Written By: Alexandra Stolfe
Buying a home can be a complex process, which is why 86% of Americans used a real estate agent or broker when purchasing their home in 2022. It can be puzzling to buyers, however, when they discover that they did not pay their realtor a dime.
Real estate agents typically collect commission; meaning, when an agent helps buy or sell a home, he or she gets a percentage of the final sale. The industry tradition is a 5-6% commission. In this payment scheme, the realtor gets paid by an “offer of compensation”. An offer of compensation refers to the practice in which the seller pays both of the agents.
The offer of compensation is an over one hundred-year-old practice formulated by a group of agents who created what is known as the Multiple Listing Service, or MLS. The idea behind this database is that anyone who uses the MLS to list a property for sale has to offer a commission to the buyer’s agent. Ultimately, the 5-6% commission paid by the seller is split between the two agents.
If the commission is not included as part of the sale price, the commission has been “decoupled”, meaning each side independently pays its own agent. The theory behind decoupling is that it increases competition among agents, thus driving down commissions closer to 3-4%.
What Happened in Burnett v. NAR?
On Tuesday, October 31st a federal jury in Missouri ordered the National Association of Realtors (NAR), along with other large real estate brokerages, to pay nearly $1.8 billion in damages. The jury found that the NAR artificially inflated home prices by coupling commissions paid to agents.
Filed in 2019, this class-action lawsuit was on behalf of 500,000 home sellers in Missouri and border towns. The primary issue of the case focused on the NAR rule mandating the use of the offer of compensation model when the property is advertised on the MLS.
The plaintiffs argued that this practice by the NAR “forces home sellers to pay a cost that, in a competitive market and were it not for defendants’ anticompetitive restraint, would be paid by the buyer,”. They also claimed that the NAR requirement artificially inflates the commission of the home buyer’s agent. The jury agreed, stating that the defendants “conspired to require home sellers to pay the broker representing the buyer of their homes in violation of federal antitrust law.”
The next question for courts to consider is how to restructure this compensation scheme. The plaintiff’s counsel claims that the solution is for buyers to finance these commissions as part of their mortgage but acknowledges the steep regulatory barriers to adopting this strategy. Mantill Williams, spokesman for the NAR, however, adamantly maintains that the current system is fair and correct. The defendants will be appealing, but in the meantime, they have asked the judge to reduce the jury award. An appeal would bring the case to the St. Louis-based 8th U.S. Circuit Court of Appeals.
New Class Actions
The push for change following this verdict shows no signs of stopping. The lawyers for the plaintiffs in Burnett filed a new class-action lawsuit in the U.S. District Court for the Western District of Missouri that seeks class-action status covering anyone in the U.S. who sold a home in the last five years. It again names the NAR as well as seven brokerage companies, including Redfin, eXp, and Douglas Elliman. In a Chicago federal court, these brokerage companies are also being sued, alleging a conspiracy in violation of U.S. antitrust laws. Industry titans, individual agents, and prospective homebuyers will be watching the courts as these lawsuits challenge the longstanding industry practice on commissions.
What Does This Mean for the Industry?
The verdict does not indicate an overnight change to realtors’ commission structure. However, the case and subsequent lawsuits have sent shockwaves through the real estate community. For example, last month, Redfin announced it would mandate that its brokers and agents withdraw from NAR membership in light of the controversy. Furthermore, Bloomberg has reported that the DOJ may be interested in conducting its own investigation into antitrust violations regarding this commission structure.
As articulated in the plaintiff’s argument, the primary benefit to the elimination of the offer of compensation model is more autonomy for buyers and sellers. By decoupling, buyers and sellers would be able to negotiate the commission, meaning ultimately more competition and lower commissions. The main argument was that including commission in the sales package artificially inflates home prices. If commissions were paid on an independent basis, buyers would face lower housing prices and both sides would likely pay less in fees.
However, there are potentially dire implications for less liquid buyers. Critics warn that changing this structure would make it harder for “cash-strapped buyers” to afford homes, as they would have to pay broker commissions out of pocket. The NAR goes as far as claiming that this change would exasperate the growing wealth disparity between homeowners and nonhomeowners. They argue that the current practice is the best for consumers because “it gives the greatest number of buyers a chance to afford a home and professional representation, while also giving sellers access to the greatest number of buyers.”
All eyes are now on the courts as they settle the debate.
Alex Veiga, et al., Americans Are Taxed $60 Billion In Real-Estate Commissions, FORTUNE (Nov. 2, 2023, 12:15 PM).
All Things Considered, $1.8 Billion Lawsuit Could Upend the Real Estate Industry, NPR (Nov. 5, 2023).
Amy Crews Cutts, Vanessa Gail Perry & Ann Schnare, Be Careful What You Ask For: The Economic Impact of Changing the Structure of Real Estate Agent Fees, SSRN (May 13, 2022).
Batton v. Compass, Case No. 1:23-CV-15618 (N.D.Ill. filed Nov. 2, 2023).
Burnett v. NAR, Case No. 4:19-CV-00332-SRB (W.D.Mo. 2023).
Emily Peck, These Lawsuits Could Upend The Real Estate Market, AXIOS (Oct. 23, 2023).
Gibson v NAR, Case No. Case 4:23-cv-00788-FJG (W.D.Mo. filed Oct. 31, 2023).
Mike Scarcella, US Home Brokers Face New Lawsuits After $1.8 Billion Verdict, REUTERS (Nov. 3, 2023, 3:30 PM).
National Association of Realtors, Quick Real Estate Statistics, NAR (Oct. 31, 2023).