New lawsuits raise question of who should pay homebuyer’s agent

A house with a real estate agent (Credit: iStock)
A house with a real estate agent (Credit: iStock)

The long knives are out again for one of American real estate’s oldest and most controversial traditions: requiring home sellers to pay the agents who represent the buyers of their properties.

A landmark suit filed in March alleged that the 1.3-million-member National Association of Realtors has conspired with local multiple listing services (MLSs) and with major realty brokerage companies to force sellers who list their homes on an MLS to pay a contractually specified percentage of the commissions to the broker/agent who brings in the ultimate buyer. Now two new class-action lawsuits have been filed with allegations along the same lines.

According to all the suits, an NAR rule prevents buyers from unilaterally altering the “split” stated in the listing contract. Say, for instance, you are a seller of a $500,000 home and agree at the listing to pay a total 5.5% commission, allocating 3% to the listing agent and 2.5% to the buyer’s agent. If the house sells for the full asking price of $500,000, that would mean the buyer’s agent would be due $12,500 at closing. If you thought this was more than you wanted to pay — especially given the fact that you knew part of the buyer’s agent’s job was to help your buyer obtain a lower price for your house — you might not be happy about having to shell out the $12,500. Shouldn’t the buyer pay this fee?

In March, the seller of a home in Shorewood, Minnesota, filed suit to challenge this NAR rule, arguing that, among other problems, this system of mandating compensation to the buyers’ agent raises total transaction costs. The rule “saddle[s] home sellers with a cost that would be borne by the buyer in a competitive market,” where buyers can opt to pay directly for their agents’ services. The U.S. market’s total transaction costs tend to be much higher than in most other industrial economies.

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The original suit, which already ranks as the most significant antitrust litigation against Realtors in decades, is now pending in U.S. district court in Chicago, with NAR’s reply to the complaint expected shortly.

The two most recent class actions, filed in April, have different plaintiffs than the original suit but have nearly identical allegations. They come with proposed giant classes of alleged victims who have sold and paid millions of dollars in commissions via major MLSs to buyers’ agents across the country. NAR, which is the largest lobby in the real estate field, rejects the premises of the suits and pledges to fight them vigorously. The sheer costs for any single law firm to mount a credible antitrust case against a major lobby and the largest realty enterprises in the U.S. — plus no doubt the prospect of large payoffs and settlements — has apparently attracted the new actions. Sources tell me that it’s not unusual in wide-ranging cases like these for other law firms to jump in with nearly identical copy-cat filings.

Defendants in all three include NAR along with the giants of the brokerage industry: Home Services of America, Keller Williams Realty Inc., Realogy Holdings Corp. and RE/MAX Holdings Corp. Realtors tell me that an adverse decision in the cases would produce transformative changes in home-sale transactions nationwide. Some brokers say that it could create situations where first-time and other cash-short buyers might not be able to afford to pay for their agents’ services — creating a whole new obstacle to home ownership. Rather than buyers having their commissions paid for by the seller, they would now need to come up with that money themselves. Today, however, buyers don’t give it a thought, and in fact they often do not even know what commission split the buyer agent expects to receive.

In places like the United Kingdom and much of Europe, home sellers typically pay total realty fees of 1% to 3% versus the 5% to 6% average commonplace in the U.S. Critics of the American system have long argued that if home buyers paid the fees for the services rendered for them — and negotiated them with the buyers’ agents directly — total fees would be lower. On the other hand, sellers’ agents say that if the buyers-side commission is low under the current system, many buyers’ agents will not show houses because the compensation is not sufficient. In fact, discount realty firms have reported that sometimes they cannot get any of their listings presented to willing and able purchasers because buyers’ agents will not cooperate with them.