A recent jury verdict in an antitrust case has thrust a century-old practice in the real-estate industry into the limelight, with the potential to upend how real-estate agents get compensated \u2014 and in turn, buyers\u2019 and sellers\u2019 bottom lines.\u00a0\u00a0<\/p>\n
A Missouri jury on Tuesday found the National Association of Realtors and two real-estate brokerages guilty of conspiring to inflate real-estate commissions. The NAR, which is the largest real-estate industry group in the U.S., as well as HomeServices of America and Keller Williams, were found guilty of colluding to inflate or maintain high commission rates for agents who help owners sell their homes.\u00a0<\/p>\n
At the heart of the case, which is the first of two real-estate-related antitrust lawsuits, lies an effort to reform a longstanding practice of how home sellers pay fees to brokers.\u00a0<\/p>\n
The verdict, which is pending a judge\u2019s decision, is being heralded as a welcome change for consumers, according to consumer advocates and real-estate startups.<\/p>\n
\u201cIt\u2019s a great victory not only for the plaintiffs but also for all home buyers and sellers because it sets in motion for consumers to pay less 20% to 30% less in commissions each year,\u201d Steve Brobeck, a senior fellow at the Consumer Federation of America, told MarketWatch.\u00a0<\/p>\n
\u201cThere\u2019s no guarantee that we\u2019ll finally get to that place, but this is a huge milestone and really a watershed, because it\u2019s now far more likely than not that the marketplace will become much more price competitive \u2014 eventually,\u201d he added.<\/p>\n
\u201cThe U.S. real estate market is the world standard and has long been viewed as the most consumer-friendly around the world,\u201d Mantill Williams, vice president of communications at the NAR, told MarketWatch. <\/p>\n
\u201cBuyers abroad are forced to wade through complex markets that require consumers to work with multiple brokerages to access fragmented inventory because listings are not shared freely in the marketplace,\u201d Williams added. \u201cThe result is more time consuming, impersonal and costly.\u201d<\/p>\n
One startup founder said it\u2019s time to embrace the idea of removing intermediaries \u2014 and the commissions they\u2019re paid \u2014 from the real-estate equation. In today\u2019s digital age, one can buy and sell stocks on their phones \u201cwith no commission while waiting for a latte,\u201d Amanda Orson, founder of real-estate startup Galleon, told MarketWatch. \u201cYet, real-estate transactions conducted in the U.S. would be totally unrecognizable to my grandparents and great-grandparents.\u201d\u00a0<\/p>\n
She added, \u201cThe idea that you need to use another human being to transact your home is old fashioned \u2014 that\u2019s last century\u2019s model.\u201d<\/p>\n
Galleon is an early-stage startup that aims to create a real-estate market consisting of what it calls \u201cpocket listings,\u201d meaning homes that aren\u2019t listed by traditional real-estate brokerages, and that sellers sell directly to buyers, without intermediaries like real-estate agents. <\/p>\n
Today, the NAR, which has a membership of 1.6 million real-estate agents, has affiliate organizations that control the \u201cmultiple listing service,\u201d where most homes for sale are advertised. It has also historically set the standard for the commission rate for real-estate agents across the U.S.<\/p>\n
The MLS system first rose to prominence in the early 1900s, analysts at Keefe, Bruyette & Woods, wrote in a report. The vast majority of MLSs are owned or operated by local NAR chapters, the analysts noted.<\/p>\n
Redfin, a real-estate brokerage that was also sued and accused of conspiring to inflate commissions, recently announced that it was leaving the NAR board over its opposition to the NAR\u2019s requirement to charge sellers a fee for the buyer\u2019s agent on every listing. But Redfin said that a full divorce from the NAR wasn\u2019t feasible because \u201cmembership is required for agents to access listing databases, lockboxes, and industry-standard contracts. It\u2019s impossible to be an agent if you can\u2019t see which homes are for sale, or unlock the door to those homes, or even write an offer.\u201d<\/p>\n
In a similar vein, the commission structure for real-estate agents who sell homes and help buyers find homes was first set by local real-estate associations in the late 1800s and 1900s. The NAR standardized it in 1939, and by the 1950s, \u201ca 5% commission rate became standard practice throughout the U.S.,\u201d the analysts stated. \u201cOver the next decade, commission rates generally increased to 5-6%.\u201d Since then, the industry has stopped using any fee schedules, but the standard still prevails informally. <\/p>\n
Typically, when a home is sold today, the listing agent and the buying agent each get a 3% commission, both of which are paid for by the seller. With the lawsuits, the stage is set for the buyer\u2019s agent to no longer automatically receive a 3% commission, which is $12,000 on a median-priced $400,000 home.<\/p>\n
Here\u2019s what that means for home buyers and sellers.<\/p>\n
The biggest item on the chopping block would be to nix buyer\u2019s agents fees, which could save home sellers thousands of dollars. As Brobeck put it in an interview with Axios, one could buy a car with the money saved from not paying broker fees.<\/p>\n
Aside from a potential \u201cwin for anybody who\u2019s selling their home\u2026 it\u2019s a huge win for homebuilders,\u201d John Burns, CEO of John Burns Real Estate Consulting, told MarketWatch on a recent episode of Barron\u2019s Live. \u201cHomebuilders pay a lot of real-estate agents to bring people to their communities, and the rule of thumb was paying 3%\u2026 this [jury verdict] opened the door for home builders to pay less in commissions.\u201d\u00a0<\/p>\n
He estimated that each percentage saved on commissions could add up to hundreds of millions of dollars per year for some big-name builders.<\/p>\n
Home prices could also go down in the immediate-term, if buyer\u2019s agent fees were to be slashed, one expert said. But that outcome could be short-lived.<\/p>\n
\u201cWith the decoupling of commissions, that was central to the case\u2026 it\u2019s going to allow sellers to negotiate with their agent on what their compensation is, and buyers to negotiate with their agents,\u201d Jonathan C. Bennie, co-founder at Cincinnati-based real-estate startup Homeshake, told MarketWatch. \u201cWhen that happens, inevitably, that will cause commissions to drop.\u201d<\/p>\n
\u201cAs commissions go down, the cost to transact goes down, and that\u2019s gonna have an ancillary benefit for consumers because that\u2019s gonna drag down home prices,\u201d he added.\u00a0\u00a0<\/p>\n
But the changes are far from being set in motion, Brobeck cautioned.\u00a0<\/p>\n
\u201cEverything depends on the specific decision of the judge in terms of the industry rules,\u201d he said.<\/p>\n
The NAR said that its guidance for local MLS broker marketplaces aims to \u201callow consumers to get comprehensive, equitable, transparent and reliable home information efficiently rom their broker.\u201d<\/p>\n
And if buyer\u2019s agent fees go away, \u201cbuyer representation would be at risk and homebuyers would have to come up with more money out of pocket or forgo professional representation for what is likely the most complex and important transaction they will ever make,\u201d the NAR added. <\/p>\n
\u201cThis model for how commissions are paid works because seller agents making offers of compensation to buyer agents has given\u00a0first-time, minority and low\/middle-income homebuyers \u2014 and really all home buyers \u2014 a better shot at affording a home and professional representation for these really complex purchases,\u201d the NAR said.<\/p>\n<\/p><\/div>\n