Real Estate Brokers Pocketing Up to 6% in Fees Draw Antitrust Scrutiny

By echonewshub 8 Min Read

The American residential housing market’s lucrative broker commission system finds itself under an unprecedented antitrust lens. The Justice Department, along with two private class-action lawsuits, threatens to undermine the influence of the National Association of Realtors, a potent lobbying force within the industry.

Intriguingly, federal antitrust enforcers stand at the crossroads, deliberating on initiating their legal pursuit following an extensive investigation.

Their focus is intently placed on the real estate commission-sharing structure, which conventionally burdens home sellers with a substantial 5% to 6% carve from the sale. This sum is then divided between the listing agent and the buyer’s representative.

This system, rather unique to the United States, thrives thanks to the National Association of Realtors’ command over numerous multiple listing services, a pivotal tool that consolidates available properties within a specific region. However, it comes at a price.

In return for using this framework, NAR mandates sellers to provide compensation to the buyer’s representative, a practice vehemently criticized for its role in inflating home prices.

The contentious nature of this arrangement is not confined to governmental scrutiny alone; it’s also facing legal trials through two antitrust class actions. One such case is set to commence in Missouri, with the potential for up to $4 billion in damages. Meanwhile, plaintiffs in an Illinois trial scheduled for early next year are vying for a staggering $40 billion.

Describing this commission-sharing structure, Michael Ketchmark, the lead attorney for the plaintiffs in the Missouri case, labels it as “collusion,” hinting that a day of reckoning is imminent.

The Department of Justice’s inquiry into residential real estate commenced during the Trump administration. Back then, the NAR consented to certain measures, including enhanced price transparency, in an attempt to resolve the matter.

However, in 2021, Biden administration officials withdrew from that agreement, expressing their desire to retain the capacity to pursue future antitrust claims against the association.

A federal judge’s ruling in January, though, still binds the DOJ to that settlement. An ongoing appeal further complicates the matter as the Biden administration broadens its antitrust scope beyond conventional domains.

The Justice Department declined to comment.

‘Seismic Change’

The damages sought in the two civil cases – based on allegedly inflated commissions in each of those markets – would be a blow to the realtor association and the major brokerages listed as co-defendants that haven’t already settled. Re/Max and Anywhere Real Estate Inc. agreed to pay $55 million and $83.5 million, respectively, and to no longer require agents to belong to NAR.

But the bigger threat to the industry as a whole would be a nationwide case brought by the Justice Department to dismantle the commission-sharing structure altogether. In the worst-case scenario for the industry, the federal government could seek to ban sharing commissions, prohibiting sellers’ agents from compensating buyers’ agents.

“Our guess is that the lawsuits in Missouri and Illinois will not go that far, but it’s possible,” Redfin Corp. Chief Executive Officer Glenn Kelman said in an interview. “We think that DOJ action is necessary to reach that level, and that would be a seismic change — basically, half the real estate agents in this country would be unemployed.”

Redfin, an online real estate firm, also withdrew from the National Association of Realtors earlier this month, citing its long-held concerns about agent compensation.

Commission rates, which often get baked into a home’s listing price, are an attractive target for the Biden administration as low housing supply and spiraling mortgage costs combine to create the least affordable housing market in four decades. On a $407,100 house — the median existing-home sales price — a 5.5% commission comes to about $22,390.

In some parts of the world, total commissions for each sale are significantly lower – around 2% in countries like Australia and the UK.

The Justice Department highlighted the issue in a recent court filing asking a federal judge in Boston to hold off on approving a potential settlement in another antitrust suit challenging commission rules.

The Justice Department “is concerned about policies, practices, and rules in the residential real estate industry that may increase broker commissions,” the agency said, asking for a two-month delay to offer further thoughts on the issue.

Lower Payout

Completely untying buyer and seller agent fees could eventually lower commissions by as much as $30 billion annually, according to a study by the Consumer Federation of America, a watchdog group. If aspiring homeowners had to pay agents directly, they would likely shop around before hiring one — increasing competition — or pay an hourly or flat-fee service to handle paperwork at closing.

“Increasingly the industry is accepting the fact that the rates will eventually be untied, and they’re just trying to delay it,” Steve Brobeck, former executive director of CFA, said in an interview.

NAR says the existing system opens the door to first-time home-buyers, especially from minority and lower income groups.

“This case is very much about buyer representation and that being at risk,” Mantill Williams, a spokesman for NAR, said in an emailed statement. He said buying a home is a consequential decision and people “shouldn’t be forced to go it alone.”

Read More: Realtors Want to Fix Discrimination. And Protect the Commission

NAR has said the buyer commission offer doesn’t have to be the traditional 2.5% – the group recently said it could even be $0. But that higher rate persists in most transactions as sellers fear that listing with lower payouts for buyers’ agents would cause them to steer clients away — a concern borne out by recent research.

Indeed, in an email to Re/Max affiliates describing the company’s settlement in the civil case, President and CEO Nick Bailey reminded agents of their “professional obligation” to show properties regardless of the compensation offer.

These changes could also put the future of the National Association of Realtors in doubt. The group collects $150 in annual dues from more than 1.5 million agents. It’s a moment of reckoning for the group that last year surpassed the US Chamber of Congress to be the biggest spender on lobbying in the US, laying out more than $80 million in 2022.

This unprecedented pressure poses an “existential threat,” according to David Greer, who worked with NAR for over a decade. He said the prospect of buyers’ agents exiting the industry – and taking their membership dues with them – in the wake of any reform has left NAR “immensely afraid.”

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