Ep. 107 - Will Real Estate Commissions Change After This Class Action Lawsuit?Nov 06, 2023
Real estate commissions have long been a standard part of buying and selling homes. Yet recent legal action is challenging the traditional brokerage fee structure and threatening to upend the system. For both home buyers and sellers, big changes could lie ahead.
Understanding the Lawsuits
Several major real estate brokerages were hit with class action lawsuits alleging that the traditional commission model forces home sellers to pay unfair and inflated fees. Plaintiffs argue that requiring the seller to pay the commissions of both the listing agent and buyer's agent, typically 5-6% of the sale price split between both sides, lacks economic justification.
The lawsuits claim these commissions are inflated, with the allegation being that the buyer's agent acts against the seller's interests by negotiating for lower prices. Hundreds of thousands of home sellers have joined the class action suits against industry groups like the National Association of Realtors (NAR) and large brokerage brands. Defendants argue these commission practices have been standard for over a century and provide value for all parties.
So far major brokers like Realogy and RE/MAX have settled for over $100 million combined. In October 2023, a federal jury hit NAR and other large brokerages with a $1.8 billion judgment. While appeals are expected, the lawsuits seem to be gaining traction.
Potential Changes for Home Sellers
If the suits continue succeeding, significant changes in real estate contracts could occur. Sellers may soon have choices added to listing agreements on whether to pay buyer agent commissions. Some sellers will likely opt to only pay their own listing agent.
This could incentivize more sellers to try to “save costs”, but it may also limit the buyer pool and lead to slower sales without buyer agent incentives. Those who value a quick sale with the widest buyer reach may still opt to pay both sides. Much will depend on listing agent counsel as these contract changes roll out.
Impacts on Home Buyers
For home buyers working with an agent, if the seller isn't paying their commission, they'll likely now pay an agreed amount to their agent directly. This could add to closing costs, which may be a challenge for first-time buyers in particular.
Without commissions guaranteed on the seller side, many buyers may be tempted to go agent-free. However, experienced buyer's agents can still provide key value during negotiations, inspections, and closing. Without this guidance, buyers risk overpaying or buying properties not properly vetted for defects.
The Bottom Line
This upheaval in the real estate space bears close watching in the months and years ahead as the impacts start to unfold. While the class action lawsuits may bring more choice and transparency around real estate commissions, they also risk dis-incentivizing buyer's agents from actively participating if their commissions are no longer secure. Without guarantees that seller's will pay their fees, many buyer's agents may be less eager to take on clients, limiting buyer representation. This could make the process more difficult for both new home buyers and sellers in different ways.
For buyers, the home search process may become more challenging to navigate without experienced representation to guide negotiations, inspections, and closing. Sellers may have to adjust to buyers making direct overtures without agents as intermediaries, forcing them to handle communication and vetting on their own. There is also risk of disruption to market activity if buyer's agents step back, which could slow home sales.
Overall, this is a period of transition with much uncertainty ahead. As with any major industry changes, extra diligence, research, and caution will be key for consumers in the months and years to come. While more choice and transparency around commissions may emerge, there could also be unintended consequences. Time will tell whether this shake-up actually benefits home buyers and sellers long-term, or makes navigating real estate more complex and risky. Change is here, but the jury is still out on the net impact to consumers.