Real-Estate Commissions Could Be the Next Fee on the Chopping Block

In recent years, technology has made a host of consumer transactions cheaper—from booking a vacation to buying stocks—but commission rates for selling a home haven’t really budged. That could soon change.

A pair of class-action lawsuits challenging real-estate industry rules—including one that went to trial beginning this week—and continued pressure from U.S. antitrust officials are threatening to disrupt a compensation model that hasn’t meaningfully changed in decades.

Home buyers rarely pay their agents. Instead, sellers pay their own agents, who in turn share their commissions with the buyer’s representative. In the typical transaction, total agent commissions are 5% to 6% of the sale price. For a $400,000 home purchase, that is roughly $20,000, split two ways.

In most markets, publishing the amount of compensation offered to the buyer’s agent is a condition for listing a home on a multiple-listing service—a vital tool for marketing a home.

In the current environment, trying an alternative approach can be risky. When Jon Anderson decided to sell his khaki-colored three-bedroom house in Colorado Springs four years ago, the veteran home seller was fed up with paying a real-estate agent tens of thousands of dollars.

He hired a low-fee brokerage company, REX, that was bucking a widespread industry rule by not guaranteeing the seller would pay a commission to the home buyer’s agent. At the time, homes were often selling in days, but for several weeks Anderson said virtually no buyers even toured his home. It eventually sold for $15,000 less than he originally listed it.

“I believe that when my house went on the market through REX that we were completely and utterly blackballed by the real-estate market,” he said.

REX, which is now defunct, recorded a call with a buyer’s agent interested in Anderson’s home until she realized there was no guaranteed commission. “I won’t bother to show it,” she said. A former REX data scientist said the recording and about 600 similar ones have been turned over to plaintiffs’ attorneys and the Justice Department.

The plaintiffs in the class actions, who are home sellers in different regions of the country, say the longstanding industry rules amount to a conspiracy to keep costs high in violation of U.S. antitrust law. Buyers, they say, have little incentive to negotiate with their agents because they don’t pay them directly, while sellers are loath to experiment with a lower commission rate for fear that agents will steer clients away from their home.

An academic study released this month provides some evidence of these concerns. It found that home listings offering lower buyers’ agent commissions take significantly more time to sell and are much less likely to sell at all, even after controlling for factors such as the home’s age and location and listing-agent attributes.

The National Association of Realtors, a defendant in both cases, says the current system helps first-time home buyers and those with modest means by sparing them a significant upfront cost when purchasing a home. Buyers might otherwise put themselves at a disadvantage by not having their own agent, the group says.

“What is at stake here is the future of buyer representation,” said Katie Johnson, NAR’s chief legal officer. In court documents, the association said sellers’ agents pay the commissions to buyers’ agents to attract more interest in their homes.

In a report released this month, Ryan Tomasello, a real-estate industry analyst with Keefe, Bruyette & Woods, predicted that the lawsuits could lead to a 30% reduction in the $100 billion that Americans pay in real-estate commissions every year and push well over half of the roughly 1.6 million agents out of the industry.

“The writing is on the wall given the attacks that the industry has right now from all sides,” Tomasello said.

Ever since Zillow went online in 2006 and attracted more than one million visitors in the first few days, which crashed the site, the residential brokerage industry has seemed on the cusp of radical change. About half of buyers now find their homes online.

Cracks in the traditional industry structure are starting to show. Two major brokerages, Anywhere Real Estate and Re/Max Holdings, both agreed to settle claims against them in the two class actions for almost $140 million combined. The firms, which admitted no wrongdoing, agreed not to require their agents to belong to NAR.

Another brokerage, Redfin, which isn’t a defendant in the class actions, recently announced it was requiring many of its agents to leave NAR. The trade group is “defending the indefensible” in the lawsuits, said company Chief Executive Glenn Kelman.

The case currently on trial is unfolding in a Kansas City courtroom, where a federal jury is considering claims by home sellers in several Midwestern states against NAR and major national brokerage companies. The proceedings are expected to last three weeks.

Another class-action, based in an Illinois federal court, involves 20 markets from Philadelphia to Miami and could go to trial next year. Plaintiffs in both suits are claiming damages that could total more than $40 billion, according to Tomasello’s calculations.

The Justice Department also has taken a keen interest in the issue, particularly as high home prices and rising mortgage rates have made home purchases unaffordable for many Americans. It has submitted legal papers in both pending cases to object to some of the claims made by the National Association of Realtors.

The department’s antitrust division also objected last month to a settlement in a commissions-related lawsuit in Massachusetts, saying the agreement didn’t go far enough to promote competition.

“Promoting competition for the steep fees that sellers and buyers face can help return billions of dollars to the American people,” the department said.

During the Trump administration, the Justice Department settled an antitrust investigation into NAR when the group agreed to modest rule changes. The Biden administration tried to withdraw from the settlement but was blocked by a federal judge; it has appealed the decision.

A department spokeswoman declined to comment beyond the government’s court filings.

News Corp, owner of The Wall Street Journal, operates Realtor.com under license from the National Association of Realtors.

Write to Laura Kusisto at Laura.Kusisto@wsj.com and Nicole Friedman at nicole.friedman@wsj.com

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