Oct 31, 2023 - Economy

Federal jury verdict on broker fees rocks real estate industry

A for sale sign in Mastic, New York, in 2018. Photo: Steve Pfost/Newsday RM via Getty Images

A federal jury in Kansas City on Tuesday found the National Association of Realtors (NAR) and some of the largest real estate brokers in the country guilty of colluding to inflate real estate commissions.

Why it matters: The verdict is a major shake up to the U.S. real estate market and could change how Americans purchase homes, or specifically, how they pay for broker fees.

The big picture: The jury, after around two weeks of testimony from the plaintiffs and defendants, ordered the NAR and real estate franchises HomeServices of America and Keller Williams to pay $1.78 billion in damages to the sellers of more than 260,000 homes in Missouri, Kansas and Illinois — the plaintiffs in the case.

  • The case is just one class-action lawsuit against the defendants, and the guilty verdict, if upheld, could spawn new legal actions in other states.

What they're saying: Representatives for the NAR and HomeServices of America said they planned to appeal the verdict, while a spokesperson for Keller Williams said the company would consider appealing.

  • Mantill Williams, the NAR's vice president of communications, said the organization stands by its Clear Cooperation Rule, adding that it will ask the court to reduce the damages awarded by the jury.
  • "It will likely be several years before this case is finally resolved," Williams said.

Catch up fast: At the heart of the lawsuit is broker commissions, or the fees paid by home sellers to brokers for executing transactions or providing other services — like schedule property showings — which are generally factored into the listing price of a home.

  • Specifically at issue is the seller's fee payments to the buyer's Realtor, which are in part governed by the NAR's Clear Cooperation Rule, Axios' Emily Peck reports.
  • The rule requires sellers to include a fee offer to the buyer's agent when listing a home. The fee offer is visible to the buyer's agent, but prospective buyer usually do not get access to them.
  • Real estate agents generally must become members of the NAR, one of the largest trade associations in the U.S., to gain access to most local real estate databases.

Zoom in: The plaintiffs argued that the rule effectively creates a conspiracy that artificially drives up home prices, as agents can steer their clients to properties that offer compensation.

  • The rule, they argued, requires sellers to pay inflated commission rates at closing — potentially by tens of billions of dollars annually.
  • Americans paid over $85 billion in residential real estate commissions in 2020, according to the Department of Justice, which previously investigated the NAR for violations of antitrust laws.

By the numbers: After news of the jury's decision broke, real estate stocks dropped on Tuesday, particularly those for online real estate companies, like Redfin.

  • Zillow shares dropped over 7% at one point, while Opendoor stock fell by over 9%.

State of play: When the lawsuit was originally filed in 2019 it included Anywhere Realty and Re/Max as defendant, but they agreed to scale back their relationship with the NAR and pay a total of $139 million in damages as part of a settlement.

  • The judge overseeing the case still has to issue a final judgement in the case, which could alter or even ban the cooperative compensation ruling nationally.
  • Depending on the judgement, it could mean that home sellers will not be responsible for paying the commissions of both the listing and buying brokers.

Go deeper: Report warns of a real estate "climate bubble"

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