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The real estate sector trembles due to commissions for the sale of homes

The real estate sector trembles due to commissions for the sale of homes

Florida real estate agent Alexandré Worthington is already preparing for a change that threatens to overturn a compensation system that has governed his industry for more than a century.

“It’s the perfect time to pick up the pieces,” Worthington said. “It’s a perfect time to reflect on the changes that might be coming and how to prepare for them.”

In a federal civil case, a Kansas City jury found last month that the National Association of Realtors (NAR) and major brokerage firms conspired to keep commissions artificially high. The result has left the real estate industry holding its breath as experts say it is on the cusp of a radical shakeup that could affect everything about the business.

“There’s a lot of speculation about how this will play out,” said Ryan Tomasello, who covers the real estate technology sector for Keefe, Bruyette & Woods. Although there are still many things uncertain, “we have a high degree of confidence that, at the conclusion of this story, significant changes will be made to the structure of the commission in the US.”

The most immediate and forceful blow could come as a result of the federal case in Kansas City, Missouri. The judge overseeing the case has the power to issue an injunction that could break the century-old system of “aggregate” or “cooperative” commissions. , in which sellers’ and buyers’ agents split a commission that typically ranges from 5 to 6 percent of the home’s sales price. The timing of such action is still unclear.

A settlement in which the NAR agrees to change the system is also possible, according to Michael Ketchmark, the lead plaintiff attorney. “We are in the process of having conversations with the [Justice Department] and NAR, and we remain hopeful that we will have a resolution that provides relief to millions of people across the county,” he told The Washington Post.

How real estate commissions work and why they could go down

In 2019, a group of home sellers sued NAR and brokerages 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 make the cooperative commission offer before listing the homes in a widely used property database, the Multiple Listing Service, which allows properties for sale to receive listings. The plaintiffs alleged that the system stifled competition and inflated commissions for buyers’ agents.

NAR, Keller Williams and HomeServices of America have denied those allegations and vowed to appeal the Oct. 31 verdict that awarded $1.8 billion to half a million Missouri home sellers, an amount that could rise to $5 billion. Those organizations say the existing commission structure is transparent and denied that the pay structure was anti-competitive. The NAR said after the verdict that “the matter is nowhere near final.”

NAR spokesman Mantill Williams said the association is open to a resolution that “maintains a way for buyers and sellers to continue to benefit from the cooperation of real estate professionals and eliminates the risk of liability for our members for the alleged claims”.

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

But the verdict has already caused convulsions in the financial markets and the real estate industry.

Zillow shares plunged nearly 7 percent after the jury returned its verdict, as investors viewed the potential changes as a threat to the company’s revenue model, a large portion of which comes from advertising for buying agents, according to analysts. During an earnings conference call a day after the jury verdict, Zillow CEO Richard N. Barton tried to reassure Wall Street analysts that buyer agents would not go extinct and that the company’s revenue model It was safe.

He added that potential developments in the commission system “seem like good initial steps towards greater transparency and education for consumers,” although he added that he believed any changes would come slowly.

Changes to the commission structure could eventually result in a 30 percent reduction in the total $100 billion that American consumers pay in real estate commissions, according to a report by Tomasello and his team. Real estate analysts and experts said buyer’s agents’ prices would more closely align with the value of their services. If buyers’ agents are no longer guaranteed 3 percent commission, their fees could go down because they would have to compete on the price of their services, experts said.

Worthington, the Florida real estate agent, said buyer’s agents could shift to an “a la carte” service model, in which potential homebuyers choose their level of service and pay accordingly. A 1 percent commission, for example, could buy a customer automated emails with new homes for sale, based on a potential buyer’s preferences, he said.

For a 3 percent commission,In fact, I’m going to go into my office every morning and clean up our system and every resource I have to find the house you’re looking for,” he said.

Sophia Gilbukh, an assistant professor of real estate at the Zicklin School of Business at Baruch College in New York, said splitting buyer and seller agent commissions could also result in lower listing prices for homes.

The high fees sellers pay result in higher listing prices, Gilbukh said, because sellers want to cover their costs. Higher prices increase buyers’ mortgage payments, he said.

Breaking the commission system, Gilbukh said, would result in lower prices overall, but would also result in higher upfront costs for buyers, who indirectly pay the commission costs in the form of higher mortgage payments. Without the current cooperative system structure, buyers would have to pay their agents directly immediately after the sale.

“That could put many buyers at a disadvantage, especially liquidity-constrained buyers,” he 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 up front.”

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

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.

U.S. regulators have long scrutinized the U.S. commission system, analyst Tomasello said. In 2020, the Department of Justice sued the NAR and proposed a settlement in which the association would have to change its rules to bring more transparency to its commission system. The agreement also sought to prevent the NAR from saying that the services of buyers’ agents are free. But less than a year later, the Justice Department withdrew from the agreement to “allow a broader investigation of the NAR’s rules and conduct to be conducted without restrictions.”

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

Echoing the Missouri and Illinois cases, a new group of Missouri residents filed a proposed lawsuit on October 31, alleging that real estate agents are conspiring to keep commissions high, restricting price competition and harming consumers in violation of federal antitrust laws. The lawsuit seeks damages for home sellers nationwide.

Carole Higgins, a real estate agent in Suttons Bay, Michigan, said the changes are long overdue because agents largely have not adequately explained contracts and commissions to consumers.

“We have become so lax with how we train our real estate agents that this was the natural result,” Higgins said of the lawsuits. This is a wake-up call.”



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