🏠 The Class Action That Shook Real Estate
Article Update: 8/8/24
In an update to The Real Estate Broker Commissions Settlement, the National Association of Realtors has now settled, bringing the total settlement amount up to $730 Million. Wow, that’s a lot of commissions…
Who’s included in this settlement? Well, it’s actually three different settlements that you’ll be able to file for once (that’s pretty neat!). Below are the three different groups:
1) Anywhere, RE/MAX, and Keller Williams
2) Compass, Real Brokerage, Realty ONE, @properties, Douglas Elliman, Redfin, Engel & Völkers, HomeSmart, and United Real Estate
3) National Association of Realtors (NAR)
CAC will have a full settlement page coming soon… (we promise 🙏)
Keep reading for the full explanation of what happened 👇.
Settlements and a Seismic Shift in Commissions (3/28/24)
In today’s world, real estate holds a prominent position in the news and our daily lives. Whether you’re looking to buy your first place, that forever home or your 15th apartment complex, it’s pretty hard to watch the news or scroll IG or YouTube without someone telling you, “real estate is the key to wealth”. Well, a main player in the home buying/selling process has come under fire.
The Lawsuit
The residential real estate industry has long presented a paradox. On one side, it wields significant control over property marketing through nationwide multiple listing services (MLSs), prompting concerns about collusion and price-fixing, drawing scrutiny from entities like the U.S. Department of Justice. On the flip side, entering the real estate sales domain is competitive but relatively accessible, evident in the National Association of Realtors' (NAR) membership rolls boasting over 1.5 million agents.
Stephen Brobeck, a senior fellow at the Consumer Federation of America, asserts that the current real estate market lacks true competitiveness. He argues, "It’s not a free market right now," highlighting the absence of rate competition alongside the intense battle for clients. In a standard marketplace, he emphasizes, competition extends beyond marketing to encompass pricing strategies.
So what happened next?
A Seismic Shift
A Missouri federal jury in October 2023 delivered a verdict totaling $1.8 billion, holding the NAR and associated brokerages accountable for collusion aimed at maintaining inflated prices in, you guessed it, a major class action lawsuit. Given the antitrust nature of this, that number had the potential to inflate to $5 billion. This verdict brought significant attention to the industry, shining a light on opaque commission practices and monopolistic tendencies within the real estate market and sparking seismic shifts that promise to reshape it fundamentally.
The Settlement
To resolve the cases it is facing, the NAR recently announced a settlement, agreeing to pay sellers approximately $418 million and pledging to enact rule changes. One of those rule changes, viewed as a very important shift in the sales process, is barring sellers from disclosing compensation details on the MLS, a longstanding cornerstone of home marketing strategies. These changes are likely to start rolling out summer 2024 but will be gradual as this unfolds.
Let’s look at the workings of real estate commissions, how class actions affected real change, and how those affected can seek recovery and justice going forward.
Real Estate’s Commission History
U.S. Realtor commissions have ranged from 5% to 6% since the 1950s and are usually split between the seller’s and buyer’s agents, with the home seller footing the entire bill. And while the NAR claims that commissions have always been negotiable, in reality, it isn’t clear to homebuyers/sellers that this is the case due to long-standing norms.
Almost 9 in 10 home sales are handled by real estate agents affiliated with NAR. The organization, the country's largest trade association, requires home sellers to determine a commission rate, typically that 5-6%, before listing homes on its property database, known as the Multiple Listing Service, or MLS (which is then used by Zillow, Redfin, etc.).
Comparing that to other developed countries like the U.K., Australia, Netherlands, Singapore, Sweden and Norway, rates are typically below 2%, according to a 2019 Brookings study. Shown below is data reported by investment banking firm Keefe, Bruyette & Woods (KBW).
Source: KBW Research
Buyers opting for agent representation are expected to see a significant decrease in fee costs. Currently, U.S. commission rates rank among the highest globally. For instance, on a $500,000 home sale in the U.S., commissions typically range from $25,000 to $30,000— a notable difference compared to approximately $6,500 in the U.K.
Source: KBW Research
Impacts of the Lawsuit
This ruling stands to have a significant impact on both interested home buyers and sellers. Specifically, it could save home sellers an estimated $30 billion from the $100 billion in real estate commissions paid annually by Americans, according to KBW.
The settlement also makes a huge shift, with the NAR barring sellers from including compensation details on the multiple-listing service, which has long been the most important tool for marketing homes – and included in buyer (and buyer agent’s) math.
Experts believe that this will “decouple” buyer and seller agent fees, creating a win for consumers because it will create transparency around how commissions are set and paid and ultimately lower costs for both potential home buyers bidding on houses and lift the burden of paying all the commission by sellers. This increased transparency will make it easier for buyers to negotiate fees or bypass the use of buyer agents entirely as well.
The Payments
There are actually two major class action settlements that make up this lawsuit, listed below, that comprise the $418 million in damages owed by the NAR (Burnett and Moehrl, for ease of reference).
Burnett et al. v. The National Association of Realtors et al.
The class action lawsuit suit filed in the U.S. District Court litigated in the Western District of Missouri, has settled to resolve allegations against Anywhere Real Estate, Inc. f/k/a Realogy Holdings Corp. (“Anywhere”), RE/MAX LLC ("RE/MAX"), and Keller Williams Realty, Inc. ("Keller Williams") in a lawsuit that alleges the existence of an anticompetitive agreement that resulted in home sellers paying inflated commissions to real estate brokers or agents in violation of antitrust law. This case is now settled for $208.5 million – broken down here:
Keller Williams: $70 Million
Anywhere: $83.5 Million
RE/MAX: $55 Million
Total Amount: $208.5 Million
Moehrl v. The National Association of Realtors
What we know so far is that Compass just settled for $57.5M, leaving $152 million left for an appealing Berkshire Hathaway and others.
This case is ongoing and we will keep you updated as it progresses – check back soon!
Settlement payments and potential reductions in real estate commissions could have a significant impact on consumers and industry professionals. Payments from NAR and major brokerages, coupled with changes to commission structures, signal a seismic shift in industry dynamics. The aftermath of the verdict offers opportunities for innovation and disruption within the real estate market, with implications for buyers, sellers, and industry professionals alike.
Who Wins Here?
The settlement payments and potential decrease in real estate commissions holds considerable implications for both consumers and industry insiders. These payments and changes mark a monumental change in industry dynamics. The aftermath of this verdict presents avenues for innovation and upheaval within the real estate sector, and Consumer advocates believe that this will have benefits a number of groups:
1) Home Sellers:
🚫 No longer burdened with covering the entire commission for both buyer and seller agents.
🤝 Empowered to negotiate commission rates rather than just accept the standard 5-6%.
📉 Expected to see a 30% slash in the $100B in annual commission paid in the future.
2) Home Buyers:
🤝 Now given the opportunity to negotiate instead of automatically absorbing the typical 3% commission added to home price / closing costs.
❌ Able to opt out of agent representation completely - more in line with the rest of the world (Non-U.S. average is 33%)
3) Home Builders:
📈 Expected to experience a significant boon as the reduction in commissions alleviates the financial strain for builders covering agent commissions.
🏘️ Experts believe this will likely lead to more houses (something desperately needed) at slightly lower costs.
4) Startups:
🖥️ Positioned to leverage shifting market dynamics, such as increased transparency and heightened competition, to disrupt traditional brokerage models dominating the real estate industry (think Zillow, Redfin, etc).
If you sold your home – check back here soon!
We’re pulling together a settlement page to start help folks file their claims.
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