Class action suit could change real estate commissions

National /
Mar.March 22, 2019 09:45 AM

From left: NAR president John Smaby, Realogy CEO Ryan Schneider, Keller Williams CEO Gary Keller, HomeServices of America CEO Gino Blefari, and Re/Max CEO Adam Contos (Credit: Getty Images, Wikpedia, iStock, and Hitchcock + Associates)

In what could be the most far-reaching antitrust lawsuit for the real estate market in decades, the National Association of Realtors and four of the largest realty companies have been accused of a conspiracy to systematically overcharge home sellers by forcing them to pay commissions to the agents who represent the buyers of their homes.

The class-action suit, filed in federal district court in Chicago, focuses on a rule it says has been imposed by the NAR. The rule requires brokers who list sellers’ properties on local multiple listing services (MLSs) to include a “non-negotiable offer” of compensation to buyer agents. That is, once a home seller agrees in a listing to a specific split of the commission, buyers cannot later negotiate their agents’ split to a lower rate. That requirement, the suit alleges, “saddle(s) home sellers with a cost that would be borne by the buyer in a competitive market,” where buyers pay directly for the services rendered by their agents.

In overseas markets where there is no such mandatory compensation rule for buyer agents, total commission costs tend to be lower — averaging 1 percent to 3 percent in the United Kingdom, for example — versus the 5 percent to 6 percent commonplace here. The suit alleges that if buyers in the U.S. could negotiate fees directly with the agents they choose to represent them, fees would be more competitive and lower. Today many American buyers are unaware of their agent’s commission split.

Sellers typically know the percentage because they agree to it in the listing contract. But they may wonder: Why am I required to pay the fee of the buyer’s agent, who may be negotiating against my interests in the transaction? Also, at a time when buyers often search for and find the house they want to buy online, shouldn’t compensation for a buyer’s agents be decreasing, rather than stuck in the 2.5 percent to 3.0 percent range?

Besides NAR, the suit names RE/MAX Holdings Inc., Keller Williams Realty Inc., HomeServices of America Inc. and Realogy Holdings Corp. as co-defendants. NAR, with 1.3 million members, is the largest trade group in the industry. The four realty companies named as defendants are behemoths: franchisor Keller Williams has approximately 180,000 agents in the U.S. and Canada; RE/MAX has 120,000 agents; Realogy includes among its brands Better Homes and Gardens, Century 21, Coldwell Banker Real Estate and ERA; HomeServices of America is a Berkshire Hathaway affiliate and includes among its companies regional powers such as Long and Foster Real Estate and Edina Realty.

The plaintiff in the case is Christopher Moehrl, who sold a home in 2017 using a RE/MAX broker to list the property; the buyer was represented by Keller Williams. Moehrl paid a total commission of 6 percent. Just under half of that, 2.7 percent, went to the buyer’s agent. If Moehrl’s case is certified as a class action, the potential number of sellers affected would be massive. It includes sellers who have paid a broker commission during the past four years in connection with a home listed by an MLS in these metropolitan areas: Washington D.C.; Baltimore; Cleveland; Dallas; Denver; Detroit; Houston; Las Vegas; Miami; Philadelphia; Phoenix; Salt Lake City; Richmond, Virginia; Tampa, Orlando, Sarasota and Ft. Myers, Florida; Charlotte and Raleigh, North Carolina; Austin and San Antonio, Texas; Columbus, Ohio; and Colorado Springs, Colorado.

NAR Vice President Mantill Williams called the suit “baseless” and said it “contains an abundance of false claims,” but he provided no specifics. Representatives of the four realty companies declined comment. But some Realtors say the suit could dismantle the compensation system as it now exists. Anthony Lamacchia, broker-owner of Lamacchia Realty in Waltham, Massachusetts, says if the suit is successful “it would basically destroy buyer agency, which would not be in the best interests of buyers or sellers.” Lamacchia argues that even in an era where buyers frequently find homes online, buyer agents have important functions in managing contract negotiations, providing strategic advice and guiding clients through the process to closing.

Some brokers challenged allegations in the suit, such as buyer agents refusing to show homes with low commission splits. Alexis Eldorrado, managing broker of Eldorrado Chicago Real Estate, told me that “in reality, if the buyers have found the place they want and are interested in seeing it, NAR’s code of ethics requires the agent to show it.”

[Disclosure: Having sold a house in 2017, I am a potential class member if a class action is certified. To avoid any perceived conflict of interest, I will opt out of the class.]


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