A federal jury last month in a Missouri class action lawsuit ruled the National Association of Realtors and other big real estate brokerages conspired to artificially inflate commissions.
Home sellers were awarded damages to the tune of $1.8 billion.
Many experts are calling this a landmark court case that will change the way homes are bought and sold in the U.S. In fact, some say the consequences have already arrived in the Arizona real estate market.
While NAR and its Arizona location contends there will not be any immediate impact, other lawsuits of the same nature in other states are moving forward and the U.S. Department of Justice is looking into the situation, which could use its power to change NAR’s commission structure.
Charging commissions
At the heart of this case is the longtime NAR rule requiring an offer of compensation, in which home sellers must pay commissions of the buyer’s agent in addition to their own agent in order to show their home on the Multiple Listings Service, which is where the majority of homes in the country are listed for sale.
Although this is not always the case, home sellers are typically represented by a Realtor who negotiates the offer of compensation, which is often a 5% to 6% commission split between the buyer’s agent and the seller’s agent, a longstanding custom. The commission for both agents comes out of the seller’s pocket, regardless of how much work either agent does to close the deal.
Plaintiffs in the case claimed it wasn’t fair that the rule effectively forced sellers to compensate an agent who doesn’t represent them, and who negotiates for a buyer against them. The plaintiffs further alleged that this structure is used to keep commissions artificially high.
And the sellers won with a big settlement. The jury in the Missouri case unanimously and swiftly sided with the home sellers in this case.
72Sold founder Greg Hague said this is rightfully so. The argument that buyers should pay their own agent is intuitive, and the argument that sellers should not have to pay the agent who negotiates against them is intuitive, he said.
Part of the Missouri case hinged on buyer agent expectations that they should receive a certain amount of commission from sellers, and if that isn’t offered, they won’t show the home.
Hague said this expectation has proliferated within the industry over the years.
Obviously, he said, this would be a reprehensible practice, horribly unfair to innocent buyers who miss out on what might be their perfect home, and also potentially a breach of the agency relationship and fiduciary responsibility buyer agents have to their buyers.
The ruling is going to disrupt the real estate industry, Hague said.
“I do know that I see the plaintiffs’ side. I really do,” Hague said. “We needed a change in the industry. It has operated a lot on custom and antiquated ways of doing things.”
NAR Response
The National Association of Realtors says it will appeal the case. In a statement to Independent Newsmedia, Scott M. Drucker, CEO of Arizona Association of Realtors, said the Missouri case was not adjudicated in Arizona and is not close to being final as the verdict is being appealed. Therefore, the Arizona Association of Realtors does not expect any immediate impact, he said.
Compensation on the sale or rental of properties in Arizona is not set by any Realtor association or any multiple listing service, Drucker added.
“Multiple listing services throughout Arizona prioritize consumers, support market-driving pricing, and promote business competition. The Arizona Realtor community has always emphasized and will continue to emphasize that commissions are negotiable and established and agreed upon between brokers and their clients,” he said. “Realtors will continue to help consumers understand the current market and guide them through what could be the most expensive, complex transaction of their lives.”
Consequences
Other related cases are being filed and the U.S. Department of Justice is also considering it. All said, it is up in the air as to how the industry in Arizona will be affected in the long-run.
Mark Stapp, a professor of real estate at ASU, said the success of the Missouri case is giving rise to other cases, but it is unclear what will happen now that NAR is appealing.
“This is a long way from fully resolved. But, brokerages and NAR and local associations are certainly addressing the ruling,” Stapp said. “I do not think sellers paying buyers agent fees will completely go away, but it may be more explicitly given as an option that sellers have rather than being required to comply with NAR’s mandatory offer of compensation rule.”
But Hague says effects have already hit the local industry. He said his Realtors are already getting calls from home sellers asking if they can decline buyer commissions, and he is saying yes.
Hague thinks buyer’s commissions will be cut in half.
“And if the buyers want representation, they will have to take it. But it also might reduce showings,” he said. “It will affect everybody who sells a home, and sellers may be entitled to a refund if they sold their house in the last four or five years.”
Hague added that overall the ruling is a good thing, with buyers also benefiting — when buyers pay their own agent, they will receive true representation with more objective advice, like one would from an attorney, compared to their “agent being paid by a seller to sell them the home.”
In recent years, the industry has seen some changes with the advent of online sites like Opendoor and others that don’t do commissions, and instead do flat fees.
Hague added that changes in the online home search business could also benefit both buyers and sellers.
Most consumers don’t know home search portals like Zillow and Realtor.com make money by directing buyers who are interested in a specific home away from the listing agent, who knows about the home, to an “unknowledgeable agent” who pays the home search portal for buyer leads, Hague said.
“This is a practice that harms sellers because interested buyers are connected with agents who know nothing about the home the buyer is interested in. It also harms buyers who are sold off to agents because they don’t know this is happening, and they don’t really get representation but rather a ‘pay-to-play’ agent who is motivated to talk them into buying the first home they like,” Hague said.
On the other hand, Rebecca Durfey, a real estate agent with Keller Williams Professional Partners, said she doesn’t think the ruling will impact the way compensation is negotiated much, especially since it is not a “standard” fee.
“But I do think it will create more transparency and conversations around that compensation, and I think that is a good thing,” Durfey said.
She added compensation may adjust a bit, but sellers know their best path to receiving an offer on their home will be to engage all the buyers out there – and the buyer’s brokers are the way to do that.
“Our value as agents is to negotiate and advocate in order to provide our clients the desired outcome,” she said. “I think the objective will remain: buyers want to buy and sellers want to sell. I don’t see another way or option to help buyers afford the home they want except for wrapping their agent’s cost in the co-brokerage fee from the seller’s agent.”
Philip Haldiman can be reached at phaldiman@iniusa.org, or on Twitter @philiphaldiman. We’d like to invite our readers to submit their civil comments, pro or con, on this issue. Email AZOpinions@iniusa.org.
Meet Philip Haldiman is an award-winning journalist who most recently took first place for investigative reporting in 2023 from Arizona Newspapers Association. He joined Independent Newsmedia, Inc., USA, in 2015, covering Sun City West his first year. Since 2016, he has covered the city of Peoria. Prior to coming to INI, he was a reporter with The Arizona Republic for seven years, covering numerous cities throughout the Valley. Before that, he was a freelance writer.
Community: Haldiman spearheads the Peoria Independent Hometown Heroes Awards program, honoring local individuals and businesses that give back to the community. He has hosted local candidate forums over the years and is a member of the Society of Professional Journalists. Haldiman also served as a member of the Journalism Program Community Advisory Board at Glendale Community College. Outside journalism, Haldiman served as a member of the city of Peoria Complete Count Committee for the Census, 2019-2020. Lastly, he has served as a member of his HOA governing board since 2021.
Education: Arizona State University with a BA in Journalism and Mass Communications and a BA in Theater.
Random Fact: Haldiman is a fourth-generation Arizonan as well as wrote and produced an autobiographical comic book about his time spent in Hollywood and his life as a cult film star.
Hobbies: He enjoys hiking Arizona’s mountainous landscapes and is currently working on a play for the stage.
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