action.

U.S. District Judge Andrea Wood’s decision grants class-action status to past home sellers seeking more than $13 billion in damages and creates a separate class of current and future sellers who want a court injunction that bars subsequent violations of U.S. antitrust law.

The lawsuit challenges a requirement that sellers make “blanket unilateral offers of compensation” to buyers’ brokers when a home goes on sale via a multiple listing service. That system puts pressure on sellers to offer high commissions to attract buyers’ brokers, the sellers claimed.

According to Plaintiffs, the rules implementing and governing the requirement that an MLS listing include a set commission offer to the successful buyer-broker are anticompetitive and caused them to pay artificially inflated, supracompetitive commission rates. They have therefore brought the present antitrust action alleging that Defendant National Association of Realtors (“NAR”), along with Defendants Realogy Holdings Corp.,HomeServices of America, Inc., HSF Affiliates, LLC, The Long & Foster Companies, Inc., BHH Affiliates, LLC, RE/MAX LLC, and Keller Williams Realty, Inc. (collectively, “Corporate Defendants”), engaged in a conspiracy in restraint of trade in violation of § 1 of the Sherman Act, 15 U.S.C. §

Two real estate firms have already settled.

RE/MAX, one of several large brokerages named in the suits, known as the Sitzer/Burnett and Moehrl cases, agreed to pay $55 million to resolve all claims against the company. The news comes two weeks after another defendant, Anywhere Real Estate, formerly known as Realogy Holdings Corp., settled for $83.5 million.

National Association of realtors has no plans to settle

The National Association of REALTORS®, also named in the lawsuits, has said it plans to continue arguing its case for pro-consumer, pro-competitive local MLS broker marketplaces, which enable listing brokers and their clients to determine the amount of compensation offered to a buyer’s agent in connection with MLS listings.

This lawsuit will likely take years to finally resolve and will likely ultimately end up at the supreme court on appeals.

Do realtors commissions really materially inflate the prices of homes

This is the common argument that the department of Justice and others keep trying to emphasize is that realtor’s commissions are a key item making homes less affordable. Unfortunately, whether you agree or disagree with the realtor commission structure, this argument is a huge stretch at best. The real drivers of unaffordability are:

Government spending driving up interest rates
Huge increases in wages for building professionals
Big jumps in material costs
Shortage of land in desirable locations.

The four items above are the big drivers of unaffordability not a 2 or 3% commission from a realtor. To put this in perspective take a 250k loan that was done 18 months ago at 3%, the payment is 1054/month, assume rates now at 8% is now 1834/month, just in year one the increase is 9,360 due to higher interest rates.

Unintended consequences of the realtor commission lawsuit

Whenever there is a radical change in how the marketplace has operated for years, there are going to be some huge unintended consequences. Regardless of whether the national association of realtors is right or wrong in the way commissions are charged, lower income and first time home buyers will be harmed the most from any changes.

Lower income/first time home buyers hurt the most

Don’t have expertise: first time home buyers do not know what they don’t know and might not have the expertise to get the appropriate help.
No funds to pay up front for the expertise, take for example someone who is getting an FHA loan with 5% down or less, does this buyer really have the funds to pay out of pocket for an attorney, a realtor, etc… This is highly unlikely. They likely will go without representation.
The realtor is helping with important items that could be devastating to first time homebuyers
- Basic contracts: sure can use an attorney, but a real estate pro who does this day in and day out has expertise that traditional attorney’s do not as they are not on the ground.
- Value: just because the zestimate is X, does not mean the property is actually worth that
- Radon: this is just one example, for example in Colorado, many houses have radon in both the air and water (if on a well), would a first time homebuyer know to ask about this, how to mitigate it, to put something in the contract?

There are already alternatives to paying real estate commissions.

The lawsuit tries making a blanket claim that you have to pay a buyer’s commission if you list a property. This is a pretty bold statement as there are countless alternatives. A seller could list for sale by owner or use a discount brokerage or even simply put the house on Zillow. As an alternative a seller could directly sell their house to opendoor or some other ibuyer with no commissions.

Furthermore a buyer can buy a property that is not listed by a realtor or even not listed at all. I’ve bought multiple properties without using a realtor. Long and short if a buyer or seller wants to buy or sell a property without a realtor there are tons of options out there if that is the route they want to go.

Summary:

The case against realtor’s commissions will be critical to watch as there will be far reaching consequences. At the end of the day, this lawsuit could radically alter a system that has been in place since the 60’s. Although whether the system works or not is at the heart of the lawsuit that must be decided by the courts, the real impact is that there are huge unintended consequences for lower income/first time homebuyers.

Although the current system is not perfect, it fills a huge void for lower income and first-time homebuyers by providing representation without an upfront cost to them. At the end of the day, this lawsuit will ultimately dictate whether lower income or first-time homebuyers have representation as they are highly unlikely to be able to pay for it upfront on their own. The irony of the lawsuit is that it claims to help lower income and first time homebuyers by lowering the price to get into their first home when in actuality it could be doing the opposite.

Although it will take years to fully resolve the litigation, the loss in the first suit against the realtor’s association with the jury only deliberating a few hours does not bode well for the industry.

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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