Real estate brokers sued, and brokers will reshape the home buying process

On Tuesday afternoon, in a courthouse in Kansas City, Missouri, the real estate industry’s collective nightmare became a reality.

For decades, the basic structure of how real estate agents get paid when they help someone buy or sell their home has remained roughly the same. But over the past few years, some of the most powerful organizations in the field — the National Association of Realtors and several of the nation’s largest brokerage firms — have been fighting two multibillion-dollar class-action lawsuits, arguing that the system is rigged against ordinary Americans. , forcing them to pay a lot to their customers.

The first two notable cases, Burnett et al. v. NAR and others, went to trial in mid-October, and the events continued over a turbulent two weeks. The battle between the real estate industry and consumer advocates ended Tuesday after a jury decided that the NAR and brokerage firms were using the rules of multiple listing services, local databases where agents can see the vast majority of homes advertised for sale, in order to inflate the commissions paid by sellers. As part of the ruling, nearly $1.8 billion was awarded to the plaintiffs, who included sellers of more than 260,000 homes in Missouri, Illinois, and Kansas between 2015 and 2022. Because those damages are automatically tripled in a case like this, that number will rise. To more than $5.3 billion.

Beyond the serious damage, the decision could radically change the way we buy and sell homes. As it stands now, the home buyer does not pay his agent directly, but rather pays the seller for the home, who then deducts a check to his agent from the sale price, who then splits that commission with the buyer’s agent. This roundabout way of paying agents is supposed to be the most efficient way to get the deal done since buyers don’t have to pay out of pocket and agents aren’t stuck on who gets paid. But prosecutors convinced the jury that this setup is a scam that costs sellers billions of dollars every year. They point the finger squarely at the NAR, which controls almost all MLSs and enforces this status quo through the “cooperative compensation rule.”

Here’s how it works: When you list your home for sale on the MLS, you have to make a commission to the buyer’s agent. Technically, that amount could be as little as a penny, and NAR says commissions are always negotiable — in fact, the organization recently changed its interpretation of the rule so that someone can offer $0 and still be in compliance. But in practice, plaintiffs say, sellers are largely forced to offer 2.5% to 3% to lure buyers’ agents — and their clients — into the home. Some sellers may not know that they have the option to negotiate.

Stephen Brubeck, a senior fellow at the Consumer Federation of America, called this “the biggest watershed moment” for real estate in his 30 years covering the industry. He said he was surprised by the speed of the jury’s deliberations — “for such a complex case that involved so much money, obviously they went into the jury room and they all agreed” — but not by the verdict.

“This is very clearly a case of antitrust violations,” Brubeck told me. “For nearly a century, the industry has managed to maintain high, uniform commission rates. This decision indicates that it will be difficult for them to do so in the future.”

How things could change forever

The implications of the decision could be staggering. If the plaintiffs get their way, buyers and sellers will begin paying their agents’ costs separately. Consumer advocates say that would provide greater transparency and encourage each side to negotiate more with its agents. Instead of each side receiving the usual fee of 2.5% to 3.5% of the sale price, buyers and sellers are more likely to shop around and find people willing to accept a flat fee or a lower percentage.

The savings for both buyers and sellers can be enormous. If typical real estate sales commissions fell to between 3% and 4%, instead of today’s 5% to 6%, Brubeck estimated the savings for consumers could amount to $20 billion to $30 billion annually. For sellers who have cash left after selling the home, it may be convenient to pay just one broker. But cash-strapped buyers will have to pay their agents thousands of dollars out of their own pocket, plus all the other fees, without the help of a mortgage — current regulations don’t allow commissions to be built into the loan in this way. . At the very least, buyers will be incentivized to haggle over fees. Some may choose to pay the agent by the hour, as we do with attorneys. At the extreme end, many may abandon agent services altogether.

In addition to the ripple effects on home buyers and sellers, the decision could impose huge costs on real estate agents and brokerage firms that provide them with training, back-end operations, and legal support in exchange for a portion of their money. Committees. Experienced, well-connected agents who regularly nab high-dollar listings are likely a good thing. But for unverified agents, or those who focus mostly on working with buyers, the situation can be dire. If fewer buyers seek out agents, or if they begin negotiating aggressively to lower their fees, a buyer’s agent’s profits may decline. The slowdown in home sales has already exposed the glut of agents, and if check commissions shrink, a mass exodus from the industry could ensue.

