The enduring custom of homeowners paying fees to their buyers’ real estate representatives might soon become obsolete.Thank you for reading this post, don't forget to subscribe!
A recent multibillion-dollar class-action judgment in Missouri revealed that the National Association of Realtors (NAR) colluded with some of the largest real estate brokerage firms in the nation to engage in antitrust fraud by conspiring to maintain sales fees artificially high. Breaching the regulations. NAR and other brokerages are facing several new and historical lawsuits with similar allegations.
The lawsuit has already prompted modifications to the contracts signed by homeowners with their real estate agents, setting guidelines for sharing fees.
Depending on the eventual outcome of these cases, they could dismantle NAR’s dominance over a system that has historically dictated broker fee rates at 5% to 6% of a home’s sale value. This pricing structure has been criticized for adversely impacting sellers and buyers and is likely to significantly influence the overall housing market.
“The entire practice needs to come to an end,” remarked Patrick Nye, one of the lawyers representing plaintiffs in a recent case in South Carolina, to Yahoo Finance. “We simply need to return to a free market.”
Pictured is a home for sale in Austin, Texas on October 16, 2023. (Photo by Brandon Bell/Getty Images) (Brandon Bell via Getty Images)
Whispers of this restructuring gained momentum on October 31 when an unanimous eight-member jury determined that since 2015, NAR and its co-defendant brokerages, part of NAR’s professional body, defrauded homeowners of $1.79 billion. Resulted in harm.
NAR has expressed its intention to challenge the ruling. Nevertheless, comparable class-action lawsuits have emerged within the past three weeks in Missouri, South Carolina, New York, Illinois, and Texas, with an existing case in Illinois still awaiting trial.
Central to these litigations are NAR regulations that effectively compel sellers to cover the fees for buyers’ agents.
NAR’s Multiple Listing Service (MLS), a database where 88% of sellers listed their properties this year, continues to be a primary tool for matching home buyers and sellers. Brokers listing their clients’ properties in the database are required to consent to sharing their fees with other MLS participants.
Plaintiffs and others in the Missouri case argue that this arrangement artificially inflates property prices and deprives sellers, and in one instance, buyers, of benefits.
“In our relatively small state of South Carolina, the Keller Williams Group… amassed roughly $940 million in sales in 2022. And if a 3% fee is taken, they burdened the seller with covering the buyer’s fee,” Nye mentioned. “The average seller burdened by this exceeds $28 million annually.”
NAR, on its part, asserts that its fee structure, ingrained for over a century, benefits consumers.
The Missouri jury disagreed. This ruling, which grants the presiding judge the discretion to impose triple or “treble” damages, could raise damages against NAR and its co-defendants to as much as $5 billion.
In addition, the Justice Department has reportedly contemplated legal intervention. In July 2021, the department halted progress on the agreement with NAR after concluding that it could impede its ability to safeguard competition in a market that “deeply impacts the financial well-being of Americans.” The agency has subsequently lodged an appeal against a court ruling that obstructed it from reopening its scrutiny of the two NAR regulations.
The impending outcome of the Missouri case, along with other pending cases and potential actions by the DOJ, has already exerted an influence on NAR’s role in property transactions.
Read more: How to purchase a home in 2023?
Prior to the trial, the organization revised the language of its partnership agreement to eliminate the directive for its selling brokers to distribute fees. In its amended agreement, NAR’s obligatory buyer fee has been lowered to $0.
While this revision could prevent prospective antitrust litigations stemming from fees paid under the revised NAR agreement, it may not be sufficient to preempt a wave of litigation aiming to recoup brokerages’ already disbursed fees. Not feasible.
“In our view, this is merely cosmetic,” commented Matthew Sheely, another attorney representing the South Carolina plaintiffs, to Yahoo Finance. “We are skeptical that this will resolve the issue… Why would a buyer’s agent steer a buyer towards that property?”
