Is Realtor Commission Sharing in Jeopardy?

After a two-week trial in federal court in Kansas City Missouri, a jury awarded nearly $1.8 billion in damages to plaintiffs in a class action suit against the National Association of Realtors (NAR) and several residential real estate brokers for conspiring to keep home sales commissions artificially high. The suit involved hundreds of thousands of homebuyers with sales that occurred between April 2015 and June 2022.

The case centered on a long-standing NAR rule that requires sellers’ agents to pay non-negotiable commissions to buyers’ agents when they list a property on a local or regional Multiple Listing Service (MLS). Typically, the seller’s agent shares a portion of the commissions earned with the buyer’s agent. Additionally, the NAR prohibits buyer agents from making purchase offers contingent on a commission reduction.

Plaintiffs’ counsel Michael Ketchmark argued that buyers, not sellers, should pay the buyer agent’s commission. Plaintiffs claimed the NAR’s “Mandatory Offer Compensation Rule” effectively keeps a buyer agent’s commissions artificially high, and if the rule weren’t in place, it would foster competition among buyers’ agents and lower commissions.

NAR president Tracy Kasper argued that NAR rules and the current commission-sharing system “serve the best interests of consumers,” bolster market-driven pricing and encourage competition. The NAR plans to appeal and has asked the court to reduce the awarded damages in the interim. Other defendants in the lawsuit include Berkshire Hathaway-owned HomeServices of America and Keller Williams.

A HomeServices spokesperson claims the decision will create additional obstacles for buyers and prevent sellers from “realizing the true value of their homes.” Mr. Ketchmark asserted that the current system incentivizes agents to steer clients into deals that maximize their commissions. He has filed antitrust lawsuits against several companies and claims the damages could rise to more than $5 billion.

Housing policy analyst Jaret Seiberg claims the appeals process could take up to three years, and he doesn’t believe buyer commissions are going away any time soon. He thinks any injunctions that result would amount to little more than “minor tweaks to the current commission-sharing system.”

What This Means For Homebuyers and Sellers

Opponents to realtor commissions claim that, in the current system, the commission is added to the home’s sale price, thereby inflating the home’s value. If sellers did not have to pay the commission, the home price wouldn’t inflate, and buyers could negotiate the commission down. Standard commissions currently run between 5% and 6%.

NAR claims the current practice allows buyers to afford a home and retain professional representation. A representative for HomeServices was disappointed with the ruling and stated that it could force buyers to forgo professional representation and not receive much-needed help in a complex financial transaction that may be the largest investment of their lives. They went on to say, “Cooperative compensation helps ensure millions of people realize the American dream of homeownership with the help of real estate professionals.”

Bottom Line: Negotiate Commissions

It remains to be seen how the ruling and subsequent appeal play out and how they affect the real estate market, if at all. While it’s reasonable to presume commissions will exist, the rules may change. According to Ryan Tomasello, managing director of a financial services firm, the ruling could “drastically” change the way the commission system operates and that the commission pool may decline by up to 30% in the coming years.

One thing to remember is that, despite what current NAR rules say, commissions are negotiable in virtually any real estate transaction. As long as negotiations fall in line with industry regulations and standards, either a buyer or seller agent should be open to negotiating the terms of not only the percentage amount and the split but also who pays what.

Whether you are buying or selling a home, either your own or as part of settling an estate, you need to consult an experienced real estate attorney for advice and guidance. An attorney can review aspects of the contract to help you realize your goals while obtaining the best results possible.

Melanie Levan has a diverse practice with an emphasis on real estate, estate planning, and land use. She uses her experience and knowledge to guide her clients through complicated legal issues by providing straightforward advice and discussing all of the available options. For answers to your questions and specific advice about your real estate transaction, contact Melanie at 856-354-7700 or mlevan@earpcohn.com.