A century-old real-estate practice could soon end. Here’s how home sellers and buyers could
By Aarthi Swaminathan
‘It’s a great victory not only for the plaintiffs but also for all home buyers and sellers,’ one consumer advocate says of a decision in a real-estate lawsuit.
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 — and in turn, buyers’ and sellers’ bottom lines.
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.
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.
The verdict, which is pending a judge’s decision, is being heralded as a welcome change for consumers, according to consumer advocates and real-estate startups.
“It’s 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,” Steve Brobeck, a senior fellow at the Consumer Federation of America, told MarketWatch.
“There’s no guarantee that we’ll finally get to that place, but this is a huge milestone and really a watershed, because it’s now far more likely than not that the marketplace will become much more price competitive — eventually,” he added.
“The U.S. real estate market is the world standard and has long been viewed as the most consumer-friendly around the world,” Mantill Williams, vice president of communications at the NAR, told MarketWatch.
“Buyers 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,” Williams added. “The result is more time consuming, impersonal and costly.”
One startup founder said it’s time to embrace the idea of removing intermediaries — and the commissions they’re paid — from the real-estate equation. In today’s digital age, one can buy and sell stocks on their phones “with no commission while waiting for a latte,” Amanda Orson, founder of real-estate startup Galleon, told MarketWatch. “Yet, real-estate transactions conducted in the U.S. would be totally recognizable to my grandparents and great-grandparents.”
She added, “The idea that you need to use another human being to transact your home is old fashioned — that’s last century’s model.”
Galleon is an early-stage startup that aims to create a real-estate market consisting of what it calls “pocket listings,” meaning homes that aren’t listed by traditional real-estate brokerages, and that sellers sell directly to buyers, without intermediaries like real-estate agents.
A century-old practice thrust in the limelight
Today, the NAR, which has a membership of 1.6 million real-estate agents, has affiliate organizations that control the “multiple listing service,” 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.
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.
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’s requirement to charge sellers a fee for the buyer’s agent on every listing. But Redfin said that a full divorce from the NAR wasn’t feasible because “membership is required for agents to access listing databases, lockboxes, and industry-standard contracts. It’s impossible to be an agent if you can’t see which homes are for sale, or unlock the door to those homes, or even write an offer.”
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, “a 5% commission rate became standard practice throughout the U.S.,” the analysts stated. “Over the next decade, commission rates generally increased to 5-6%.” Since then, the industry has stopped using any fee schedules, but the standard still prevails informally.
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’s agent to no longer automatically receive a 3% commission, which is $12,000 on a median-priced $400,000 home.
Here’s what that means for home buyers and sellers.
1. Home sellers could end up paying less in broker fees
The biggest item on the chopping block would be to nix buyer’s 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.
Aside from a potential “win for anybody who’s selling their home… it’s a huge win for homebuilders,” John Burns, CEO of John Burns Real Estate Consulting, told MarketWatch on a recent episode of Barron’s Live. “Homebuilders pay a lot of real-estate agents to bring people to their communities, and the rule of thumb was paying 3%… this [jury verdict] opened the door for home builders to pay less in commissions.”
He estimated that each percentage saved on commissions could add up to hundreds of millions of dollars per year for some big-name builders.
2. Home prices could go down in the immediate aftermath
Home prices could also go down in the immediate-term, if buyer’s agent fees were to be slashed, one expert said. But that outcome could be short-lived.
“With the decoupling of commissions, that was central to the case… it’s going to allow sellers to negotiate with their agent on what their compensation is, and buyers to negotiate with their agents,” Jonathan C. Bennie, co-founder at Cincinnati-based real-estate startup Homeshake, told MarketWatch. “When that happens, inevitably, that will cause commissions to drop.”
“As commissions go down, the cost to transact goes down, and that’s gonna have an ancillary benefit for consumers because that’s gonna drag down home prices,” he added.
But the changes are far from being set in motion, Brobeck cautioned.
“Everything depends on the specific decision of the judge in terms of the industry rules,” he said.
The NAR says the current system helps first-time home buyers
The NAR said that its guidance for local MLS broker marketplaces aims to “allow consumers to get comprehensive, equitable, transparent and reliable home information efficiently rom their broker.”
And if buyer’s agent fees go away, “buyer 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,” the NAR added.
“This model for how commissions are paid works because seller agents making offers of compensation to buyer agents has given first-time, minority and low/middle-income homebuyers — and really all home buyers — a better shot at affording a home and professional representation for these really complex purchases,” the NAR said.
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