What the $2 Billion Realtor Lawsuit Means for Homebuyers and Sellers
Change is coming to the real estate business following a big legal win for home sellers.
What the NAR Lawsuit Means for You
The NAR lawsuit could eventually lead to changes in how agent commissions are set and paid out.GETTY IMAGES
An October jury ruling against the nation’s largest trade organization could have sweeping consequences for anyone looking to buy or sell a home.
The class-action lawsuit – Sitzer v. the National Association of Realtors – alleged that NAR, Keller Williams Realty, Anywhere Real Estate (formerly known as Realogy), RE/MAX and HomeServices of America (all major real estate brokerages), colluded to artificially inflate agent commissions.
RE/MAX and Anywhere Real Estate (formerly known as Realogy) earlier this year settled out of court for a combined $140 million. A jury ultimately sided against the remaining defendants on Oct. 31, awarding a judgment of $1.8 million that could, depending on the judge’s decision, surge to over $5 billion in total damages.
“They ultimately agreed that there was a conspiracy among Realtors to keep their fees artificially high,” says Omar Ochoa, a class action attorney and founder of Omar Ochoa Law Firm in Texas.
It’s just the latest hit for the 1.5-million-member group of real estate agents, which has recently faced several lawsuits (including one from the Department of Justice) regarding harassment accusations, executive shuffles and a surge of pullouts from big-name brokerages, like RE/MAX, Century 21, Redfin and more. It also has the power to forever change what it costs to buy and sell real estate.
As Richard Kruse, an agent with Gryphon Realty in Columbus, Ohio, and former member of NAR, puts it, “The fight will go on and an appeal will be filed and drag this out, but eventually agent payments will change.”
What Was the NAR Lawsuit About?
It’s a little complicated, but the basis of the NAR lawsuit boils down to the group’s commission-sharing rule. To list a for-sale property on a multiple listing service – the databases that agents use to share properties amongst themselves – they must offer a commission to the agent who ultimately brings in the winning buyer. Historically, this has resulted in a 5% to 6% commission, with half going to the seller’s agent and half to the buyer’s.
Here’s the catch, though: The buyer doesn’t pay their agent’s fee directly. Instead, the commission is fully paid by the seller as part of their closing costs.
According to the Sitzer suit, as well as other litigation, this amounts to a form of antitrust, reducing competition and pushing up commissions higher than services warrant.
“The jurors were convinced by the plaintiffs’ attorneys that an environment of collusion existed with the industry, enabled by NAR’s practices, and that buyers should be free to negotiate fee structures separate from that established in listing agreements with sellers,” says Budge Huskey, CEO and president of Premier Sotheby’s International Realty in Naples, Florida. (To be clear: Huskey does not agree with the jury’s verdict.)
What’s Next?
While the jury has ruled in the Sitzer case, the judge, Stephen Bough, has yet to finalize damages. Once he does, those damages will be divvied out among the thousands of home sellers who participated in the class action lawsuit.
That may take a while, though, as Kruse suggested, NAR plans to appeal the decision. “This matter is not close to being final as we will appeal the jury’s verdict, and we remain confident we will ultimately prevail,” NAR president Tracy Kasper said in a statement. “Due to the nature of appeals, this case likely will not be concluded for several years.”
There’s a chance the case could be settled outside of court before those appeals wind through the courts.
What It Means for Buyers and Sellers
Eventually, the lawsuit may lead to changes in how agent commissions are set and paid out. According to Kruse, the commission-sharing model could evolve into a referral fee system.
“In my opinion, there will be something in the form of a referral fee from the listing agent to the buyer agent for introducing the buyer to the property,” he says.
It could also mean an end to commission sharing altogether. A recent report from consulting firm Keefe, Bruyette & Woods projects this “unbundling” could occur as early as 2024. It could result in commission decreases as much as 2 percentage points or more.
“The new buzzword for real estate will be ‘decoupling,’” says Sissy Lappin, a real estate agent and co-founder of ListingDoor in Houston. “The seller will pay their agent and the buyer will pay theirs.”
How that decoupling will play out is uncertain. Some experts say buyer’s agents may resort to flat fees or hourly rates. Others say variable fees may be more fitting, as services and time spent with each consumer can vary widely.
“There may be a variable buyers’ agent fee that is determined when a buyer goes under contract or how many showings they’ve requested and viewed,” says Steve Nicastro, a real estate agent and content lead at Clever Real Estate in Charleston, South Carolina. “This could better align pay with the work required from buyer’s agents. For example, imagine a scenario where a homebuyer pays an agent $50 to $100 per house showing, and then another fixed rate for specific services related to completing the transaction – finding and hiring home inspectors, appraisers, attorneys, etc.”
Nicastro says there could also be a larger move toward using real estate attorneys – rather than agents – or more buyers going it alone entirely.
That all remains to be seen, though. In the meantime, consumers can likely expect more transparency as they go about buying and selling properties. In fact, in the wake of recent litigation, NAR has already released guidance that Realtors should no longer market their buy-side services as “free” and that shared commissions must be “disclosed openly.”
As Laura Ellis, president of residential sales at Chicago-based real estate firm Baird & Warner, explains, “At its core, this issue is about being transparent, taking responsibility and earning consumers’ trust.”
This article was originally posted on US News & World Report and can be viewed here.