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Let’s say you’re ready to sell your house. Trying to find a buyer and sifting through offers sounds like a nightmare, so you hire a real-estate agent. In exchange for their guidance, you agree to pay the agent 3% of the sale price, which they say is industry standard. Your agent advises you that in order to drum up sufficient interest in your home, you should also promise to cover the commission for the buyer’s agent — another 3% of the sale price.
This seems like a hefty chunk of change, but you go along with the setup since you almost certainly couldn’t navigate the transaction without some professional help. You get some glossy photos taken, hang a sign in your front yard, and wait for the offers to pour in. When the deal closes, however, you don’t cut a check to both agents. Instead you give 6% of your proceeds to your agent, who then splits that with the buyer’s broker.
As the money makes its way to all the players in the transaction, you may wonder: Why does it work this way? According to the plaintiffs of two massive class-action lawsuits, this circuitous method of paying real-estate agents is all part of a far-reaching scheme that is bilking home sellers out of billions of dollars every year.
The heart of the problem, according to the lawsuits, are the multiple listing services — local, online databases where agents share photos and detailed information about homes for sale. The MLSs are a central component of the US real-estate market, and the most critical tools that licensed agents have at their disposal — in fact, they’re one of the most persuasive reasons for even hiring an agent in the first place.
In order to access an MLS, listing agents must agree that money from the sale will follow the prescribed, serpentine path. But now two multibillion-dollar lawsuits — Sitzer et al. v. NAR et al. and Moehrl et al. v. NAR et al. — threaten to upend the entire system. The plaintiffs, representing a large swath of home sellers around the country, are accusing the National Association of Realtors and some of the country’s largest brokerages of using MLS rules to charge exorbitant fees and unfairly prop up agent commissions.
These lawsuits are finally coming to a head after simmering for several years, and if the plaintiffs succeed, they could rewrite the rules of how agents get paid. The seller might no longer pay out both agents’ commissions after the sale closes. Instead, a buyer would pay their agent directly. Proponents say these changes would increase competition among agents, dramatically lower commissions, and potentially save consumers as much as $20 billion to $30 billion a year. The defendants, led by the NAR, argue that the current setup actually favors consumers by providing broad access to an efficient real-estate market.
Despite the potentially earthshaking consequences, most local real-estate agents — who, to be fair, have more pressing short-term concerns — have largely ignored the cases. But if the plaintiffs prevail, these cases could radically reshape what buying and selling a home looks like, and they represent the biggest existential threat to the real-estate industry today.
The case for ‘decoupling’
When you buy a home with the help of a real-estate agent, paying for their services will probably be among the least of your worries — and agents are happy to have it that way. The rules are designed to make their commissions as inconspicuous as possible: Since the seller pays both agents, the buyer doesn’t pay anything up front. Until just a few years ago, Realtors were even allowed to tell buyers that their services were free. Of course, that’s not really the case. The buyer is the one coming up with the money for the property, after all. But the illusion helps agents preserve their commissions, the plaintiffs argue, since buyers don’t have to think about the fees, and sellers are incentivized to promise high commissions in order to get brokers to look favorably upon their properties.
The NAR argues that this is the most efficient arrangement. Buyers don’t have to pay out of pocket for their agent, and sellers benefit from closing the deal without delays over which agent gets paid what. But detractors, including the plaintiffs in the two lawsuits, say this setup forces sellers to pay inflated commissions to buyers’ agents in order to generate interest in their homes. And they say the defendants in the case — the NAR along with large brokerages like Re/Max, Keller Williams, Anywhere Real Estate (formerly Realogy), and HomeServices of America — have benefited from this shell game.
Ultimately, the rules of the MLS are the sticking points. What agents collectively refer to as the MLS is actually a web of roughly 600 independent, local databases around the country. Nearly 97% of these MLSs are owned or operated by local Realtor associations, according to court filings, and are governed by rules mandated by the NAR. The reach of the MLS is incredibly powerful — nearly 86% of sellers last year listed their properties on the databases, according to the NAR. In exchange for this access, the NAR requires sellers who list on an MLS to agree to the “cooperative compensation rule” — the expectation that the seller will pay a commission to the buyer’s agent.
The rule is the primary target of the two class-action lawsuits, both of which are seeking billions of dollars in damages. Sellers, the plaintiffs argue, had no choice but to list their homes on an MLS. This, in turn, meant they were forced to agree to the rules of the databases — including paying exorbitant commissions to buyers’ agents who might choose to pass over their properties if they didn’t. The first case to reach trial will be Sitzer et al. v. NAR et al., which was filed in Missouri and is scheduled for an October trial. Total damages in the case could reach nearly $4 billion. In the larger of the two cases, Moehrl et al. v. NAR et al., damages could total more than $40 billion. That case, which was filed in Illinois, would likely reach a trial in the first half of 2024. Brokerages named in the suits either declined to comment or did not respond to requests for comment.
Stephen Brobeck, a senior fellow at the Consumer Federation of America, told me that one of the biggest problems identified in the cases is what’s known as “steering.” Since agents representing buyers can see the promised commission for each home in the MLS, they can discourage their clients from viewing properties with unsatisfactory paydays. The NAR doesn’t set a minimum commission that listing brokers need to promise to their counterparts on the buyer’s side — technically, it could be as little as $1. But the going rate is typically between 2.5% and 3% of the total sale price, so anything below that amount means the sellers’ home could be less likely to get traction.
