Feb 22, 2024
Following a $1.8 billion jury verdict against the National Association of Realtors (NAR) and several large brokerage firms, one analyst predicted the decision could lead to realtors facing huge cuts on commission fees that might drive them away from the industry altogether.
Now, as the NAR gets set to battle even more lawsuits across the country, a new trade association threatens to kick the highly influential real estate group while its down.
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On Oct. 31, a federal jury in Missouri ordered the NAR and fellow defendants to pay $1.8 billion in damages to the sellers of more than 260,000 homes for conspiring to artificially inflate home-sale commissions. Motions have since been filed by defendants in dispute of the verdict.
Ryan Tomasello, an analyst for investment banking firm Keefe, Bruyette & Woods, published a report in October prior to the landmark ruling, according to the Wall Street Journal. In it, he predicted the result of the lawsuit — and others like it taking place across the country — could lead to a 30% reduction in the $100 billion Americans pay in real-estate commissions each year.
He added this could also drive more than half of the nation’s 1.6 million realtors out of the industry.
“The writing is on the wall,” Tomasello told Yahoo! Finance in an interview following the verdict. “This scrutiny is going to re-shape the housing structure as we know it.”
With home sales already stunted by high mortgage rates, “this lawsuit is just another punch in the gut for real-estate franchises,” Bill Gross, a self-employed real-estate broker associate in California with eXp Realty, told CNBC.
Why realtor commissions have been courting controversy
Commission fees typically amount to around 5-6% of a property’s selling price and are often divided equally between the buyer’s agent and the seller’s agent.
The plaintiffs in the Missouri class-action case argued that several NAR rules stifled competition among real estate brokers — including ones that effectively required sellers to make a non-negotiable commission offer to buyer agents before the property was added to the association’s Multiple Listing Service (MLS). Lawyers said this made it harder for buyers and sellers to negotiate and kept commission fees high.
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The NAR maintained throughout the trial that its practices were best for consumers. In a video published Jan. 31, NAR interim CEO Nykia Wright stated: “NAR does not set commissions. It never has and it never will. Period. End of story.”
On Jan. 8, along with co-defendants HomeServices of America and Keller Williams, the NAR filed motions claiming the plaintiffs had insufficient evidence and asking for a new trial. On Feb. 1, Keller Williams bowed out of the lawsuit, announcing a $70 million settlement agreement, according to HousingWire.
HousingWire also reports the NAR is a defendant in nearly two dozen additional commission lawsuits across the country.
Redfin — which exited the association last year — says the court ruling could cause both buyers and sellers to question the common practice of setting fees at around 5-6%.
“Traditional brokers will undoubtedly now train their agents to welcome conversations about fees,” Glenn Kelman, Redfin’s chief executive, said in a statement following the verdict. “Rather than saying that a fee for the buyers’ agent of 2% or 3% is customary or recommended, agents will say that a buyers’ agent fee, if one is offered at all, is entirely up to the seller.”
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He added: “But it’s also possible that buyers will become the ones who decide how much to pay a buyer’s agent.”
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What this means for the industry
The court decision — and others to follow — could have long-term implications for the future of America’s real estate industry. If plaintiffs continue to win lawsuits, the current system of split commission fees could change entirely, experts speculate.
If a buyer decides to hire an agent, it could be at a negotiated fee that is constrained in part because their compensation may no longer be baked into the listing price, Kelman said.
Some buyers might even skip working with an agent entirely and try searching for properties on their own to save money, Gross said.
Another issue is that many new agents start off their careers by working for buyers, Gavin Myers, managing partner at venture capital firm Prudence, which invests in tech companies involved in the real-estate sector, told CNBC.
Lower demand for buyer agents, or the possibility of lower commission fees, could deter folks from entering the industry entirely.
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Those who are quick to adapt and pivot their business model may gain an edge in the future.
New kids on the block
A pair of high-profile real estate agents recently launched a new trade association that aims to compete directly with the NAR.
Jason Haber, a New York agent with Compass, and Mauricio Umansky, the Los Angeles-based celebrity agent, founder of the luxury brokerage the Agency and a reality TV regular, together have started the American Real Estate Association (AREA).
The two had planned to kickstart their new group at a later date, but decided to proceed ahead of schedule to take advantage of the NAR’s courtroom and leadership troubles, according to The New York Times. Several executives have stepped down from the NAR in recent months, including two presidents — one following allegations of sexual harassment, another after what was described as a blackmail threat.
The AREA will grant members access to an alternative of the NAR’s MLS called the National Listing Service, which includes a database of listings nationwide.
Haber emphasized the new association isn’t meant to replace the NAR but offer competition.
“NAR was too big to fail, until it failed,” he told The Times. “People want something different. We’re setting ourselves up for failure if we try to replicate the NAR model.”
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Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.
