The National Realtors Association has been in the news recently for settling a class action lawsuit. The NAR is basically a trade association for those who work in the real estate industry. In this lawsuit, they were accused of charging heavy commissions from home sellers.
It was argued that certain rules and codes of ethics that they follow creates an anticompetitive environment in the market, meaning that it discourages competition and promotes monopoly over a product or service.
This is not the first lawsuit faced by the NAR, but this one is important because it might have implications for how realtors, homeowners and agents do business in the real estate industry. In this article, we will talk about how the lawsuit started, how it concluded, and what this means for real estate industry in the USA.
What is an anti-trust lawsuit?
When any one firm holds more market power, they start to have monopoly over the sector. Sometimes this happens when a big player outperforms and puts all other people out of business. Sometimes, it happens through big companies acquiring smaller ones, or merging with other big companies.
In such cases, the market price of the product or service is entirely controlled by one company, which is not good for the economy. It leads to anticompetition practices such as price fixing. It doesn’t allow consumers to choose the product they like. Hence, unlike in a free and fair market, in a monopoly, the customer is never right, their opinion doesn’t matter.
In the USA, antitrust laws are meant to prevent the monopoly of any one private player in a particular industry. It ensures that competition is encouraged in all sectors of the economy. So here, a ‘trust’ means a group of private entrepreneurs teaming up to form monopoly.
For example, in January 2023, Google faced an antitrust lawsuit for attempting to monopolize the digital advertisement industry, by using unlawful means to eliminate its rivals. The company has used such advertising strategies, that they are able to control both the supply and demand side of the sector.
Burnett et.al. versus National Association of Realtors et. al.
In this lawsuit, the plaintiffs claimed that the NAR have some rules in their Handbook and Code of Ethics that require home sellers to give fixed compensation for any agents who help them advertise the property. This leaves the sellers with less choice as to how they want to work with agents. They also claimed that the commissions are too high, and inflated.
How property brokers earn commission
Before the lawsuit, there was a typical way in which commission was fixed by the buying and selling brokers. A person who wants to sell their house could hire an agent. They would be required to pay about 6% of their earnings as commission to this agent.
On the other end, another person may have hired a broker for buying a house. These two brokers get in contact with each other and offer to split the commission. If the buyer likes the house, her broker will get that promised share of the commission.
Now, in light of these practices, here’s a list of rules, policies and practices that have been called into question during the trial.
- They asked other property listing platforms to not tell the buyers about the amount of commission their broker will earn if they buy a house through that platform.
- Brokers were allowed to present incorrect or incomplete information to mislead buyers into thinking that the service was free, that they didn’t have to pay any commission.
- Brokers were allowed to filter listings based on how much commission is offered, and exclude properties with lower commissions.
- Access to homes was limited to brokers who were affiliated to the NAR.
However, the NAR denied these allegations. In their version of events they claimed that their cooperative compensation policy was misunderstood. They maintained that they were in support of their current model of compensation, and believed it was good for consumers.
The $418 million settlement
On 23rd April 2024, both parties came to an agreement to settle the lawsuit with a sum of $418 million paid to the home sellers in damages. Earlier the judge had proposed an even larger amount of $1.8 billion, but then a lower amount was agreed upon.
What will happen to real estate commissions in the USA?
Until before the lawsuit, 6% of the price of a property was split between the buyer’s broker and the seller’s broker. Now that home buyers have more freedom in deciding compensation for brokers, there is quite some discussion on how this will affect property prices.
One would intuitively think, if buyers get to decide the commission, then they can lower the broker fees, and homes will get cheaper. But it’s not that simple. Sure, sellers would list more properties, since the fees for doing so are lowered. In that sense, with more properties on the market to meet the demand, prices might fall.
But they might not necessarily lower the prices. They might still choose to keep the prices same and keep the extra revenue for themselves. While it is difficult to predict how this will affect prices, we can say with some certainty that home sellers will be more confident to list their property and find buyers without the help of a broker.
There are many property management software platforms that connect buyers and sellers with no agents in the middle. As people find it easier to list their properties, these companies will probably get a larger customer base, and make quite a bit of profit out of it.
Yet another possibility is that seller brokers would find a workaround to charge their clients anyway. After the settlement, it won’t be possible for these brokers to convince their clients to pay the 6% commission, on the grounds that the buyer brokers won’t show their listing unless they got their share of the commission. Now that it’s not possible to do so, they might charge a flat fee on their services or try to get the full commission from the buyer’s pocket.
If you are interested in real estate news and trends, we hope you found this article informative. Keep reading!
