Will commissions fall after Realtors lose in court?
It’s a decision that has the potential to rewrite the entire structure of the real estate industry in the United States, lowering the cost of moving homes by reducing commissions.
A federal jury ruled on Tuesday that the powerful National Association of Realtors and several large brokerages had conspired to artificially inflate the commissions paid to real estate agents. The realtors’ group and brokerages were ordered to pay damages of nearly $1.8 billion. The verdict allows the court to issue treble damages, which means they could swell to more than $5 billion.
Under a NAR rule, a home seller is required to pay commissions to the agent representing the buyer, which sellers claimed forced them to pay excessive fees to the agents. The home sellers said the brokerages collaborated with NAR to enforce what is called the “cooperative compensation rule.”
But under the verdict, the sellers would no longer be required to pay their buyers’ agents, and agents would be free to set their own commission rates, which could be slashed in half or less. For example, a home seller with a $1 million home can now pay as much as $60,000 in agent commissions — $30,000 to their agent and $30,000 to the buyers’ agent.
“We view it as a tremendous day of accountability for these companies,” said Michael Ketchmark, the lead attorney for the plaintiffs.
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NAR, alongside Keller Williams, Anywhere, Re/Max and HomeServices of America, had been on trial in Kansas City in an antitrust suit brought by nearly half a million Missouri home sellers. Before trial, Re/Max and Anywhere Real Estate opted to settle, with Re/Max paying $55 million and Anywhere paying $83.5 million in damages.
But NAR, as well as Keller Williams and HomeServices, headed to trial. After deliberating for less than three hours, an eight-person jury delivered the verdict: Yes, there had been a conspiracy, and not only would the defendants be required to pay damages, but those damages could triple.
Chicago-based NAR is the largest professional organization in the United States. It has more than $1 billion in assets and owns the trademark to the word “Realtor,” making a real estate agent’s ability to buy and sell homes contingent upon the payment of membership dues in much of the country. NAR said it plans to appeal the verdict.
“This matter is not close to being final. We will appeal the liability finding because we stand by the fact that NAR rules serve the best interests of consumers, support market-driven pricing and advance business competition,” NAR president Tracy Kasper said in a statement.
‘This is an earthquake’
How the ruling plays out remains to be seen, but it’s clear that the verdict — and the size of the damages — point to a shift in the way agent commissions are now paid.
Redfin CEO Glenn Kelman said that the decision will prompt homebuyers and home sellers to now question the standard practice of setting commissions between 5% and 6%.
“Traditional brokers will undoubtedly now train their agents to welcome conversations about fees,” he said. “But it’s also possible that buyers will become the ones who decide how much to pay a buyer’s agent.”
More than 1.5 million real estate agents across the United States pay dues to the organization in order to call themselves Realtors. But after a series of sexual harassment allegations led to the resignation of the organization’s president this summer, Tuesday’s ruling threatens to further diminish the influence.
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“This is an earthquake,” said Jason Haber, a real estate agent with Compass who has been one of the most outspoken critics of NAR in recent months. “I’m disappointed in today’s verdict and I’m even more disappointed in NAR. This was their Super Bowl and World Series rolled up into one and not even Taylor Swift could have saved them.”
Haber said he believed that there was no conspiracy when it comes to agent commissions but that NAR “failed me, they failed all of my colleagues.”
Mantill Williams, a spokesperson for NAR, said the group “will continue to focus on our mission to advocate for homeownership and always put consumer interests first. It will likely be several years before this case is finally resolved.”
What’s next?
Makenzy Mohrman, a financial services analyst at Capstone LLC, noted the U.S. Department of Justice is likely to pursue a more thorough investigation of how real estate transactions are handled in the United States.
“This is something that will affect a lot of consumers,” she said in an emailed statement. “We believe this is a significant hit for real estate brokers, but we don’t think this is over yet at all. There are more battles to be had. This is the first domino to fall.”
But Jaret Seiberg, a housing policy analyst at TD Cowen, said Tuesday’s verdict does not mean “buyer commissions are a thing of the past.”
The judge presiding over the case will have to decide the scope of the injunction, which could end up amounting to “minor tweaks” to the current commission-sharing system. “If that is the case, then the impact may be limited as we expect most brokers will continue to offer commission sharing to boost interest in the property,” Seiberg. added.
Brokerages who chose to settle ahead of the trial said they were pleased with their decision.
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“The settlement releases our company, affiliated agents, and franchisees from liability related to these claims. The jury verdict, while disappointing, does not alter our settlement,” said Trey Sarten, a spokesperson for Anywhere Real Estate, in an emailed statement.
Those who had lost previous court battles with NAR were celebrating.
Jack Ryan, the CEO of REX Real Estate, which in August lost an antitrust lawsuit against NAR, Zillow and Trulia, has been outspoken about setting commissions lower. He hailed the verdict as “extremely good news for Americans.”
If commissions can be lowered, “the price of every home will come down, jobs and wages will go up, tax revenues will increase, people can easily move to better and more fulfilling jobs,” he wrote.
Other lawsuits are now imminent. Within minutes of receiving the verdict Tuesday, the lawyers for the plaintiffs entered another class-action suit into U.S. District Court in Missouri. That case, filed on behalf of three new home sellers, also claims the practice of having home sellers pay sales commissions to buyers’ agents is a violation of the Sherman Antitrust Act. It names NAR as a defendant, as well as several major brokerages including Compass, eXp World Holdings, Redfin and Douglas Elliman.
New York Times and CNN contributed to this report.