When a Missouri federal jury decided on Oct. 31, 2023, that the National Association of Realtors® (NAR) and two large brokerage firms conspired to price-fix real estate commissions, industry observers speculated that costs to consumers could drop when buying and selling homes.
The actual results of this potentially revolutionary change in how homes are bought and sold in America, however, is up in the air and might take years to appear. It isn’t clear at this point how both buyers and sellers will fare under an unknowable set of potential new practices.
The verdict in the Oct. 31 case was that home sellers in the Kansas City, Missouri region who listed properties on one of four local Multiple Listing Services (MLS) dating back to 2015 and paid a broker are now entitled to $1.8 billion in damages. Because the jury ruled federal anti-trust laws were violated, that award could be tripled by the judge. Two original defendants settled before the trial, agreeing to pay $83.5 million and $55 million, without admitting any guilt.
Class-action attorneys, seeing blood in the water, are filing piggyback lawsuits all across the country, with new cases popping up in Texas, Illinois, South Carolina and New York.
Paying out verdicts in the billions of dollars could financially cripple or bankrupt even the largest real estate companies if the Missouri decision stands after appeals, which could reach the Supreme Court. High numbers of individual real estate agents could be laid off.
NAR has stated that it disagrees with the verdict and expects to overturn it on appeal, a process that will unfold into 2024.
“This matter is not close to being final,” NAR said in a statement after the verdict. “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. We remain optimistic we will ultimately prevail. In the interim, we will ask the court to reduce the damages awarded by the jury.”
Following guidelines set by NAR and local Multiple Listing Services (MLS), home sellers have for decades hired an agent or broker to sell their house. The seller agrees to pay a commission on the sale price and is told that the buyer’s agent will be paid from that commission. The buyer typically pays no commission.
Two local real estate professionals interviewed by River Journal North point out that buyers and sellers have always been able to negotiate the commissions they pay, and that top-flight agents provide value on the most important investment that most people make.
“There has never been anything in writing specifying a commission amount on the MLS,” said Lynda Fernandez, CEO of the Hudson Gateway Association of Realtors (HGAR).
“In fact,” she added, “rules in the MLS handbook and NAR policy expressly prohibit MLS, associations, and brokers from setting or suggesting any such commissions – they are negotiable. It is completely at the discretion of the listing broker and their client and is negotiable.”
Joe Lippolis, an associate broker who, with wife Cynthia Lippolis, co-owns the Berkshire Hathaway HomeServices River Towns Real Estate franchise based in Croton-on-Hudson, has been in the real estate business for several decades. He says a system that has worked for many years could face an uncertain time ahead for clients.
“There’s nothing standard on commission arrangements,” Lippolis said. “It’s what the market is willing to bear. Nobody sits down in a room full of brokers and sets a price. No one from our franchise parent is dictating what we are supposed to charge.”
In the Missouri case, the attorneys for the plaintiffs based their complaint on the long-standing arrangement of having the seller, instead of the buyer, pay the buyer’s agent commission. For example, if a house sells for $500,000 and the seller agreed to pay a 6% commission ($30,000), the seller’s agent receives half ($15,000) and the buyer’s agent gets the other half ($15,000).
The plaintiffs’ attorneys state the rules of the NAR require that houses for sale can only be listed on the MLS service if the buyer’s broker’s commission is paid by the seller and that the buyer’s broker cannot rebate a part of that commission to their client. They claimed sellers were financially damaged by being forced to pay the buyer’s broker’s commission.
“I think what will change eventually, and I don’t necessarily agree it should, is that the ability to decouple commissions between the seller and the buyer will take place,” Lippolis said. “Traditionally the seller has funded the buyer side and it works, but they’re trying to fix it.”
Sellers have been willing to pay the buyer’s agent’s commission as an incentive to bring the best offer to the table. In the future, if sellers decide to pay less of the buyer broker’s commission, buyers will most likely have to make up the difference.
“You’re going to have a whole hodgepodge of arrangements,” Lippolis said. “Ultimately, you are negotiating with the client for their needs.
“On the opposite side,” he continued, “the buying agent and the selling agent are going to negotiate for their needs. Maybe one agent needs 4% and somebody else is 1.5%. It’s going to vary. Nothing is being dictated. The only thing the brokerage dictates to the agents that work under them is the fee they need to be profitable.”
Shifting more of the upfront commission costs to buyers will keep some potential homeowners out of the market if the commission is a budget buster. State mortgage laws prevent buyers from including commission costs in their mortgage, according to Fernandez.
“It would hurt the consumers, particularly the most vulnerable lower-income consumers, and it’s going to make things more difficult in this market where we already lack supply. Consumers may not be able to afford representation and sellers might not secure the best offer on their homes from qualified buyers.”
Lippolis said that “a first-time home buyer who can’t afford to pay a buyer’s broker could lose out to another buyer, say an investment group, that can afford to pay a buyer commission. Who’s at a disadvantage?”
“All actions have consequences, and this is a possible unintended one. The lower-end buyer is going to have a tougher time.”
Jim Roberts is a freelance business reporter based in Peekskill.