In the first of several class action lawsuits against the National Association of Realtors and several large national brokerages, a jury on 10/31/23 found the defendants guilty of collusion in the manner of which real estate commissions are set and distributed between the brokerages and sales associates are compensated for their services. The jury awarded 1.78 Billion$ in damages. NAR has indicated that it intends to appeal this decision and it could possibly take several years before the dust settles. Another similar case is set to start in the near future. I don’t expect to see any major changes in the way real estate commissions are structured any time soon.
Who Are the Plaintiffs That Filed The NAR Lawsuit?
The lawsuit was filed on behalf of home sellers in Kansas, Missouri and Illinois who claim that they were overcharged in the sales of approximately 260,000 properties between the years 2015 and 2022 and that NAR and the brokerages colluded to set the commissions that the brokerages and realtors received in the sale of these properties. The suit contends that the manner in which the compensation framework that has been in use for decades has unfairly overcharged sellers when selling their properties.
How Have Commissions Traditionally Been Structured?
Typically a home seller agrees to pay a sales commission to the brokerage that writes a listing contract with the seller, who agrees to pay the broker a percentage of the ultimate sale price of the home. There has never been a “default” percentage and the seller and brokerage have always been free to choose whatever was agreeable, but in most cases 6% became the most widely used benchmark. From that let’s say 6%, the listing brokerage would agree to sharing that percentage with the realtor and brokerage that ultimately finds the buyer for the property. This sharing arrangement has also always been negotiable between the brokerages but again, in most cases it might be 3%. So in the big picture, the seller is paying the listing agent for their services in selling the property, AND the selling agent who finds the buyer. The lawsuit contends that the seller should not have to pay the buyer’s agent for their services that should more appropriately be paid by the buyer.
Are Realtors and Brokers Even Necessary?
The short answer is NO. A property can be sold directly from one party to another by using an attorney or Title company to handle the transaction and file the paperwork as well as the fees that may be involved. This is becoming more prevalent as the internet (Zillow for example) has made the process of advertising a property for sale and shopping for homes much easier. But that was not always the case…..
The Multiple Listing Service (MLS)
There are many regional MLS’s throughout the US. Each MLS operates independently and controls it’s own listings which are obtained from it’s member brokerages. Long before the advent of the internet, the MLS would regularly generate a book that included all of the listings with pictures etc. of all the properties that were available for sale in their area. This book was distributed to all the member brokerages and realtors that were members of the MLS. This was how sellers could have their property advertised to potential buyers and buyers could see the inventory of available properties. Assumedly there needed to be a way for real estate professionals to be compensated for their services and likely that’s how the commission structure was instituted. The NAR established a “Clear Cooperation Policy” that made it mandatory that brokerages be transparent as to the compensation structure between them, but not necessarily between the buyers and sellers themselves. This is also one of the considerations in the lawsuit. But at the time there needed to be some system and that was what resulted.
What About Zillow and Other Online Property Websites?
Zillow gets almost all of it’s listings by buying them from the individual MLS’s. The only lstings that actually belong to Zillow are the For Sale By Owner listings. So the MLS’s are the source of most of the data that Zillow uses and posts on their website. Zillow actually derives most of it’s revenue from selling advertising to buyer’s agents looking to get leads from potential buyers. Zillow wouldn’t exist if not for the MLS.
So Who Are The Winners and Losers if The Verdict in the NAR Lawsuit is Upheld?
The Big Winners would be sellers. They would no longer be asked to pay anything to the buyer’s agent or brokerage. They would still negotiate their own arrangement with the listing brokerage taking into account the level of services that are agreed upon. Or the seller can just go For Sale By Owner, which they have always been able to do.
The Big Losers would be buyers. Their options would be to enter an exclusive buyer agreement where they would agree to pay their buyer side brokerage a fee for their service in helping find a suitable property, negotiate a contract, and handle the details of the transaction. Or they could just go it alone, which they can do now if they choose. But this would make things difficult for first time homebuyers or those with little experience navigating the process.
Zillow Also Loses as they get the majority of their revenue from buyer’s agents looking for potential buyers. As realtors would get no compensation from working with buyers (unless the buyer is willing to pay them) they will not advertise on Zillow.
My Thoughts……
I have been reading lots of comments from people to the different news sites and stories that are reporting on this lawsuit and the verdict yesterday. Many people have a negative view of realtors and say they are slimy, liars, greedy and don’t deserve their compensation. I cannot dispute some of that as I have come in contact and had to engage with some who do in fact display those tendencies. But by far the number of really good people who work hard and are diligent far exceeds the bad apples and any profession contains some bad apples. Is overall realtor compensation too high? Maybe. As technology has dramatically changed the way transactions are processed, properties are marketed there is much more efficiency in the process. The large increase in home prices has also driven up the average commission in each sale, although over the last several years I have seen a decline in at least the percentages of compensation.
We will definitely continue to see changes in the industry and this verdict if left to stand will accelerate that change.