On March 6, 2019 a class action lawsuit was filed by Hagens Berman law firm against the National Association of Realtors (NAR) and several real estate brokerage firms.
The lawsuit asserts that NAR has engaged in price fixing of real estate commissions by not allowing buyers to negotiate the buyer’s agent’s commission. The brokerages included in the class action lawsuit include:
Who’s included in the suit
- Century 21
- Better Homes and Garden Real Estate, LLC
- Coldwell Banker
- ERA
- Berkshire Hathaway
- RE/MAX Holdings
- Keller Williams
- Intero Real Estate Services
- and others
The lawsuit in a nutshell
According to the lawsuit, the plaintiffs are accusing the National Association of Realtor® of preventing buyers from negotiating the amount of commission the buyer’s agent can collect.
Realtors® are required to use NAR approved listing agreements. The typical agreement, specifies the amount of commission the seller will pay to both the buyer and seller brokerages.
The listing is then published in the Multiple Listing Service (MLS). Agents can the view the amount of commission the agent will receive before showing a house.
A typical real estate transaction, commission is between 5 and 6 percent. Some of the commission is paid to the seller’s brokerage office. The rest is paid to the buyer’s agent’s brokerage office. After the agent’s broker takes out their fees, the agent receives the remaining commission.
A seller can negotiate the amount of commission that the buyer’s agent receives. However, a buyer cannot negotiate what commission their agent will receive. Typically, the buyer’s agents receive between 2.5 and 3 percent commission, depending in the type of real estate being sold.
The suit alleges that “most buyer brokers will not show homes to their clients where the seller is offering a lower buyer broker commission, or will show homes with higher commission offers first”. They argue that sellers are under pressure to offer higher commissions in order to attract potential buyers.
The suit argues that the defendants have ” inflated the total commissions paid by home sellers, who have incurred, on average, thousands of dollars in damages”. Presumably, if this requirement was removed, then the buyer would be responsible for paying their agent’s commission.
It does seem unfair that buyers cannot negotiate how much the commission should be paid to their agent’s brokerage. However, we need to ask some very important questions.
Will buyers have the additional money to pay their agent’s commissions?
Having buyers agree to pay their agent’s commission is not new. Years ago, Charles Chatham required his clients to agree to pay his commission, even if they didn’t buy a house. In return, he would determine the client’s specific needs, then he would research three homes for the client to purchase.
His methodology required much more from a buyer’s agent up front. But it also eliminated the countless hours of showing houses to their buyers.
It seems doubtful that entry level buyers will have the money to pay for their agent’s commissions. With housing prices continually increasing, it is often difficult for new buyers to have more than three to five percent down.
If buyers had to pay for their agent’s commission, it might price many first time buyers out of the market. Having the commission come from the proceeds of the sale of home seems the most practical, especially in the entry level market.
Related story: 31 Crazy things Realtors say to sell houses
The Internet has changed how home buyers shop
Buyers today have the advantage of being able to shop for homes without leaving the comfort of home. As a result, buyers do not have to spend as much time asking their agents to show them every home on the market.
The lawsuit’s argument is that buyer’s agents don’t spend as much time marketing the seller’s home. That is being done via the Internet. Now, buyers can quickly view the pictures online as well as quickly take advantage of street views using the Internet.
According to the law firm’s website, their is a “diminishing role of buyer brokers due to buyers independently identifying homes through online services and retaining buyer brokers only after they have found the home they wish to buy.”
The argument presumes that a buyer’s agent has less influence on bringing buyers to the seller. Therefore, the buyer’s agent should not be paid by the seller, or they should be paid less. They argue that in countries like Germany, Australia and the United Kingdom, buyers typically “pay less than half the rate paid to buyer brokers in the United States”.
Who’s notably absent from the suit
Notably absent from the suit is the Multiple Listing Services in cities like New York and San Francisco, where real estate is much pricier. Is this purely coincidence, or do they realize in these markets buyers would be priced out of the market due to significantly higher commissions?
Conclusion
Sellers may pay less in commissions
This will be an interesting case to follow. If the suit prevails, sellers may have to pay less commission, or no commission at all to buyers. This could save sellers thousands of dollars, but will it cost them more in the long run?
According to the National Association of Realtors Roughly 10% of all home sales are performed without the use of a Realtor®. These sellers either have homes that need significant repairs and are sold to cash investors, FSBO’s or directly to friends and family. These sellers completely eliminate paying any commission.
Potentially fewer buyers in the entry level market
This could have undesired side affects. Making buyers pay for their agent’s commissions, could eliminate many potential buyers. Unless the buyer was a move up buyer, they may not have the extra money to pay commissions.
New home buyers would likely need more financial assistance to buy a home. Gifts might be allowed from family members in order pay their agent’s commissions, but lenders would need to add new rules to allow for gifting of commission funds.
Homes may potentially take longer to sell
It’s unlikely that buyer agent’s commissions will totally disappear. But what if they’re significantly reduced? The National Bureau of Economic Research release a report in 2015 showing the affects of lower commissions on listed properties. The report observed that listings with smaller commissions were 5% less likely to sell and took 12% longer than properties offering the full commission.
Potentially fewer foreclosures
One possible benefit would be buyers having more skin in the game. If buyers have to pay their own agent’s commissions, they might have a more vested interest in keeping their home. The result could be fewer home owners walking away from their homes or doing strategic defaults. Of course, that also depends whether mom and dad put up the funds for the commission.
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