A challenge to real estate commissions gains ground
Consumer advocates long have criticized traditional real estate commissions as confusing and too high. Now, those commissions are coming under increasing legal pressure.
A federal judge in Illinois recently ruled that a potential class-action lawsuit against the National Association of Realtors and four major brokerage companies could proceed.
The lawsuit, filed last year in U.S. District Court in Chicago on behalf of several home sellers, alleges that the way that brokerages charge commissions and run property databases called “multiple listing services” is anti-competitive and artificially inflates commission rates paid to real estate brokers. (A similar lawsuit filed in Missouri is also pending, after a federal judge declined last year to dismiss it.)
Mantill Williams, a spokesman for the Realtors association, which represents more than 1.3 million real estate professionals, said in an email that the trade group was “disappointed” in the ruling but confident that it would prevail in the suit. As the case moves forward, he said, “we intend to demonstrate how the MLS system creates competitive, efficient markets that benefit home buyers and sellers as well as small-business brokerages.”
Homebuyers in many parts of the country are facing a strong sellers’ market. A lack of houses for sale is pushing up prices, impeding first-time and lower-income buyers even as mortgage rates remain low.
In an order denying requests by the Realtors association and the brokerages to dismiss the suit, Judge Andrea Wood said the plaintiffs would have paid “substantially lower” commissions if not for the rules established by the Realtors association and followed by the brokerages.
The suit takes aim at the way that brokers who represent homebuyers are paid. Typically, people seeking to sell their home agree to pay a listing agent a commission — usually 5 percent to 6 percent of the sale price — to place it on a listing service maintained by local Realtor groups and to market the home. The seller agrees that the listing agent will offer to split the commission — say, a 2.5 percent share — with the agent representclosing ing the buyer. (Agents may share part of their commissions with their brokerages.)
Homebuyers pay nothing directly to their agent and may believe they are paying no commission because, according to the lawsuit, the Realtors association allows buyers’ agents to tell clients that their services are free.
“In a competitive market,” the suit says, “the seller would pay nothing to the buyer broker, who would be paid instead by the buyer, and the commission paid by the seller would be set at a level to compensate the seller broker only.”
In effect, the suit argues, the home seller is paying an inflated commission that is covering the buyer’s share as well. By that analysis, a seller paying a 5 percent commission on the sale of a $500,000 home is overpaying by about $12,500.
Consumer advocates and some analysts say the practice pushes up home prices because the commission for the buyer’s agent ends up being added to the asking price of the home so the seller can get a particular net price.
In a report last year, the Consumer Federation of America found that few people understood the commissions they paid when buying or selling a home, partly because most agents don’t make it easy for consumers to learn about them.
Also, the complaint says, buyers’ agents can see, through the listing service, the commission split offered for each home — but homebuyers generally cannot. Buyers’ agents, then, may tend to “steer” clients to homes paying higher commissions.
Mantill, the Realtors association spokesman, maintained that the broker commission structure “ensures greater access for first-time, low-income and many other homebuyers who otherwise couldn’t afford a home purchase.”
That echoes an argument made by agents: that if buyers had to pay brokers directly, many would find it difficult to afford a home. Many buyers already struggle to save enough to cover a down payment and to secure a mortgage.
Others, however, dismiss that concern. Stephen Brobeck, a senior fellow at the consumer federation, said buyers wouldn’t have to come up with the cash upfront. Rather, they could finance the commission through their mortgage, just as they finance other costs. And paying their agent directly would allow them the opportunity, perhaps, to negotiate a lower commission.
The plaintiffs are asking for damages and a halt to the practice of having sellers’ agents pay commissions to buyers’ agents.
Here are questions and answers about real estate commissions:
Q: Can I negotiate the commission I pay a real estate agent?
A: The National Association of Realtors says all commissions are negotiable. But in practice, that may be difficult. In its research, the Consumer Federation of America found that only about a quarter of agents interviewed said they would consider adjusting their commission.
Brobeck at the consumer federation suggested that homebuyers interview several agents and ask about commission splits. Some agents may be agreeable to different approaches, such as being paid by the hour.
Sellers do have other options. They can try to sell their home themselves, but it can be difficult to market a property without the help of an agent to list the home on multiple listing services. Or they can work with some online brokerages that offer lower commissions.
Q: What are commission rebates?
A: Some brokers may offer commission “rebates” or refunds to homebuyers. If, say, a buyer’s agent received a typical 2.5 percent commission, the agent may return part of that amount to the buyer. Such rebates can save homebuyers thousands of dollars, according to the Justice Department.
But at least 10 states ban such rebates.