Lawsuit Against Real Estate Brokerages, Realtors Will Reshape Home Buying

On Tuesday afternoon at a courthouse in Kansas City, Missouri, the collective nightmare of the real-estate industry became reality.

For decades, the basic structure of how real-estate agents get paid when they help someone buy or sell their home has remained roughly the same. But over the past few years, some of the most powerful organizations in the business — the National Association of Realtors and several of the country’s largest brokerages — have been fighting two multibillion-dollar class-action lawsuits that argue the system is rigged against regular Americans, forcing them to pay their agents way too much.

The first of the two landmark cases, Burnett et al. v. NAR et al., went to trial in mid-October, unfolding over a tumultuous two weeks. The battle between the real-estate industry and consumer advocates ended on Tuesday after the jury determined that the NAR and brokerages were using the rules of the multiple-listings services, local databases where agents can see the vast majority of homes advertised for sale, to inflate the commissions paid by sellers. As part of the ruling, roughly $1.8 billion was awarded to the plaintiffs, which included the sellers of more than 260,000 homes in Missouri, Illinois, and Kansas between 2015 and 2022. Because those damages are automatically tripled in a case like this one, that figure will rise to more than $5.3 billion.

Beyond the eye-popping damages, the decision could fundamentally change how we buy and sell homes. As it works now, the homebuyer does not pay their agent directly but instead pays the seller for the home, who then cuts a check to their agent out of that sale price, who then splits that commission with the buyer’s agent. This roundabout way of paying agents is supposed to be the most efficient way to get a deal done since buyers don’t have to pay out of pocket and agents don’t get hung up on who gets paid what. But the plaintiffs convinced the jury that this setup is a rip-off that costs sellers billions of dollars every year. They pointed the finger squarely at the NAR, which controls nearly every MLS and enforces this status quo via the “cooperative-compensation rule.”

Here’s how it works: When you list your home for sale on an MLS, you’re required to offer a commission to the buyer’s agent. Technically, that could be as little as a penny, and the NAR says commissions are always negotiable — in fact, the organization recently changed its interpretation of the rule so that someone could offer $0 and still comply. But in practice, the plaintiffs argued, sellers are pretty much forced to offer the standard 2.5% to 3% to draw buyers’ agents — and their clients — to the home. Some sellers may not even know they have a choice to negotiate.

Stephen Brobeck, a senior fellow at the Consumer Federation of America, called this “the biggest watershed moment” for real estate in his 30 years covering the industry. He said he was surprised by the speed of the jury’s deliberations — “For such a complicated case involving so much money, they clearly went into the jury room and all agreed” — but not by the verdict.

“This is so clearly a case of antitrust violations,” Brobeck told me. “For nearly a century, the industry has been able to maintain high and uniform commission rates. This decision indicates that it’s going to be much more difficult for them to do that in the future.”

How things could change forever

The ripple effects from the decision could be staggering. If the plaintiffs get their way, buyers and sellers will start paying for their agents separately. Consumer advocates say that would offer greater transparency and encourage each side to negotiate more with their agents. Instead of each side getting the customary fee of between 2.5% and 3.5% of the sale price, buyers and sellers would be more likely to shop around and find people willing to take a flat fee or a lower percentage.

The savings for both buyers and sellers could be enormous. If the typical total commissions for a real-estate sale were to fall to between 3% and 4%, instead of the customary 5% to 6% today, Brobeck estimated the savings for consumers could reach $20 billion to $30 billion a year. For sellers flush with cash after a home sale, it might be a relief to pay out just one broker. But cash-strapped buyers would have to pay their agents thousands of dollars out of their own pocket, on top of all the other fees, without the help of a mortgage — current regulations don’t allow commissions to be rolled into the loan like that. At the very least, buyers would be incentivized to bargain down the fees. Some might choose to pay an agent by the hour, like we do with lawyers. At the most extreme end, many might forego the services of an agent altogether.

In addition to the trickle-down effects for homebuyers and -sellers, the decision could force a massive reckoning for real-estate agents and the brokerages that provide them with training, back-end operations, and legal support in exchange for a cut of their commissions. Experienced, well-connected agents who regularly nab high-dollar listings would probably be fine. But for unproven agents, or those who focus mostly on working with buyers, the situation could be dire. If fewer buyers seek out agents, or if they start aggressively negotiating down their fees, buyer-agent earnings could plummet. A slowdown in home sales has already exposed the glut of agents, and if commission checks shrink, a mass exodus from the industry could ensue.

