SC realty giants under fire in lawsuit after $1.8B verdict in similar case. What’s at stake

A little-known practice among realtors has come under fire, and the fallout has the potential to capsize the real estate industry in South Carolina — and beyond — following a recent $1.8 billion verdict elsewhere in the U.S. in favor of home sellers who argued they’ve been forced to pay too much to realtors who have conspired against a competitive market.

A federal Kansas City jury, late last month, awarded more than 250,000 home owners in Missouri, Kansas and Illinois a nearly $1.8 billion verdict against the National Association of Realtors and two giant real estate brokerages — Keller Williams and HomeServices of America. The jury found that the realtors conspired to force home sellers to pay commission fees to the buyer’s agent in addition to their own agent — in many instances, without the seller’s knowledge.

The verdict, which could translate into thousands of dollars in savings for home sellers, could ultimately be tripled under federal law and has spurred additional lawsuits, including one in South Carolina, where plaintiffs say the National Association of Realtors and Keller Williams have engaged in a practice of illegally inflating commission rates, resulting in home sellers paying significantly higher costs to sell their homes than those that would be permitted in a competitive market.

Patrick Knie, a Spartanburg-based attorney, who recently filed the federal class-action lawsuit in South Carolina against the National Association of Realtors and Keller Williams, said it all starts with technology.

A Multiple Listing Service, or MLS, is an online database of homes for sale accessible by realtors, which is also used to populate listings on popular home buying websites such as Redfin and Zillow.

Knie said the vast majority of homes sold in South Carolina stem from an MLS, and homes not listed on the service aren’t typically shown to prospective buyers and, therefore, will likely not sell as quickly or even at all.

In order to list a home on an MLS, the National Association of Realtors has a rule, which Knie called the adversary commission rule, that requires the seller’s agent to offer a flat, “effectively non-negotiable” rate of compensation to the buyer’s agent, before that agent is even identified.

“The National Association of Realtors said, look, nobody can be (on a Multiple Listing Service) unless you agree to the terms and conditions that we provide, and one of those terms and conditions is that the seller will pay a part of the buyer’s agent commission,” Knie said. “And so they’re transferring a cost to the seller that is unfair.”

The rule, Knie argues, facililates an anti-competitive real estate market, in that it forces the seller to pay the buyer’s agent a non-negogtiable commission, thereby increasing the seller’s costs. Absent the rule, Knie says sellers would pay half or less the amount of commission currently required because the buyer would be required to compensate their own agent.

The National Association of Realtors and major brokerages, such as Keller Williams, maintain that a 6% rate of commission, assessed to the home seller, is an industry standard.

But that amount far surpasses other real estate markets in similarly developed countries such as the United Kingdom and Australia, where commission rates hover around 2% for home sellers.

At a commission rate of 6%, a home seller with a $500,000 home can now pay as much as $30,000 in agent commissions — $15,000 to their agent and $15,000 to the buyer’s agent.

Possible widespread consequences

Prior to the inception of the MLS, Knie, who began practicing law in 1973, said realtors had to work harder in representing consumers wishing to sell or buy a home.

“With all due respect, (realtors’) jobs have been made a whole lot easier by technology, but they’re getting these inflated 6% commissions that never get reduced, and they’re doing less work,” Knie said. “I don’t know of any other industry that has enjoyed this.”

Knie says the practice violates the Sherman Antitrust Act, which says that anti-competitive agreements, such as the one required by the National Association of Realtors to list a property on an MLS, are illegal.

In cases involving antitrust violations, such as those alleged in Knie’s suit, plaintiffs are entitled to three times the amount of their actual damages, known as treble damages.

“If the courts stand firm on that verdict in Kansas City, it’s going to basically open things up, and you’re going to see competition, real competition among realtors, which are going to drive commissions down to a fair level,” Knie said.

Keller Williams and the National Association of Realtors did not immediately respond for comment.

But Ron Phipps, a real estate agent in Rhode Island and former president of the National Association of Realtors, told NPR that shifting commission costs to the buyer will potentially lock first-time home buyers out of the market.

“A lot of buyers don’t have additional cash,” Phipps said Sunday on the NPR show “All Things Considered.” “They don’t have the extra money to go ahead and proceed. On the macro level, the disparity of wealth between homeowners and nonhomeowners is going to grow even more.”

While Knie’s South Carolina lawsuit currently involves one plaintiff, who used Keller Williams to sell her Spartanburg home in September, he’s inviting other similarly situated home sellers who may have solicited home-selling services from other major brokerages such as HomeServices, to join the suit as part of a class action.

“To the extent class reps come forward from some of those other (brokerages), we’ll just amend our complaint and add them in to give a little more beef to it,” Knie said. “But we’re comfortable going forward only if we have Keller Williams because the conspiracy is the same whether (other brokerages) are named or not.”