Real estate industry holds breath as commission system falters – The Washington Post

Comment on this storyCommentAdd to your saved storiesSave

Florida real estate agent Alexandré Worthington is already preparing for a shift that could see the dismantling of a compensation system that has dominated his industry for more than a century.

“It’s the perfect time to pick up the pieces,” Worthington said. “It’s the perfect time to think about the changes ahead and how to prepare for them.”

In a federal civil case last month, a Kansas City jury concluded that the National Association of Realtors (NAR) and major brokerage firms colluded to keep commissions artificially high. The result has The real estate industry held its breath as experts say it is on the cusp of a radical shake-up that could impact all areas of the business.

“There’s a lot of speculation about how this will play out,” said Ryan Tomasello, who covers real estate technology for Keefe, Bruyette & Woods. Although much remains uncertain, “we have a high degree of confidence that at the end of this story there will be significant changes to the commission structure in the United States.”

The most immediate and serious blow could be the outcome of the federal trial in Kansas City, Missouri. The judge overseeing the case has the power to issue a preliminary injunction that could break up the century-old system of “bundled” or “cooperative” commissions, in which seller and buyer agents share a commission, typically between $5 and $6 percent of the house sale price. The timing of such an action remains unclear.

According to lead plaintiff attorney Michael Ketchmark, a settlement is also possible in which NAR agrees to a system change. “We are currently in discussions with him [Justice Department] and NAR, and we remain hopeful that we can find a solution that brings relief to millions of people across the county,” he told The Washington Post.

How real estate commissions work and why they may be lower

In 2019, a group of home sellers sued NAR and brokerage firms Keller Williams and HomeServices of America in federal court in Kansas City, accusing the organizations of conspiring to keep commissions artificially high by requiring sellers to do so to make a cooperative commission offer before listing homes on a broad platform Used property database – the Multiple Listings Service – which allows properties for sale to be notified. The plaintiffs alleged that the scheme stifled competition and inflated commissions for buyer agents.

NAR, Keller Williams and HomeServices of America have denied those allegations and vowed to appeal the Oct. 31 ruling that awarded half a million Missouri home sellers $1.8 billion, an amount estimated at $5 billion. Dollar could rise. These organizations claim that the existing commission structure is transparent and they dispute that the payment structure is anti-competitive. NAR said after the ruling that “the matter is not anywhere near final.”

Mantill Williams, a NAR spokesman, said the association is open to a solution that “provides buyers and sellers the opportunity to continue to benefit from the collaboration of real estate professionals and eliminates our members’ risk of liability for the claims asserted.”

“Nevertheless,” he added, “we remain confident that we will prevail in our appeal.”

But the ruling has already sent shockwaves through the financial markets and the real estate industry.

Zillow shares plunged nearly 7 percent after the jury made its verdict, as investors viewed potential changes as a threat to the company’s revenue model – much of which comes from advertising to shoppers, analysts said. During a conference call a day after the jury’s verdict, Zillow CEO Richard N. Barton tried to reassure Wall Street analysts that buyers would not die out and that the company’s revenue model was safe.

He added that possible further developments to the commission system “look like good first steps towards greater transparency and education for consumers”, but added that he believes any change would come slowly.

According to a report by Tomasello and his team, changes to the commission structure could ultimately result in a 30 percent reduction in the $100 billion that U.S. consumers pay in real estate commissions. Analysts and real estate experts said prices for buyer agents would become more aligned with the value of their services. If agents are no longer guaranteed three percent commission, their fees could fall because they would have to compete on the price of their services, experts say.

Worthington, the Florida real estate agent, said buyer agents could move to an “a la carte” service model, where prospective homebuyers choose their level of service and pay accordingly. For example, with a 1 percent commission, a client could purchase automated emails with new homes for sale based on a potential buyer’s preferences, he said.

For a 3 percent commission, “I actually go into my office every morning and search our system and all the resources at my disposal to find the home you’re looking for,” he said.

Sophia Gilbukh, an assistant professor of real estate at Baruch College’s Zicklin School of Business in New York, said splitting agent commissions for buyers and sellers can also lead to lower asking prices for homes.

High fees borne by sellers lead to higher listing prices, Gilbukh said, because sellers want to cover their costs. Higher prices increase mortgage payments for buyers, she said.

Eliminating the commission system, Gilbukh said, would result in lower prices overall, but would also result in higher upfront costs for buyers, who indirectly bear the cost of the commissions in the form of higher mortgage payments. Without the structure of the current co-op system, buyers would have to pay their agents directly immediately after a sale.

“This could put many buyers at a disadvantage, particularly buyers with limited liquidity,” she said. “They may not be able to afford a higher-fee agent – ​​even if it’s worth it to them – because they simply don’t have the money to pay it upfront.”

The cooperative compensation structure was founded in 1913 when the National Association of Real Estate Exchanges, the forerunner of NAR, required its member brokers to share commissions with agents who produced buyers, according to a 2015 study by economists Panle Jia Barwick and Maisy Wong had. According to the study, the commission rate reached 5 percent in 1940 and has remained virtually unchanged since then.

According to the study, commissions work differently in countries like the United Kingdom, where sellers typically pay less than 2 percent and buyers pay their own agents.

The US regulators have been scrutinizing the American commission system for a long time, said analyst Tomasello. In 2020, the Justice Department sued NAR, proposing a settlement that would require the association to change its rules to bring more transparency to its commission system. The settlement also sought to stop NAR from claiming that the buyer’s agent’s services were free. But less than a year later, the Justice Department withdrew from the settlement to “pursue a fuller, unrestricted investigation into NAR’s rules and conduct.”

The Justice Department has also filed notices of interest in the Missouri case and a similar civil case in Illinois clarifying the parameters of a 2008 settlement between NAR and the Justice Department related to online listings. The company did not respond to a request for comment on settlement negotiations in the Kansas City case.

Following the Missouri and Illinois cases, a new group of Missouri residents filed a lawsuit on October 31 alleging that real estate agents conspired to keep commissions high, restrict price competition and harm consumers violates federal antitrust laws. The lawsuit seeks damages for home sellers across the country.

Carole Higgins, a real estate agent in Suttons Bay, Michigan, said changes are long overdue because agents have largely failed to adequately explain contracts and commissions to consumers.

“We have become so lax in the way we train our agents that this was the natural consequence,” Higgins said of the lawsuits. This “is a wake-up call.”