Legal scrutiny signals shift in how homes are bought and sold

It was a bombshell verdict that reverberated in the stock market and put the rules for how U.S. homes are sold on shaky ground: A jury in Missouri found last week that the National Association of Realtors and others colluded to keep real estate agent commissions high.

NAR has promised to appeal. But at a time when the housing market is mostly frozen — battered by a shortage of available homes and surging mortgage rates — the decision puts the real estate industry under unprecedented scrutiny.

A larger class-action lawsuit focused on the same central issue is expected to go to trial in Illinois next year. And after Tuesday’s verdict, the law firm representing the plaintiffs launched a more ambitious suit against NAR and seven brokerages, seeking more than $100 billion in damages on behalf of all U.S. home sellers who paid commissions over the last four years.

Then there’s the Department of Justice, which may seek to upend the way the agents are paid nationwide. While exact implications of the Missouri verdict are unclear, it signals the potential for changes to everything from how buyers search for listings to how much they’re willing to pay for homes. Here’s what we know so far:

The Missouri verdict

The jury called for damages of nearly $1.8 billion to compensate a class of roughly 500,000 plaintiffs who sold homes in Missouri in recent years. That amount could be tripled because the jury found defendants acted with intent rather than negligence.

Known as Sitzer/Burnett, the case centered on a standard real estate professionals call the buyer-broker commission rule. It requires sellers’ agents to offer compensation to representatives for buyers as a condition for submitting a property to a multiple-listing service, the industry’s main tool for marketing homes.

In practice, the rule means sellers pay commissions of roughly 6% on a typical transaction. The commission comes out of the sale proceeds, meaning that if a buyer pays $500,000 for a home, the owner gets $470,000 and the respective agents divide $30,000. In theory, the system gives buyers’ agents an incentive to show listings to their clients, helping to ensure the highest possible price.

Still, the plaintiffs argued the industry rule amounts to a conspiracy to force sellers to pay a commission that would otherwise be covered by buyers. In addition, they said Keller Williams and Berkshire Hathaway’s HomeServices of America are part of a collusive practice that keeps buyer commissions artificially high. Brokerages have indicated they plan to appeal.

Other cases

Additional cases are looming, including the class-action suit against NAR in Illinois, which is expected to go to trial early next year. Damages in that case could reach $40 billion, posing an existential risk to the trade group. Brokerages Anywhere Real Estate and Re/Max agreed to collaborate with the plaintiffs in that case as part of their settlement in the Sitzer/Burnett case, according to Makenzy Mohrman, an analyst at Capstone.

The biggest threat to the status quo likely comes from a Department of Justice investigation into industry practices. The DOJ recently injected itself into a Massachusetts lawsuit that centers around buyer commissions, a move that may indicate it wants decouple buyer and seller commissions.

While the Justice Department is hamstrung by a settlement reached with NAR when Donald Trump was president, Mohrman believes there’s a 60% chance that DOJ will file a lawsuit during President Joe Biden’s current term that would argue industry efforts to enforce the traditional commission structure are anticompetitive.

“The practices that the DOJ is after are very core to the way real estate works today,” Mohrman said. “We think the NAR will continue to defend the narrative that these practices protect consumers and don’t hurt them regardless of the outcome of the trials.”

Industry reaction

While awaiting the courts, some parts of the industry are modifying their compensation structures. After losing several large brokerages from its membership and anticipating Tuesday’s verdict, NAR last month announced it was changing its rules to allow agents to list homes while offering zero commission to the buyer’s agent.

The Real Estate Board of New York, which isn’t part of NAR, has gone further, banning listing agents from paying buyer’s agents. Instead, it will be up to sellers to determine how to directly compensate the buyer’s agent.

Agents say they’re being unfairly targeted. Aaron Kirman, chief executive officer of his own Los Angeles-based team at Christie’s International Real Estate, said there’s already plenty of transparency and flexibility around commissions, which in L.A. have fallen to 2% to 2.5% for each side of a deal in higher-priced transactions.

“Every single day, I negotiate my commission — not something that I love to do, but it’s just part of the business,” Kirman said. “The industry is under attack at a time when we’re in an all-time difficult market.”

What happens next

How this all shakes out remains unclear, but ending commission-sharing practices would have widespread effects. It could save sellers money, since they would no longer have to pay the buyer agent’s commission. But if buyers have to pay agents directly, that could reduce the amount they’re able to offer on a home. Also, because the buyer’s agent is currently paid out of the sale price, the commission is effectively financed by the mortgage lender.

Stephen Brobeck, senior fellow at the Consumer Federation of America, said his group estimates that the commissions paid by consumers would fall 20% to 30% if there is “effective competition.”

“It’s going to be messy,” he said. “But consumers will benefit greatly.”

Every single day, I negotiate my commission — not something that I love to do, but it’s just part of the business. The industry is under attack at a time when we’re in an all-time difficult market.”

Aaron Kirman, chief executive officer of his own Los Angelesbased team at Christie’s International Real Estate