Billions of Brokerage Commissions at Stake in New York City

The verdict last week in a Kansas City class-action case has the potential to shake up New York City’s residential brokerage community.

The jury in the Sitzer/Burnett antitrust lawsuit zeroed in on the National Association of Realtors’ Cooperative Compensation Rule requiring a seller’s agent to make a commission offer to a buyer’s agent in exchange for listing service access. The defendants were found guilty of colluding to keep commissions high and ordered to pay $1.78 billion in damages.

The judge still has to issue a final decision in the case, leaving its implications for the industry group’s regulations unclear, but the trial triggered a change before it even began. NAR backed off its previous interpretation of the rule, changing it to require listing agents to “communicate an offer of compensation to other MLS participants and that offer can be any amount, including $0.”

However, commentary by the Department of Justice on a similar case in New England suggests it won’t be that simple for industry groups to comply with antitrust laws, and larger changes are likely coming for buy-side broker commissions.

Residential sales data analyzed by Crain’s sized up the billions of dollars in commissions in the Big Apple, which could be at stake if the legal action succeeds in prompting rule changes around compensation and Realtor-owned listing services.

The specific amount of commissions paid in New York City is difficult to glean. The Consumer Federation of America, however, said last year that brokers typically receive between 2 percent and 6 percent of the total home purchase price from sales in the city. There were $30.3 billion in sales reported from Oct. 11, 2022 to the same date this year.

Taking the low end of that range, estimated commission fees across Manhattan, Brooklyn and Queens could total up to $1.2 billion in the past year, including $607 million in Manhattan alone. The upper end of that range brings the total estimated commission fees across the three boroughs up to $3.5 billion. Again, that’s just for a single year.

New York’s brokerages may not need to fret yet. The result in Kansas City — which will likely be appealed for years — directly affects only home sales in Missouri. But the landmark verdict has already prompted a copycat suit filed against some of the country’s largest residential firms.

The brokerage industry in New York also isn’t as enmeshed as its Missouri counterpart with the National Association of Realtors, one of the defendants in Kansas City. Instead it is centered around the Real Estate Board of New York and the Residential Listing Service.

Even so, REBNY implemented rules last month in response to the growing backlash against NAR and its controversial “participation policy.” The board now prohibits listing brokers from paying buyers’ agents and will require sellers to pay them directly. Listing agreements will also need to clearly outline the seller’s offer of compensation to buyers’ agents.

If the recent litigation doesn’t send a shiver down the spines of New York’s brokerages, other forthcoming developments might. A nearly identical antitrust case known as Moehrl is set for trial in early 2024 and poses the possibility of larger damages, perhaps more than $40 billion.

The Department of Justice, meanwhile, is considering a case of its own against NAR after years of investigations into potential antitrust behavior. If the department takes action against the commission-sharing system and other aspects of the trade group, it could upend residential real estate across the country.

— Holden Walter-Warner