I think there are going to be a lot of terrible, unintended consequences that come out of this

Consumer advocates, like Brubeck, have welcomed these anticipated changes as a big win for consumers. They say that even if buyers have to pay for agents out of their own pocket, everyone will be better off when there is more transparency and ability to negotiate. Good buyer’s agents who can prove their value will do just fine, Brubeck predicted. The industry will be greatly incentivized to change the rules so buyers can include their agents’ commissions in their home loans, meaning they can still get help from a professional without having to borrow all that money.

Others see these moves as dangerous steps backwards. Mike Rosenthal, an agent in California with more than two decades of experience in the industry, told me he believes both buyers and sellers would be “hard hit” if they had to pay their agents separately. Sure, sellers may feel relieved that they only have to pay their side commission. But the problem with selling your home is that most of the time, you have to go back and buy another home. Rosenthal told me he’s concerned about a new era in which more buyers will have to go through the process without an agent in their corner.

“I think there are going to be a lot of terrible, unintended consequences that come out of this,” Rosenthal told me.

To be fair, some people I talked to in the months leading up to the trial expressed doubt that things would actually change that much, even if the NAR had to update the rules that created the current way agents are paid. The thinking goes like this: Sellers may not be Owns to offer buyer’s agents a commission, but they’ll do it anyway because it’s a time-tested way to get the deal done. Buyers may also initiate offers on the condition that the seller agrees to pay both agents’ commissions – otherwise there will be no deal.

Before the trial, I spoke with Saul Klein, a longtime real estate executive and consultant. I put forward the idea that the status quo would continue, but he didn’t buy it. And in a competitive market like the one we have today, he asked, why would sellers willingly pay tens of thousands of dollars to the other side’s agent if they know they don’t have to?

“I think if you really had a choice, and you had buyers knocking on your door, you wouldn’t continue with the status quo,” Klein told me.

What’s strange is that the decision may be just the beginning of the turmoil for the real estate industry. NAR, one of the country’s largest trade groups, now faces the possibility of financial disaster if it is forced to pay damages. HomeServices of America and Keller Williams, two of the nation’s largest brokerages, face a similar fate. In addition to the legal and financial challenges, the association is handing over its leadership: The organization’s president already resigned this summer following a New York Times investigation into allegations of sexual harassment and a “culture of fear” at the organization. Now its CEO, Bob Goldberg, will leave his position at the end of this month, bringing forward his planned retirement at the end of 2024. Just minutes after the ruling was announced, the plaintiffs’ lead attorney filed a lawsuit against him. last Inman reported on a class action lawsuit against NAR and several other major brokerages, including Compass and Redfin, that was not linked to these initial actions. Now that lawyers smell blood — and a lot of money — more copycat suits are sure to follow. Meanwhile, the Department of Justice is also looking to investigate NAR and its business practices. Even the real estate companies that were not named in the lawsuit were shocked by the decision. Shares of real estate companies like Zillow and Opendoor fell after the news broke, a sign that the ruling represents an existential threat to the entire industry.

NAR and other defendants pledged to appeal the decision, and said they would ask the court to reduce the damages in the interim period, which could mean several more years of legal battles. They can also still negotiate a settlement, to avoid bankruptcies and stave off the next wave of lawsuits. While the jury has reached a guilty verdict, we wait to see what types of actions the judge will take, which could include ordering changes to MLS rules and eliminating the requirement that sellers provide compensation to a buyer’s agent. This will likely involve another procedure, so it may take weeks, or even months, before a subsequent decision is made.

Even without sweeping changes to the rules, these lawsuits are sure to change the real estate landscape, Brubeck told me. He said many buyers and sellers today don’t realize that commissions are negotiable. This trial could change that. And remember, this is just the beginning.

“In a way, the cat is out of the bag now,” Brubeck said.

James Rodriguez is a senior reporter on Insider’s Discourse team.

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