James Rodriguez reports today in Insider on two class-action lawsuits (one in the 8th Circuit and one here in the 7th) against the National Association of Realtors. The cases, both filed in 2019, allege that the NAR has violated the Sherman Antitrust Act by requiring buyers to pay 3% commissions on house purchases through a multi-step process whereby the buyer's agent commission is paid by the seller. These rules prevent buyers from negotiating over fees. Recent orders by the two courts have moved the cases closer to trial (and, one assumes, consolidation), with experts predicting a big win for house buyers—and a big loss for real estate agents:
Stephen Brobeck, a senior fellow at the Consumer Federation of America, told me that one of the biggest problems identified in the cases is what's known as "steering." Since agents representing buyers can see the promised commission for each home in the MLS, they can discourage their clients from viewing properties with unsatisfactory paydays. The NAR doesn't set a minimum commission that listing brokers need to promise to their counterparts on the buyer's side — technically, it could be as little as $1. But the going rate is typically between 2.5% and 3% of the total sale price, so anything below that amount means the sellers' home could be less likely to get traction.
"They not only have to pay a buyer's agent commission, but they can't negotiate that commission," Brobeck said of sellers. "Because if they lower that commission, research has shown that the house is less likely to be shown by the buyer-agents." One study found that properties listed with sub-2.5% commission rates were 5% less likely to sell and took 12% longer to sell.
The sheer size of the damages sought by the plaintiffs would undoubtedly wreak havoc on the industry's largest players. But for regular agents, there would also be a reckoning. If buyers have to pay out of pocket for their agents, many might choose to not hire an agent at all, or just pay an agent by the hour for their insight. Agents would face more competition for clients and potentially depressed commissions. The current glut of agents would become more glaring, and a mass exodus from the industry could ensue.
[Rob Hahn, a longtime consultant to local MLSs and Realtor associations], who now runs a startup focused on bringing the auction model to residential real estate, told me he's doubtful of NAR's chances of winning in court and believes some kind of settlement is likely. With the smaller of the two suits slated for trial in just a few months, the industry has little time to come to grips with what the future could hold.
I have negotiated lower commissions for my agents in the past, but only down to 2.5%. As much as I've appreciated their efforts, I do not believe that the buyer's agent contributes nearly as much as a seller's agent, particularly in an area like Chicago where lawyers handle the closing. Why, I have asked myself every time, am I paying someone over $10,000 to help me buy a house that someone else is paying their agent to market? I mean, my lawyer only charges $1,200 and he's doing most of the work.
I very much hope these cases see the end of fixed buyer's agent commissions.