The National Association of Realtors and two brokerage firms were ordered to pay nearly $1.8 billion in damages to about a half a million home sellers after a federal jury found they had conspired to artificially inflate commissions paid to real estate agents.
The decision could radically alter the home buying process in the U.S. and could potentially lead to a restructuring of the entire real estate industry, lowering the cost of moving homes by reducing commissions, The New York Times reported.
A Missouri jury Tuesday sided with the plaintiffs in the class-action lawsuit, awarding them a total of $1.78 billion in damages. The lawsuit alleged that organizations including the National Association of Realtors, Keller Williams and HomeServices of America had violated the law by conspiring to inflate commission rates.
Under a National Association of Realtors rule, a home seller is required to pay commissions to the buyer’s agent, which sellers in the suit claimed forced them to pay excessive fees to the agents.
One plaintiff, Hollee Ellis, a Missouri homeowner and daughter of a longtime realtor who said she sold four homes and bought five in her lifetime, took the stand last Wednesday and said she paid 6% total commission on the home sale at issue in the case. The buyer’s agent’s portion added up to 20.55% of her net equity, plaintiff attorney Michael Ketchmark said, so commissions for both agents took up 40% of the property’s equity, Inman reported.
“It was a hard pill to swallow that we would walk away with so little,” Ellis said, Inman reported, adding that she didn’t think it was a “fair practice” to be forced to pay for both the seller and buyer’s agents.
Initially, the suit was brought by nearly half a million Missouri home sellers against the National Association of Realtors, Keller Williams, Anywhere, RE/MAX and HomeServices of America. Before heading to trial, both Re/Max and Anywhere opted to settle, with RE/MAX paying $55 million and Anywhere paying $83.5 million in damages, The New York Times reported. Those that didn’t settle went to trial.
While the defendants were ordered to pay the $1.78 billion, the verdict also allows the court to issue treble damages, which means they could triple to $5 billion, according to The New York Times.
The National Association of Realtors said it plans to appeal the verdict.
“NAR rules prioritize consumers, support market-driven pricing and promote business competition,” the association said in a statement. “This matter is not close to being final, as we will appeal the jury’s verdict.”
In the case, the association countered that consumers are “better off and business competition is able to thrive because of MLS rules and how well local broker marketplaces function,” a National Association of Realtors post Tuesday stated.
“NAR’s cooperative compensation rule ensures efficient, transparent and equitable local broker marketplaces,” the post continues. “Sellers can sell their home for more and have their home seen by more buyers, while buyers have more choices of homes and can afford representation. NAR also argued that realtors are everyday working Americans who are experts at helping consumers navigate the complexities of home purchases, as well as advocating for fair housing and wealth-building for all.”
While the case could take years to resolve, The New York Times reported it’s clear that the verdict and the sheer size of the damages “point to a shift in the way agent commissions are now paid.”
Glenn Kelman, chief executive of Redfin, which earlier this month separated from the National Association of Realtors, said even if “the judge doesn’t require structural change, structural change is coming.”
“The judge may take days or weeks to decide what structural changes the jury’s verdict will entail. There will also be years of appeals about the legal standard used in the case and other issues,” Kelman wrote in a Tuesday post. “For now, the initial size of the damages alone will ensure major change. In the weeks leading up to the verdict, the National Association of Realtors already updated its guidelines to let agents list homes for sale that don’t offer a commission to the buyer’s agent.”
Kelman also said traditional brokers will “undoubtedly now train their agents to welcome conversations about fees, just as Redfin has been doing for years, especially when advising a seller on what fee to offer to buyers’ agents. Rather than saying that a fee for the buyers’ agent of 2% or 3% is customary or recommended, agents will say that a buyers’ agent fee, if one is offered at all, is entirely up to the seller. This is as it should be.”
In Utah, the Salt Lake Board of Realtors (a local association of the National Association of Realtors) said in a news release the verdict “means consumers lose” and “class-action attorneys win.”
”Commissions for home sales have always been subject to negotiation. Regrettably, this verdict could potentially hinder both sellers and aspiring homebuyers,” Rob Ockey, president of the Salt Lake Board of Realtors, said in a prepared statement. “In the aftermath, it appears that class-action lawyers have emerged as the beneficiaries, while consumers are left to contend with the fallout.”
The Salt Lake Board of Realtors, the largest shareholder of Utah’s multiple listing service, UtahRealEstate.com, also said it’s “important to note that commissions on home sales have never been universally fixed at 6%. Real estate agents always engage in commission negotiations with their clients.”
Nationally, the average agent commission in the United States is less than 6%. In Utah, the average real estate commission rate stands at 5.36%, ranking the state No. 18 for some of the lowest average real estate agent fees, the Salt Lake board noted, citing Clever.com.
“The agreed upon commission rate paid by the seller occurs during the listing appointment,” Ockey said. “That negotiated rate is determined by the value the agent provides and what the seller is willing to pay.”
Lance Lambert, a former housing market reporter for Fortune who recently founded a new housing news and research outlet ResiClub, wrote in a Tuesday post that even though a U.S. District judge still needs to weigh in, the jury decision is “already an earthquake being felt in the industry.”
“This is just one case, and it already appears that the defendants will appeal. However, it is clearly an earthquake in the real estate industry, potentially triggering years of legal battles and additional lawsuits,” Lambert wrote. “The big outstanding question here is if today was a small quake, or this first tremor in something much much bigger.”