Why this verdict could upend the real-estate industry’s commission structure

A Missouri court found the National Association of Realtors and two real-estate brokerages guilty of conspiring to inflate real-estate commissions, a decision that will likely have a deep impact on the U.S. housing market.

The NAR, one of the largest industry groups in the U.S., as well as brokerages HomeServices of America and Keller Williams, were found guilty Tuesday by a Kansas City, Mo., jury of colluding to inflate or maintain high commission rates. 

The verdict is the first of two antitrust lawsuits that aim to address a longstanding practice of commissions being paid by sellers, and aims to reform the way agents are paid.

The verdict was part of the “Sitzer/Burnett” case, which was first filed in May 2019. The trial had begun on Oct. 16, and had concluded after two weeks of testimony.

Ryan Tomasello, an analyst at Keefe, Bruyette & Woods, told MarketWatch that the outcomes of this case, as well as other, similar ongoing legal battles, could fundamentally reshape the way U.S. home buyers and sellers transact.

Typically, when a home is sold, the listing agent and the buying agent get a 3% commission each, both of which are paid for by the seller. The stage is set for the buyer’s agent to no longer automatically receive a 3% commission. 

“At the end of the day, when this is all said and done, this whole legal contest will reduce friction costs in housing — an industry that turns over at $2 trillion a year — by upwards of 30%,” Tomasello said.

“That is a significant number on a very large pool of assets,” he added.

Furthermore, the cases could end up in “improved transparency for consumers around commissions,” Tomasello said. “Today, consumers have very little transparency around how commissions are set, how they’re paid, the means by which they can be negotiated.”

In early October, Redfin announced that it was resigning from its board seat on the NAR, partly because it disagreed with how the NAR blocks sellers from listing homes that don’t pay a commission to the buyer’s agent. 

The defendants have been ordered to pay damages of nearly $1.8 billion, according to the Wall Street Journal. The court could increase the damages under antitrust rules, and result in them paying roughly $5.36 billion to the class plaintiffs. 

Two other brokerages had settled before the verdict.

The judge has not issued a final ruling on the case yet. Both parties could also settle, which could stem any “chaos” that could follow from copycat lawsuits, Tomasello noted.

Minutes after the verdict, the attorney representing the plaintiffs filed a new suit against NAR, Compass, Douglas Elliman, ExP, Redfin, Weichert Realtors, United Real Estate and Howard Hanna Real Estate Services, claiming that they had committed a conspiracy, according to the Real Deal.

“This matter is not close to being final as we will appeal the jury’s verdict,” an NAR spokesperson told the Wall Street Journal.

“We are disappointed with the court’s ruling and intend to appeal,” a HomeServices spokesperson told MarketWatch.

“Today’s decision means that buyers will face even more obstacles in an already challenging real-estate market and sellers will have a harder time realizing the value of their homes,” they added.

“We disagree with the verdict but respect the jurors who decided the case based on the issues in front of them. We are disappointed that before the jury decided this case, the court did not allow them to hear crucial evidence that cooperative compensation is permitted under Missouri law,” Darryl Frost, a spokesperson for Keller Williams, told MarketWatch.

“This is not the end. Keller Williams followed the law regarding cooperative compensation and stands by the evidence presented on the 100-year-old practice of sellers’ agents offering commissions to other agents who help market and sell homes,” Frost added. “Looking forward, we will consider all options as we assess the verdict and trial record, including avenues of appeal.”

Ultimately, the verdict on the case “does not mean buyer commissions are a thing of the past,” Jaret Seiberg at TD Cowen Research Group, wrote in a note.

Before the case is even appealed, the judge must decide on the amount in damages, he added.

“The judge could conclude that commission-sharing can pass antitrust muster with a minor tweaks. If that is the case, then the impact may be limited as we expect most brokers will continue to offer commission sharing to boost interest in the property,” Seiberg said.

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