Real Estate’s Day in Court
A class action lawsuit rocked the world of American residential real estate. Here’s what it means for you.
On March 15th, the news broke. A class action lawsuit in Missouri found the National Association of Realtors (NAR) guilty of what amounts to price fixing. Between the wars in Gaza and Ukraine, election news, and reports on TikTok’s fate, the details of this landmark case and how it could impact your family may be a bit foggy. What follows is a breakdown of the major points of the case and the fallout for the industry and consumers.
Context: How Agents are Paid Today
Before jumping in, it’s important to understand how residential real estate agents are paid in around 90% of the transactions that occur each year.
When a seller puts their home on the MLS through an agent, the seller signs a listing agreement.
That listing agreement offers a total commission rate. This commission averages between 5 and 6 percent of the house’s sales price.
In the listing agreement, the seller offers a portion of this commission to the home buyer’s agent. Typically, this is around half of the total commission offered (2.5-3%)
On the settlement statement, the buyer’s agent’s brokerage receives a credit from the listing agent for their procurement of a buyer.
What happened?
The Wall Street Journal’s March 16th article sums it up nicely: “NAR, one of the nation’s most powerful trade groups, has been facing crippling antitrust liability since a Kansas City, Mo., Jury delivered a $1.8 billion verdict against the organization and two national brokerages in October. The jury found that industry rules for paying buyers’ agents kept commission rates artificially high.
How Does NAR actually do this?:
NAR controls data through its power over the local Multiple Listing Services (MLS). It does this by ensuring that new real estate agents become members of NAR before they can use local MLS systems. This enables NAR—through its local boards— to force its members to play by certain rules.
This ensures due-paying members to NAR, which is the #1 or #2 spender on lobbying each year, sometimes outspending even the US Chamber of Commerce. A typical year lobby spending for NAR is around $75 million.
Some of NAR’s rules ensure practices that help prevent discrimination. However, the practice that NAR was found guilty of showed that it used its influence over the MLS to cause buyer’s agents to be paid by the seller through an offer of cooperating brokerage.
What was the result of the case?
Again, from the WSJ: “NAR agreed to abandon longstanding industry rules that have required most home-sale listings to include an upfront offer telling buyers’ agents how much they will get paid.”
Now, a seller and their agent cannot use the MLS to offer compensation.
Sellers will be able to offer compensation to buyer’s agents through other vehicles. Agent and broker websites will likely be the places where this information is posted.
However, this also means that many sellers will likely not offer compensation to the buyer’s representative.
Thus, buyers who want to work with an agent must agree to compensate that agent.
The case requires agents to have a signed agreement in place that addresses compensation between them and any buyer before showing property.
A buyer’s agent value will be scrutinized before any service is provided.
Agents who want to represent buyers will have to be incredibly clear about their value and how they are to be paid.
How will this impact agents?
The case also examines an agent’s value by making the mechanics of paying an agent more transparent.
If you think about it, buyers have always paid their agent, they’ve just amortized the fee into their mortgage. The case takes away this discreet vehicle, which made paying even under-performing agents this fee easy.
To amortize the cost of an agent into your deal now, you’ll have to negotiate this into the deal with the sellers, possibly making your offer less attractive.
Last year, over 60% of Americans with real estate licenses didn’t do a single deal. At best, you could classify these folks as hobbyists. And who could blame them? Getting a real estate license is pretty easy and cheap. Commissions, even if they only come once every couple of years, can be an incredible subsidy to their household income.
But now, every agent, including hobbyists, will have to justify their fee.strategic consideration based on how to capitalize on demand and net more money for your home.
As a buyer, you’ll want to understand precisely what value your agent brings to the table and how this will help you identify and negotiate for a home.
Our Take:
Our hope is that this leads to a professionalization of the industry.
We think that agents should be paid by the party they have a fiduciary obligation to. This is how payment works in other fiduciary relationships like CPAs, financial planners, good attorneys, and many doctors.
No one ever wants to believe that someone supposed to represent their best interest was overpaid. On the contrary, you want to lean back and think: “gosh, without this professional in my court, I would have never achieved this result!”
The mechanics of how we will be paid in the future still need to be sorted out. It will likely not be a simple one-size-fits-all solution.In some cases, a retainer may be best. For others, a fixed fee or a percentage may be more appropriate.
As you’ll see in the following articles, the industry is ripe for long-overdue disruption. Providentially, we are in a position to help clients capitalize on the changing market in ways we could have never imagined, even a couple of years ago.