Prospective home buyer Jessica Doctoroff talks with her real estate agent Stephen Bremis while viewing a condominium for sale on April 2, 2009 in Somerville, Massachusetts. (Reuters/Brian Snyder) (Brian Snyder/Reuters)
At the local level, real estate associations have also taken notice.
For instance, the Real Estate Board of New York, or REBNY, publicized that from next year, seller’s agents cannot propose or remunerate buyer’s agents directly. According to the FAQ on the changes, any remuneration from the seller to the buyer’s real estate agent must be negotiated and provided directly by the seller.
Likewise, in California, the state’s realty association revised last year its real estate purchase agreement governing the payment of fees to buyer’s agents.
The new purchase agreement, termed RPA, features a segment titled “Seller Payment to Buyer’s Broker”, specifying that “Buyer has executed a written agreement to indemnify” [the] Buyer’s Broker. It also denotes that the seller has committed to fulfilling this obligation.
Impending adjustments to fees
The recent modifications align with the predictions of Nick Oliver, principal broker at Hosit, in regards to how these litigations will transform the sector.
“Ultimately, this boils down to how fee rates are negotiated with the seller and the listing agent, and how they are disclosed in the listing agreement,” articulated Oliver, whose firm offers customizable fee arrangements. There will be more clarity.” These hybrid services blend NAR’s established commission-based sales model with the for-sale-by-owner model, enabling sellers to procure only the listing services they require.
Another potential change is the total prohibition of NAR fee-sharing pacts.
“we believe [the Missouri] judgment raises the prospect of banning fee sharing,” scribbled Jefferies equity analyst John Colantuoni in a message to clients after the ruling.
However, the timing of this occurrence remains uncertain. In a shareholder communique, Zillow remarked that it could take years before these litigations bear impact on the real estate market due to appellate procedures. Nonetheless, at the very least, Redfin CEO Glenn Kelman asserted in a blog post that the uncertainty surrounding these lawsuits might motivate clients to negotiate more favorable terms to save money. Other specialists concur.
“I think now would be the prime time to be assertive with the real estate listing agent and mitigate that scenario,” advised Kevin Fields, associate professor of clinical finance and business economics, to Yahoo Finance.
In the existing housing situation, Fields is also inquisitive if buyers and sellers could negotiate a “fixed 4% across the board” agreement, splitting 2% between the seller and the buyer’s agent.
If this approach fails, Fields proposed a move towards “hourly fee compensation as opposed to a commission structure due to the escalating home prices.”
Implications for the property market
A man looks at property listings and homes for sale in Florida. (Jeffrey Greenberg/Universal Images Group via Getty Images) (Jeff Greenberg via Getty Images)
The question arises as to how a comprehensive prohibition on fee-sharing or reduced fees will affect the overall housing market.
In theory, this would drive down home prices, stated John Campbell, managing director of equity research at Stephens Inc., to Yahoo Finance.
“From an educational perspective, it should,” remarked Campbell.
Fields concurred, observing that fees are currently “integrated into most listing prices.”
“If it’s going to be 5% of the total that that seller has to pay, fine, they’re going to increase the purchase price of that home by 5% to offset the cost that they have to pay in commission,” Fields explained. “So theoretically, it should drive down listing prices.”
However, this would hold true in a more general housing market. Currently, the supply is so constrained that even a twofold increase in mortgage rates over the past year hasn’t permanently reined in the surge in home prices. In fact, property values reached another peak in August as mortgage rates reached a 22-year high.
As housing affordability deteriorates, legal challenges may prompt lenders to finance real estate fees into the borrower’s mortgage, with the buyer assuming the cost of their agent’s fee. This could be enforced.
Read more: Types of Mortgage Loans: Buying a Home in 2023
“It would be a strong push to start allowing lenders to factor those commissions into mortgages,” remarked Fields. “The potential buyer will need to come up with both a purchase price and a potential commission price, and then also pay whatever transaction costs are passed on to the buyer. This will be quite a large chunk to buy.”
According to Fields, this would “depress domestic transactions in the United States.”
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