I think there’s going to be a lot of terrible, unintended consequences that are going to come out of this one

Consumer advocates such as Brobeck have cheered on these prospective changes as a big win for consumers. Even if buyers have to pay for agents out of pocket, they say, everyone is better off when there’s more transparency and ability to negotiate. The good buyer’s agents who can prove their value will be fine, Brobeck predicted. And the industry would be highly incentivized to change the rules so that buyers could include their agents’ commissions in their home loans, which would mean they could still get the help of a professional without having to scrounge up all that cash.

Others see these moves as dangerous steps backward. Mike Rosenthal, an agent in California with more than two decades of experience in the industry, told me he believed both buyers and sellers would be “tremendously hurt” if they had to pay their agents separately. Sure, sellers might be relieved to have to pay out only their side’s commission. But the problem with selling your home is that, more often than not, you have to turn around and buy another. Rosenthal told me he worried about a new era in which more buyers would be forced to go through the process without an agent in their corner.

“I think there’s going to be a lot of terrible, unintended consequences that are going to come out of this one,” Rosenthal told me.

To be fair, some people I spoke with in the months leading up to the trial expressed skepticism that things would actually change all that much, even if the NAR was forced to update the rules that created the current method of paying agents. The thinking goes like this: Sellers might not have to offer a commission to buyer’s agents, but they’ll do so anyway because it’s a time-tested way to get a deal done. Buyers might also start making offers on the condition that the seller agrees to pay both agents’ commissions — otherwise, no deal.

Ahead of the trial, I spoke with Saul Klein, a longtime real-estate executive and consultant. I floated the idea that the status quo would stick around, but he didn’t buy it. In a competitive market like the one we have today, he asked, why would sellers willingly pay out tens of thousands of dollars to the other side’s agent if they knew they didn’t have to?

“I believe that if you really have an option, and you’ve got buyers beating down your door, you’re not going to just go with the status quo,” Klein told me.

The wild thing is, the decision could be just the beginning of tumult for the real-estate industry. The NAR, one of the nation’s largest trade groups, now faces the prospect of financial calamity if it’s forced to pay out the damages. HomeServices of America and Keller Williams, two of the country’s largest brokerages, are staring down a similar fate. In addition to the legal and financial challenges, the NAR is turning over its leadership: The organization’s president already stepped down this summer following a New York Times investigation into allegations of sexual harassment and a “culture of fear” at the organization. Now its CEO, Bob Goldberg, is leaving his post at the end of this month, moving up a retirement that was planned for the end of 2024. And mere minutes after the verdict was announced, the lead attorney for the plaintiffs filed another class-action lawsuit against the NAR and several other big brokerages, including Compass and Redfin, that weren’t roped into these initial proceedings, Inman reported. Now that the lawyers smell blood — and a lot of money— more copycat suits will surely follow. Meanwhile, the Justice Department is also looking to investigate the NAR and its business practices. Even real-estate companies not named in the lawsuit were hit by the shockwaves of the decision. The stock prices of real-estate companies such as Zillow and Opendoor sank after the news broke, a sign that the verdict represents an existential threat to the entire industry.

The NAR and other defendants vowed to appeal the decision and said they would ask the court to reduce the damages in the interim, which could mean several more years of legal battles. They could also still negotiate a settlement, both to avoid bankruptcies and to ward off the oncoming wave of lawsuits. While the jury has reached a guilty verdict, we’re waiting to see which kinds of actions the judge will take, which could include ordering changes to MLS rules and eliminating the requirement that sellers offer compensation to the buyer’s agent. That will likely involve another proceeding, so it may be a matter of weeks, or even months, before the subsequent decision comes down.

Even without sweeping rule changes, though, these lawsuits are certain to alter the real estate landscape, Brobeck told me. Many buyers and sellers today don’t realize that commissions are negotiable, he said; this trial could change that. And remember, this is just the start.

“In a way,” Brobeck said, “the cat’s out of the bag now.”

James Rodriguez is a senior reporter on Insider’s Discourse team.