The hefty commissions home sellers pay to real estate agents may soon disappear

The long tradition of home sellers footing the commissions of their buyers’ real estate agents may soon be a thing of the past.

A recent multibillion-dollar class-action verdict in Missouri found that the National Association of Realtors (NAR) along with some of the largest real estate brokerage firms in the country violated antitrust laws by conspiring to inflate and keep sales commissions artificially high. The NAR and other brokerages face a slew of new and older lawsuits that have similar claims.

Already, the suits have ushered in some changes to agreements sellers sign with their real estate agents that set commission-sharing parameters.

But depending on how the cases ultimately play out, they could dismantle the NAR’s stronghold over a system that has long been criticized for disadvantaging sellers and buyers by setting and maintaining broker commission rates between 5% and 6% of a home’s sale price. It would also have ripple effects on the overall housing market.

“The whole practice needs to stop,” Patrick Knie, one of the lawyers representing the plaintiffs in a case recently filed in South Carolina, told Yahoo Finance. “We just need to go back to being in a free market.”

The cases

The rumblings of this shakeup intensified on Oct. 31 when a unanimous eight-member jury concluded that since 2015, NAR and its broker co-defendants who belong to NAR’s professional organization caused home sellers $1.79 billion in damages.

NAR said it plans to appeal the verdict. However, similar class-action suits have followed in the last three weeks in Missouri, South Carolina, New York, Illinois, and Texas, adding to at least one older case in Illinois still awaiting trial.

At the heart of these lawsuits is the NAR’s rules that the plaintiffs’ lawyers argue effectively forced sellers to pay out commissions to buyers’ agents.

The NAR’s Multiple Listing Service (MLS), a database where 88% of sellers listed their homes this year, remains a primary tool to match home buyers and sellers. Brokers who list their clients’ properties in the database must also agree to share their commissions with other MLS participants.

That agreement, the plaintiffs in the Missouri case and others argue, artificially drives up home prices and deprives sellers, and in one case buyers, of profit.

“Just in our small state of South Carolina, the Keller Williams Group…had in 2022 basically $940 million in sales. And if you just take the 3% commission that they forced the seller to pay for buyer’s commission, which is the average that they forced on the seller, that’s $28 million plus in one year,” Knie said.

NAR, for its part, contends that their commission structure, which has been in place for over 100 years, benefits consumers.

The jury in Missouri disagreed. That verdict, which gives the judge presiding over the case latitude to impose triple or “treble” damages, could increase damages to $5 billion against NAR and its co-defendants.

In addition the Justice Department has reportedly considered legal intervention, too. In July 2021, the department stopped moving forward with a settlement with NAR after concluding it could prevent its ability to protect competition in the market, which “profoundly affects Americans’ financial well-being.” Since then the agency has filed an appeal to a judge’s ruling that prohibited it from reopening investigation into two NAR policies.

Changes already

The threat of the Missouri case’s outcome — plus the others still in the pipeline and the DOJ’s possible actions — has already had an impact on the NAR’s influence over home buying and selling.

Read more: How to buy a house in 2023

Ahead of the trial, the organization changed the wording of its participation agreement to remove the rule that required its seller brokers to share commissions. In its revised agreement, NAR’s mandatory buyer commissions are reduced to $0.

While the change may prevent future antitrust lawsuits that stem from commissions paid out under the new NAR agreement, it may not be enough to stop the flood of actions seeking to claw back already-paid broker fees.

“That is just window dressing, in our opinion,” Matthew Shealy, another lawyer representing the South Carolina plaintiffs, told Yahoo Finance. “We don’t think that that solves the problem…What buyer’s agent is going to take a buyer to that house?”

On a local level, real estate associations have taken note, too.

For instance, the Real Estate Board of New York, or REBNY, announced that, beginning next year, seller’s agents can’t make an offer of compensation or directly compensate a buyer’s agent. Instead, any compensation to the buyer’s real estate agent from the seller must be negotiated and paid directly by the seller, according to the FAQ on the changes.

Similarly in California, the Realtors association there updated its real estate purchase agreement last year on how buyer’s agents are paid their commission.

The new purchase agreement called RPA includes a section called “Seller Payment to Buyer’s Broker,” which indicates a “buyer has entered into a written agreement to compensate [the] buyer’s broker.” It also cites that the seller has agreed to pay the obligation.

What’s to come on commissions?

Those recent changes fit in with how Nick Oliver, principal broker at Hauseit, believes the cases will transform the industry.

“Ultimately, it will just lead to more transparency in terms of how commission rates are negotiated with a seller and a listing agent, and how they’re actually presented in a listing agreement,” said Oliver, whose firm offers “a la carte” broker services that bridge NAR’s traditional commission-based sales model and the for-sale-by-owner model. These hybrid services allow sellers to buy only the listing services they need.

Another potential change is a complete block of NAR’s fee-sharing agreements.

“We think [the Missouri] decision increases the chances of a ban on commission sharing,” Jefferies equity analyst John Colantuoni wrote in a note to clients following the verdict.

But when that would happen remains to be seen. In a shareholder letter, Zillow said that due to appeals it could be years before the cases impact the real estate market. Still, at a minimum, Redfin CEO Glenn Kelman wrote a blog post that the uncertainty around the lawsuits could encourage clients to negotiate better terms to save money. Other experts agree.

“I think now would be your time to be more aggressive with the real estate listing agent and reduce that condition,” Kevin Fields, an associate professor of clinical finance and business economics, told Yahoo Finance.

Under the current housing landscape, Fields is also curious if buyers and sellers negotiate to “flat 4% across the board,” which would split 2% between the seller’s and buyer’s agent.

If that doesn’t work, Fields said the move could be towards “an hourly fee compensation instead of a commission structure with the high cost of home prices.”

What that means for the housing market

And there’s the question of how either a total ban of commission-sharing or reduced commissions would affect the overall housing market.

In theory, that should push home prices lower, John Campbell, managing director of equity research at Stephens Inc., told Yahoo Finance.

“From an academic standpoint, it should,” Campbell said.

Fields agreed, noting that now the commission is “baked into most listing prices.”

“If it’s going to be a total 5% that that seller has to pay, well then they’re going to increase the purchase price of that home by 5% to offset the cost that they’re going to have to pay out for the commissions,” Fields said. “So theoretically, it should decrease the listing prices.”

That would hold true in a more normal housing market. But today’s market is so supply-starved that even the doubling of mortgage rates over the last year couldn’t permanently put a lid on home price increases. In fact, home values hit another high in August when mortgage rates reached a 22-year high.

As housing affordability grows worse, the legal challenges could motivate lenders to offer real estate commissions to be financed into a borrower’s mortgage that’s if the buyer is forced to pay their agent’s commission out of pocket.

Read more: Types of mortgage loans: Buying a house in 2023

“That will be a strong push to have lenders start allowing for those commissions to be included in mortgages,” Fields said. “The prospective buyer would need to come up with both a purchase price and that potential commission price, and then also pay for whatever cost of the transaction had been pushed to the buyer. It’s gonna be a significantly larger chunk to purchase.”

That, he said, would lead to “fewer home transactions in the United States.”

 

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