ISABELLA WOLSTENHOLME—If you have ever sold your home before, chances are your realtor listed it on the Multiple Listing Service (MLS), one of the local databases listing properties for sale. Roughly 97% of local and regional MLSs are owned or operated by one or more local realtor associations, which require membership from realtors to gain access to the MLS. The National Association of Realtors (NAR) is the largest real estate trade association in the U.S., in which NAR members must also join an affiliated state or local realtor association, and vice versa. NAR encompasses about 1,200 local and 54 state and territory associations, resulting in a substantial presence in MLS databases.
Standard practice in the U.S. is for the seller to pay both the seller’s and buyer broker’s commission fees. This is reflected in NAR’s Code of Ethics and Standards of Practice, requiring a listing broker on the MLS to “make blanket unilateral offers of compensation to” buyer brokers expressed as either a fixed percentage of the home’s gross sales price or a definite dollar amount. NAR’s rules further specify that any modification to buyer broker’s compensation must be communicated before an offer to purchase has been submitted. Once it is, it may not be unilaterally modified. NAR advises realtors to negotiate commissions before showing the property.
In Moehrl v. The National Association of Realtors, seven individuals who sold their homes utilizing the MLS brought suit against NAR and seven other major real estate brokerages in a Chicago federal court in 2019. Plaintiffs alleged that the practice of requiring pre-agreed commission rates prevents negotiations and keeps commissions high at a supercompetitive rate. Together, Defendants have engaged in a conspiracy to violate antitrust law. Further, Plaintiffs claim one-sided transparency, where commissions are visible to all MLS participants, and the MLS rules allow buyer brokers to selectively display listings to customers on their website based on commission offers. In conclusion, by adhering to the rules set forth by NAR, Defendants can utilize the MLS databases and benefit from supercompetitive commission rates, as well as insulation from price competition among real estate brokers.
Last month, a federal jury agreed with Plaintiffs and ordered NAR to pay almost $1.8 billion in damages. NAR, of course, is pursuing an appeal, so the outcome is not yet finalized. The class entitled to damages consists of home sellers who paid a commission to brokerages affiliated with Defendants between March 6, 2015, and December 31, 2020, with some exclusions. Two Defendants, RE/MAX and Realogy Holdings, agreed to settlements before trial totaling almost $140 million. After a big victory, Plaintiffs’ attorneys are already pursuing a new class action to allow for a broader class of home sellers. The Department of Justice also filed suit against NAR in 2020 and withdrew from a proposed settlement agreement initiated under the Trump Administration. This is consistent with the current Administration’s vigorous pursuit of enforcing antitrust regulations.
The outcome of this case could significantly transform real estate transactions by discarding current commission practices and implementing a new commission mechanism, specifically, buyers having to pay their broker. Analysts are predicting over half of the 1.6 million agents in the industry could be pushed out over time. Benefits will be passed on to consumers, projecting a 30% reduction in real-estate commissions that, in turn, will be reflected in home prices. Further, many real-estate startups have failed over the years to alter commission payment structures, but a favorable outcome for Plaintiffs could be the catalyst for new business models.
On the flipside, players in the industry are, without surprise, critical of the decision. Those affected anxiously await the judge to determine what structural changes will be ordered and how far the court is willing to push the industry. One suggested solution is to allow buyers to finance commissions as part of their mortgages, a practice currently inhibited by other regulatory barriers. CEO of Redfin stated that the size of the damages is inclination enough that the change in the industry will be significant. Redfin has already announced that it will mandate its brokers and agents to withdraw from NAR membership. Irrespective of the scope of the court order, we will likely see brokerages across the country implementing new practices as a protective measure against potential liability.
