Commission Impossible: Lawsuits Question Legality of Buyer-Broker Fees
Litigation is underway in class action lawsuits against the National Association of Realtors (NAR) and several major real estate brokerages, alleging that they have conspired to fix buyer-broker commissions. The plaintiffs claim that the defendants have conspired to require sellers to pay inflated commissions.
On Tuesday, a court in Missouri found that the NAR and brokerages conspired to keep commissions for home sales artificially high, and held them liable for almost $1.8 billion in damages. That case is being appealed, and other similar lawsuits are still going on.
Keeping up to speed on the changes in law could potentially help homeowners save money when they go to sell or buy houses. But there's a lot of real estate lingo involved, so let's break some of that down before we get into the weeds of the case.
MLSs and Buyer-Brokers
These brokerages work under four different "multiple listing services" (MLSs). An MLS is a database that shows homes that are for sale in a particular region. It shows information such as address, price, square footage, and the number of bedrooms and bathrooms. MLSs are run by cooperative associations of real estate brokers and agents who agree to share information about their listings. MLSs are not open to the public. Only real estate agents and brokers who are members of the MLS cooperative association can access the database. Both buyers and sellers rely on MLSs to list and search for homes and ensure accurate, up-to-date information.
The NAR requires listing brokers to offer compensation to "buyer-brokers" who bring buyers to their listings. A buyer-broker, also known as a buyer's agent, is a real estate professional who represents the buyer in a real estate transaction. Buyer brokers work exclusively for the buyer and have an obligation to act in the buyer's best interests.
The Participation Rule
The NAR has a rule called the Participation Rule, also known as the buyer-broker commission Rule. The Rule says that a listing broker must offer compensation to a buyer-broker who brings a buyer to the listing. The amount of compensation offered to buyer-brokers is typically negotiated between the listing broker and the buyer-broker, but the NAR requires that the amount of compensation be "reasonable" and "fair." The average buyer-broker commission this year was 2.63% of the purchase price of the home. The buyer-broker commission Rule is designed to incentivize buyer-brokers to show their clients all listings that meet their criteria, regardless of the amount of compensation being offered.
In recent years, there has been some controversy surrounding the Rule. Some critics argue that the Rule is anti-competitive and that it drives up the cost of housing. However, the NAR argues that the Rule is necessary to ensure that buyers have access to qualified representation.
Recently, the NAR changed its stance on the buyer-broker commission Rule, allowing listing brokers to offer buyer-brokers $0 in compensation when listing a home on a realtor-affiliated MLS. Though individual MLSs may still have their own Rules regarding buyer-broker commissions, this was a major change to the industry. NAR's former general counsel testified that an offer of $0 would fail to comply with the Rule.
Litigation Over the New Rule
In the recent lawsuits over the NAR's new interpretation of the Rule, known collectively as the "Sitzer/Burnett case," plaintiffs represented the class of hundreds of thousands of Missouri home sellers. They named as defendants not only NAR, but also several real estate brokerage companies, including RE/MAX and Keller Williams. The plaintiffs claim that the new interpretation of the Rule violates the Sherman Antitrust Act because it inflates seller costs. They are asking for reimbursement for the commissions that they've paid to buyer agents — more than $1 billion over the course of eight years.
The NAR has claimed that the Rule helps cash-strapped buyers by taking away the burden of having to pay their own agent. But plaintiff's expert witnesses say otherwise. During trial, Roger Alford, a law professor from Notre Dame, testified that the Rule “is not designed to benefit home sellers." Rather, he claimed that it was created to protect the trade group from non-MLS affiliated brokers. And Craig Schulman, an associate professor of economics at Texas A&M, testified that the Rule was “one of the clearest cases of price-fixing and collusion" he'd ever seen.
Many of the plaintiffs who'd been affected buy the Rule in selling their homes testified during trial as well. One of them, Hollee Ellis, bought and sold many homes during her lifetime, one of which was sold during the time period applicable to the suit. That sale was necessitated by a move to South Carolina for a new job, and she considered herself to be a “cash-strapped buyer."
But Ellis claims she paid a 6% commission for that home. Allegedly, the combined commissions for buyer and seller agents consumed about 40% of the equity she had earned on the house. “It was a hard pill to swallow that we would walk away with so little," she said.
One of the titular plaintiffs, Rhonda Burnett, said she had no problem paying for an agent to sell her house, but she wasn't happy about having to pay the buyer's agent. Similarly, another plaintiff, Jerod Breit, testified, “I still don't see the fairness in paying for somebody you're never going to meet and never works for you in any way. I don't think it's fair."
What Can Homeowners Do?
Do homeowners have other options? Burnett said she'd considered selling her home as a for-sale-by-owner, but ultimately decided not to because she would not have access to an MLS. She also considered using a "discount broker" that charged only a 1% listing fee; but even in that case, she would have been required to pay a 3% commission to the buyer's agent.
When another plaintiff, Jeremy Keel, was cross-examined by Keller Williams' lawyer, the attorney pointed out that Keel did not pay commissions when he was a buyer himself. The attorney pointed out that in one particular transaction, Keel only paid a 5% commission, rather than the 6% he claimed he had to pay. Keel denied negotiating this commission and said that he didn't know it was an option, since that rate was already filled in on all the contracts he signed. Ellis similarly said that she didn't know that clients could negotiate the commission, saying that if she'd known, she would have gone in a different direction.
In a similar trial from earlier this year, Harvard Law School antitrust law professor Einer Elhauge testified about the economic pros and cons of the use of buyer-brokers by consumers. He basically said that in a world without something like the previous Participation Rule that artificially inflated the price of commissions, the use of buyer-brokers would be rare. He noted how technological advances have decreased the value of buyer-broker services; for example, buyers can find homes without the assistance of a buyer-broker through websites like Zillow. In a more competitive market — one without the use of anticompetitive Rules like the one at issue — homeowners would be able to handle some of these transactions themselves and save money.
The Missouri case is now being appealed, a process that could take years. Housing policy analyst Jaret Seiberg stated that the verdict does not mean that buyer-broker commissions are a thing of the past. The judge in that trial still has to decide what changes will be ordered in the current commission system, which could be minor.
Similar lawsuits against brokerages such as Redfin, Douglas Elliman, and Compass also popped up this week. We'll have to wait to see where things land with all of the cases and their appeals.
But for now, it seems that homeowners may be able to negotiate much lower commission rates than before. If you're planning on entering the real estate market, it's in your best interest to read the fine print carefully for commission rates, and if you're in doubt, contact a real estate attorney in your area today.
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