An Overview of the NAR & Residential Brokerages Commissions Lawsuit

With jurors ruling in favor of the plaintiffs, Iman stated in their October 16th live updates archive that “it’s all but guaranteed that the real estate industry will be scrambling for answers,” implying that this decision could radically affect agents, brokerages, the home-buying process, and the entire real estate industry in the U.S. “This matter is not close to being final,” NAR President Tracy Kasper said in an October 31st press release, adding that NAR would appeal the verdict and “ask the court to reduce the damages awarded by the jury.” However, the verdict has not yet been finalized. The presiding judge could still potentially award triple damages, approaching five billion dollars.

NAR, Keller Williams, Anywhere Real Estate (formerly Realogy), RE/MAX, and HomeServices of America were initially defendants in the antitrust lawsuit. However, according to a September 20th article in Realtor Magazine, both RE/MAX and Anywhere opted to settle. RE/MAX paid $55 million, and Anywhere, whose subsidiaries include Better Homes and Gardens, Century 21, Coldwell Banker, Corcoran, ERA, and Sotheby’s, paid $83.5 million in damages.

In an October 6th article from BAM discussing the settlements, Anywhere and RE/MAX expressed a vote of no-confidence in NAR. As a result, they have decided that they will “no longer require any of their brokerages or agents to belong to NAR or adhere to NAR’s Code of Ethics or MLS Handbook, among other changes.”

However, it won’t be the lawyers, but rather the sellers or the first-time homebuyer, who will have to carry the burden of this lawsuit if the judgment is finalized. An October 16th article from The Real Deal expressed the weight of the verdict, citing a Wall Street Journal report from October 15th, which described the NAR antitrust suit as a “reckoning” because NAR’s practices “harm buyers and sellers.”

It is important to remember that NAR has more than $1 billion in assets, controls the MLS, and owns the trademark to the word “Realtor,” making a real estate agent’s ability to buy and sell homes beholden to NAR’s membership, which includes the payment of hundreds of dollars in yearly dues.

Difficulties for NAR are mounting. According to an October 2nd New York Times article, Redfin, the online real estate broker, is leaving NAR. “The brokerage said it would require many of its brokers and real estate agents to cancel their memberships with the National Association of Realtors,” prompted by NAR policies requiring a fee for the buyer’s agent on every listing and “allegations of sexual harassment within the group.”

Given the loss of members, the financial burdens brought by the trial verdict could be catastrophic for NAR, especially considering Redfin, the Anywhere brands, and RE/MAX have decided that agents no longer have to be members of NAR in order to possess a sales license. 

However, there are further ripples to be felt. These lawsuits have the potential to change the way real estate commissions are structured, affecting how agents are compensated. Most licensed real estate agents operate as independent contractors, relying on commissions to produce income. Agents are affiliated with brokerages, receiving a portion of their commission from any given real estate transaction, which is then divided between the listing agent representing the seller and the buyer’s agent. 

When the seller lists their home with a listing agent, the seller typically agrees, through a contract, to pay both the listing agent and the buyer’s agent. At closing, the buyer pays the seller, who then pays their agent a commission that is split with the buyer’s agent. All these commissions are funded by the seller, and this fundamental structure has led to the lawsuits.

In the Stitzer/Burnett case, a broad swath of plaintiff home sellers argued that NAR, Keller Williams, and associated brokerages conspired to force sellers to pay unjustly high commissions through the Clear Cooperation rule of the MLS. This rule dictates that any home listed must offer the buyer’s agent a commission. Sellers, naturally wanting to sell their homes, claim that NAR wields the MLS as leverage, requiring the inclusion of buyer’s agents to show properties and forcing sellers to compensate the buyer’s agent. 

Plaintiff sellers seek to decouple commissions, arguing that if each side pays their own agent separately, there would be more transparency and incentive for both sides to negotiate, rather than being bound by the alleged collusive commission framework. 

What is more excruciating comes directly from NAR. According to an October 6th Inman report, in a “‘sudden’ reversal, NAR says listing brokers can offer 0%” for buyer compensation. Attorneys for the plaintiffs, who have evidence of NAR officials previously insisting that $0 was not permissible, called this a “stunning admission of guilt.”

So, what does the verdict mean for how agents are paid? Right now, buyers can offload the payment for their agent to the seller. Buyers finance their home purchase, and agent fees are typically covered through the mortgage. The outcome of the recent court decision may lead to fewer buyers using agents, and if they do, commissions could see a significant decline.

In response to the Update in Case of Burnett v. NAR et al. report from October 31st, NAR pushed back, asserting that the current modus operandi is the most efficient way to conduct transactions. It argued that changing commission protocols would harm first-time and low-income buyers, as they might have to pay their agents directly. “This verdict does not require a change in our rules,” NAR said. “But if class action attorneys had it their way, buyer representation would be very much at risk because many first-time home buyers, among others, couldn’t afford to pay for representation out of pocket.” 

An October 31st article from bubbleinfo.com inferred that NAR let down its members by failing to present a stronger defense in court, creating an environment that allowed these types of lawsuits to go forward, and doing little to protect the real estate agents. 

In other words, NAR effectively threw in the hat on this lawsuit when they stated that agents don’t have to offer a buyer-side commission to be a member of their multiple listing systems. The bubbleinfo.com blog argued that NAR conveyed a lack of confidence in their position, choosing the path of least resistance and not adequately protecting the role of real estate agents and what they contribute. 

The settlements from both RE/MAX and Anywhere could turn out to be real bargains. NAR and Keller Williams are currently liable to pay the $1.78 billion. That being said, who really benefits from these lawsuits, which have damaged names and reputations? It won’t be the home buyers and sellers.

Fintech companies such as Zillow and Redfin are going to fill whatever void is created by a newly minted vacancy for real estate agents. 

Experts agree that sellers experience financial benefits working with a traditional real estate agent and buyer’s agent; the costs associated with that sale and the proceeds gained from it are likely to be greater than working with Zillow or Redfin. Working with a local real estate agent allows the seller to put checks and balances in place, protecting both the buyer and the seller, a feature lost with the Fintech alternative. That being said, Fintech online real estate firms are certainly happy about this lawsuit.

NAR will appeal the decision due to the significant financial stakes and the potential impact on the traditional methodology supporting real estate transactional structures. This is likely to play out over a span of years. 

But as stated in a November 16th Iman report, “The National Association of Realtors is a lobbying powerhouse, but there’s no clear ‘legislative fix’ to the ever-rising pile of antitrust commission lawsuits launched against real estate organizations and brokerages.”

This makes it difficult for agents to prepare for the future. Real estate professionals will need to be even more upfront about their compensation, getting terms nailed down through representation agreements to clarify what is being paid or received and what the client can expect in exchange for the agent’s services. 

Brokerages will be pressing this upon their agents, ensuring that clients feel they are getting their worth out of the commissions paid. However, this is going to be a long road with many twists and turns along the way, taking a while to fully play out.