A federal jury recently determined that the National Association of Realtors engaged in artificially inflating commissions, marking a landmark ruling with the potential to bring about significant shifts in the real estate industry.
Last month, a Missouri federal jury concluded that the National Association of Realtors, along with several prominent brokerages, had colluded in a price-fixing scheme, artificially inflating the commissions earned by agents in each sale.
So, what are the implications for the Florida housing market? Here’s a comprehensive overview of what you need to know.
What was the lawsuit about?
The lawsuit focused on the organization’s regulations concerning commission sharing.
To enlist a property on the Multiple Listing Service—a digital database utilized by agents to discover available properties—the national agency mandates that seller’s agents provide a non-negotiable commission, typically ranging from 5% to 6%.
This commission is deducted from the sale proceeds and divided between the buyer’s agent and the seller’s agent.
“The home sellers in this lawsuit said ‘you are forcing us to pay these artificially high fees because you have all the power,’” said Lei Wedge, a professor of finance at the University of South Florida’s Muma College of Business.
While technically a seller has the option to refrain from listing on the MLS or propose a lower commission, Wedge noted that doing so would render it nearly impossible for them to compete within the existing system.
“All Realtors look on the MLS for the listings,” she said. “Most of the time, Realtors will only show homes that pay that 6% commission.”
What was the outcome?
The jury ruled in favor of the plaintiffs, awarding the group of home sellers $1.8 billion in damages, with the potential for this amount to increase to $5 billion pending the judge’s decision.
Despite the verdict, the National Association of Realtors intends to appeal the decision.
What does this mean for buyers and sellers?
The lawsuit has the potential to eliminate commission sharing, proposing a system where the buyer’s agent is compensated by the buyer, and the seller’s agent is remunerated by the seller.
Critics argue that this might impose an unwarranted burden on lower-income buyers, requiring them to cover this expense upfront in addition to their down payment.
Conversely, proponents suggest that such a change could lead to cost reductions by affording buyers and sellers greater flexibility to negotiate a fair commission, as opposed to adhering to the standard 6%.
“People are going to look more closely at what real estate agents do and what their value is,” said CB Williams, broker and owner of People’s Choice Realty Services LLC in Tampa.
What does this mean for real estate agents and brokerages?
Analysts from the investment bank Keefe, Bruyette & Woods suggest that agents’ commissions may experience a significant decline, potentially reaching up to 30%. Such a development could trigger a widespread exodus from the industry, leading to an estimated 80% reduction in the number of agents.
The repercussions of the litigation pose substantial risks for some of the nation’s largest brokerages, with the potential for massive financial losses.
In the aftermath of the $1.8 billion lawsuit in Missouri, damages are anticipated not only for the Realtors association but also for Keller Williams and HomeServices of America. In the same case, ReMax and Anywhere Real Estate were named as defendants, opting to settle for a combined amount of $140 million.
Comparable lawsuits have been initiated in Missouri, Illinois, Texas, and South Carolina, indicating a broader legal trend. Furthermore, the prospect of additional lawsuits looms on the horizon. As of now, no lawsuits related to this matter have been filed in Florida.
What happens next?
With one of the rules of the National Association of Realtors now identified as anti-competitive, there is a heightened possibility of increased scrutiny on the organization’s overall business practices.
“The truth is, most people don’t want to be a part of (the association) but it’s forced on them,” Williams said.
He highlighted that agents are obligated to pay dues to gain access to essential tools like the MLS and a digital master key, crucial for unlocking homes before each showing.
If the association loses its influence as a gatekeeper, Lei suggests that more individuals might opt to forego using a real estate agent.
“Buyers and sellers can now connect more easily through the help of the internet,” she said. “It’s like what happened with the old industry of travel agents. Now everyone just goes to Expedia or Travelocity.”
Florida Realtors, the state-wide association, did not respond to requests for comment.