A jury in Kansas City, Mo has found the National Association of Realtors, Keller Williams and HomeServices of America guilty of colluding over commission rates. The damages are currently hovering at a staggering $1.8B (yes, with a B) and may increase to as much as $5 Billion as the possibility exists of treble (triple) damages. So what all happened?
Around 500,000 home owners in Missouri joined this landmark class action lawsuit claiming that NAR's Clear Cooperation Policy indirectly coerced seller's into paying for buyer agent representation for the buyers. The suit, filed originally in August 2019, claims by the standard practice of the seller paying the listing brokerage, who then splits that compensation with the buyer's brokerage (and thereby buyer's agent) the seller was being forced into paying for the buyers representation. Is this true? Well, as with most things, it's complicated. Let's take a standard real estate transaction, at 5% total commission, and break it down from there. Let's say the house is a $500,000 house to keep the math easy.
$500,000 x 5% = $25,000 Now, let's split that down the middle and say it's divided evenly (in the listing agreement) half and half, between listing and buying agent's brokerages. That leaves each side with $12,500. The jury in Missouri, finding for the plaintiffs, felt that it was essentially fixing the system by forcing sellers to pay for the buyers representation. They felt they should have been offered the ability to pay for their representation, and leave the buyers to their own accord to pay their agent. This finding, on a surface level, makes sense but the more we dive into it the more holes that theory may have. Not only that, it may move the dream of homeownership further away from the most vulnerable of buyers. First, VA loans. This could all but exclude VA buyers (veterans) from fair representation as VA loans do not allow the buyer to pay real estate agent commission. The below snippet is taken from the VA's own website, found here.
Second, First Time Buyers. You have my heart, you truly do. It's like this process could not have gotten more expensive and more difficult at the same time, and bam, in one fell swoop, it just did. You have possibly sat on the sideline through the influx of activity created by sub 3% mortgage rates and were saving for your down payment, and may now be forced with a tough decision. So, let's say you are working with that $500,000 purchase, and you happen to not be a licensed real estate agent. You will need professional help, and way more than simply having an attorney can provide. You are putting 10% down. You are buying points down because rates are hovering around 8%. You are now being asked to cover that $12,500 out of pocket. Before all is said and done you are paying upwards of $100,000 out of pocket before you even walk through the threshhold as a homeowner. Silly. How can this negatively impact sellers? Simple. This lawsuit can allow us to be pennywise, pound foolish. Buyers who can not afford the agent representation will only be able to see homes that A. the listing agent can personally show (opening the industry up to dual agency lawsuits in the future) or B. listings that have open houses. Gone will be the days of a house going on the market and having an accepted offer in under one week. Gone will be the days of easy showings benefitting both buyer AND seller. Secondly, agents will now have to include that information in the preparation of their CMA (comparative market analysis). So that house down the street that just closed at $500,000 paying 5% total cooperative commission, that will need to be accounted into pricing your home. If you are choosing to not pay a buyer's agent, your supported sale price will reflect that and be reduced by whatever percentage the other comp, who did offer buyer agency cooperation, offered. What's more is the appraisal process will be more complicated as the appraisers will have to also line item factor If you are a seller thinking you just found an easy way to bolster your bottom line by cutting the fat, you may be sorely mistaken. Do realtors earn too much? Would a sliding scale of commission work better? Should buyer agents work on flat fees? Perhaps. But, in my humble opinion, the only one winning big here is the firm representing the plaintiffs, and the biggest loser here will be the buyers, especially first time and VA. I'll be posting more on this in the near future, especially as NAR likely files an appeal and moves higher through the court system.