Showdown over real estate fees
The commission that U.S. home sellers typically pay to real estate agents is under fire, with the real estate industry accused of antitrust violations and extracting exorbitant fees.
Why it matters: Some legal experts predict that an antitrust lawsuit over brokers' fees will reach the Supreme Court — and say the many challenges to the current system could upend the market and make it cheaper to sell a home.
The big picture: One thing the challengers are seeking is "the uncoupling of commissions, so that both buyers and sellers negotiate and pay their own broker compensation," per the Consumer Federation of America.
- Only that change “can foster the price competition that exists in most other consumer markets,” the group says.
How it works: The seller's real estate agent typically charges a 5%–6% commission and shares it with the buyer's agent.
- A Justice Department settlement with the National Association of Realtors (NAR) — which will be finalized as early as mid-February — will make it illegal for a buyer's agent to characterize their services as free, as often happens.
- Real estate websites will have to disclose publicly what percentage of a sale the buyer's agent will reap.
- "The settlement will discourage blatant discrimination against discount brokers and the steering of buyers to high-commission properties," but doesn't go far enough, Stephen Brobeck, a senior fellow at the Consumer Federation of America, said in a statement.
Driving the news: Several powerful forces are going up against NAR and the rules governing home sales in various states:
- The Justice Department settlement was filed simultaneously with an antitrust lawsuit against the association in November, demanding changes to rules it called anti-competitive.
- Two lawsuits seeking class-action status, in Illinois and Missouri, were filed by plaintiffs who say they were overcharged as a result of NAR's system.
- REX Real Estate, a discount brokerage, is suing Oregon and other states that bar real estate agents from giving rebates to consumers.
Jack Ryan, founder and CEO of REX, is among those who argue that NAR's commission system suppresses U.S. homeownership rates and reduces overall household wealth. "This is a great David vs. Goliath story, both in terms of the odds but also in terms of the moral implications," he said.
- His company charges 2%–2.5% to sell a home, similar to the prevailing rates in other developed countries.
Of note: Real estate agent fees are a $100 billion-a-year business, per a 2019 Consumer Federation of America report. "These commissions — usually $15,000 to $18,000 on the sale of a $300,000 home — represent one of the most expensive products purchased by many consumers," the report said.
Where it stands: The lawsuits in Missouri and Illinois — filed by prominent plaintiffs' firms against NAR and an all-star cast of brokerages — are proceeding.
- In the Illinois case, Judge Andrea R. Wood "said the plaintiffs would have paid 'substantially lower' commissions if not for the rules established by the Realtors association and followed by the brokerages," per the NYT.
- REX's case in Oregon is also moving forward, and the company plans to replicate it in the 10 or so other states where brokers are not permitted to give fee rebates.
NAR — which has 1.4 million members — tells Axios it is confident it will prevail in the lawsuits and that the DOJ settlement largely just makes more transparent practices that were already in place.
- One change: "When you see listings online in the future, you will likely see the offer of compensation that brokers are offering to each other," Katie Johnson, NAR's general counsel, tells Axios.
- In an information page for brokers on the NAR website, Johnson says the class-action complaints "mischaracterize NAR rules and MLS policy."
- Brokers are advised: "Discussions regarding these lawsuits should be grounded in the bigger picture of the value of REALTORS® and the MLS system to both buyers and sellers."
What they're saying: Traditional real estate agents say that people who use discount brokers can get burned by low levels of service and marketing.
- "You get what you pay for," Andrea Paro, an agent at Compass Real Estate in Bethesda, Maryland, tells Axios.
Yes, but: People who support REX and its controversial CEO say that despite the crazy sellers' market — with existing homes commanding record prices — Americans could extract more wealth from their homes and have greater mobility if the fees were lower and more competitive.
- "I think this is going to trial and the plaintiffs win," said Rob Hahn, managing partner at the real estate consultancy 7DS Associates, who blogs about real estate under the name Notorious Rob. "You could be looking at $50, $70 billion in damages."
The bottom line: This is an issue we're likely to hear a lot more about — especially under a Biden DOJ.