“They not only have to pay a buyer’s agent commission, but they can’t negotiate that commission,” Brobeck said of sellers. “Because if they lower that commission, research has shown that the house is less likely to be shown by the buyer-agents.” One study found that properties listed with sub-2.5% commission rates were 5% less likely to sell and took 12% longer to sell.
While the plaintiffs in these cases take aim at other rules that they say hinder negotiations over compensation, their primary goal is to “decouple” the commissions paid to the buyer’s agent and the seller’s agent. If each party just pays for their own agent directly, the theory goes, there will be more transparency and more incentives for clients to negotiate with their brokers.
“It just doesn’t make any sense for the seller to have to pay the buyer’s agent,” Brobeck told me.
Katie Johnson, the chief legal officer for the NAR, told me the current model benefits both buyers and sellers by encouraging cooperation between agents.
“Making an offer of compensation is good for the seller, because that is their listing broker making an offer to all the other professionals in the area to go to work, put your time and effort in finding this buyer, because you’ll get paid for the work,” Johnson told me. “I think that’s pretty intuitive.” Buyers, meanwhile, “benefit tremendously” because they don’t have to pay out of pocket for those expenses, Johnson said.
The NAR and its predecessors have periodically faced legal challenges over industry practices that critics say discourage competition and lead to inflated broker commissions. While the internet has broadened access to real-estate listings and the competition among agents has intensified over the past two decades, commission rates have remained stubbornly high relative to countries with comparable housing markets such as Australia, the Netherlands, and the United Kingdom. Nicholas Economides, a professor of economics at New York University and an expert witness for the plaintiffs in the Moehrl case, found that in those three markets, only about 5% to 20% of homebuyers used agents compared to 87% in the US. The buyers who did use agents typically paid 1% to 2% in commissions, compared to the 2% to 3% that’s common here. Sellers, meanwhile, paid 1% to 3%, compared to the 2% to 3% in the US.
There have been other legal challenges to the current commission arrangement, including an antitrust investigation against the NAR by the Trump administration that led to a settlement — but the system so far has remained largely intact.
“We will continue to fight these cases because the model that we are currently working with, first of all, has improved, iterated, and innovated over the last 50 years,” Johnson said. “It will continue to innovate. But it has always been lawful and serves the best interests of consumers.”
A ‘revolutionary’ shift
Depending on whom you ask, the pending lawsuits could either revolutionize or ruin the real-estate industry. But despite the billions of dollars at stake, the legal fights have mostly amounted to background noise — at least so far.
“Everyone’s not really paying that much attention,” Rob Hahn, a longtime consultant to local MLSs and Realtor associations, told me. “I think agents and brokers just figure, ‘We’ll solve this somehow.'”
That may end up being true, but the stakes for every person in the real-estate industry are incredibly high. The sheer size of the damages sought by the plaintiffs would undoubtedly wreak havoc on the industry’s largest players. But for regular agents, there would also be a reckoning. If buyers have to pay out of pocket for their agents, many might choose to not hire an agent at all, or just pay an agent by the hour for their insight. Agents would face more competition for clients and potentially depressed commissions. The current glut of agents would become more glaring, and a mass exodus from the industry could ensue.
The NAR argues that this would be a calamity for first-time and low-income buyers who don’t have the cash on hand to pay an agent upfront, and would therefore risk being deprived of that expertise. Brobeck, of the CFA, told me he believes the industry would be highly incentivized to find ways to allow buyers to obtain financing for their broker’s fees, the way they already finance their home. In some cases, sellers could still agree to pay the buyer-agent’s commissions. And because of the increased attention on commissions, both buyers and sellers would be more likely to negotiate those costs down, Brobeck said.
“I think the most successful, experienced, and competent agents will continue to be able to charge what they’re charging now,” Brobeck told me. “But the many agents who are inexperienced, less competent, less successful, will not be able to charge the going rate.”
If the typical total commissions for a real-estate sale were to fall to between 3% and 4%, instead of the customary 5% to 6% today, Brobeck estimates the potential savings for consumers could reach $20 billion to $30 billion a year.
But a victory for the plaintiffs is far from guaranteed, some experts say. Since the NAR doesn’t mandate that brokers representing the seller promise a specific amount to their buyer-agent counterparts, the plaintiffs will have to prove that requiring any compensation at all hurts sellers, David Eisenstadt, a managing director at Berkeley Research Group and a former senior economist at the Justice Department’s Antitrust Division, told me. The defendants could then argue something like this: If a seller is able to offer a commission of as little as $1, that’s basically the same as offering zero dollars, so that requirement really isn’t that onerous at all. The defense could also argue that sellers should pay the buyer-agent’s commission because they actually benefit the most from their service, Eisenstadt said — namely, bringing forth a buyer who’s willing to shell out hundreds of thousands of dollars for their home.
“There are really strong efficiency reasons for sellers to pay the buyer-broker commission at settlement, rather than the buyer,” Eisenstadt said.
On the other hand, Hahn, who now runs a startup focused on bringing the auction model to residential real estate, told me he’s doubtful of NAR’s chances of winning in court and believes some kind of settlement is likely. With the smaller of the two suits slated for trial in just a few months, the industry has little time to come to grips with what the future could hold.
“This is a real, serious threat,” Hahn said. “This is not a joke.”
James Rodriguez is a senior reporter on Insider’s Discourse team.