After a $1.8 billion verdict, the clock is ticking on the 6% real estate commission

Washington, DC (CNN) — Using a travel agent to buy a plane ticket or a stockbroker to trade equities seem like relics of the past. And yet, every day, people across America hire a real estate agent to help them sell a home. It’s one of the few industries that has been able to largely avoid the disruption that has helped consumers cut costs in the Internet age.

And that is largely because of the power of the National Association of Realtors, the largest professional organization in America and a significant lobbying group for the real estate industry.

But the verdict handed down in a Missouri court on Tuesday that found NAR and two brokerage firms, Homeservices of America and Keller Williams Realty, were liable for $1.8 billion in damages for conspiring to keep commissions artificially high, may mark the beginning of the end of how homes are bought and sold.

Two other firms initially named in the suits brought by home sellers – Re/Max and Anywhere Real estate, formerly known as Realogy, which is the parent company of Coldwell Banker, Century 21, Sotheby’s International Realty and Corcoran — settled out of court for a combined $140 million. As a term of the settlement, they each announced a commitment to make changes in their business practices — including not requiring agents to be members of NAR.

While state governments license real estate agents, NAR has an extensive code of ethics it expects members to adhere to.

NAR and the brokerages have vowed to appeal the verdict, which means real estate commissions aren’t going anywhere immediately.

NAR has been fighting off US antitrust officials and litigation for years regarding anti-competitive practices and this verdict is the association’s biggest setback yet.

This verdict is just from one of several lawsuits currently filed against NAR, which is also facing scrutiny from the US Department of Justice.

NAR has already faced a difficult year, setting aside the verdict and the troubled housing market.

In August, the NAR president, a member agent named Kenny Parcell, resigned amid sexual harassment allegations. Last month Redfin, an internet real estate company, left the association.

On the commissions, NAR has said they will appeal the verdict and that the issue won’t be resolved for years.

“This matter is not close to being final as we will appeal the jury’s verdict,” said Mantill Williams, NAR vice president of communications. “In the interim, we will ask the court to reduce the damages awarded by the jury.”

“This is not the end,” said Darryl Frost, spokesperson for Keller Williams.

What was the case about?

The cornerstone of the plaintiff’s argument is that NAR is forcing homesellers to pay an inflated commission that is then split between their agent and the buyer’s agent. The homesellers argued commission sharing as a condition for access to the Multiple Listing Service was unfair and kept commissions artificially high.

Typically, when a home goes on the market for sale, the seller offers their broker a set commission. For decades, the commission has consistently been around 6% of the sale price, usually with a 3% split for the buyer’s and seller’s agent.

In a competitive market, the homesellers argue, the cost of the buyer’s agent’s commission would be paid not by the seller, but by the buyer who received the service. The sellers said that the buyers should be able to negotiate the fee with their agent, and that the sellers should not be on the hook for paying it.

NAR and the other defendants argued in court that their commissions are always negotiable. They also said that the system of having the seller’s agent split the commission with the buyer’s agent allows buyers, who are already weighed down with expenses like a downpayment, closing costs, inspections and appraisals, to avoid the added expense of having to pay an agent as well.

Consumer advocates celebrated the verdict and hoped that plaintiffs would also receive their request for the judge to order changes to how commissions are structured in the industry.

While already large, the award could grow even more — to a total of $5 billion, depending on what the judge decides.

The jury clearly saw the industry had restricted price competition to a point where it could ensure nearly uniform 5%-6% commissions, said Stephen Brobeck, a senior fellow at the Consumer Federation of America. Jurors made their decision quickly, he said, deliberating for only a few hours.

“The extent of injunctive relief decided by the court will strongly influence whether a price competitive system develops that lowers consumer costs and increases quality of services,” Brobeck said. “We hope that the court will sever the ties between listing agent and buyer agent compensation, freeing sellers from the obligation and need to compensate buyer agents.”

Impact of commissions on buyers and sellers

Not much is expected to change in the near term with regard to how commissions are set, agents say.

The longer-term impact of the verdict may be that the pairing of buyer’s agent commission and seller’s agent commission will eventually be separated.

Analysts from Keefe, Bruyette & Woods, an investment banking firm, said in report released ahead of the verdict that the NAR litigation and related government action is likely to reshape the residential brokerage industry’s commission structure, by eliminating the buyer-broker commission rule, and eventually the practice of listing agents and sellers setting and paying buyer agent commissions.

And since the commission paid to an agent is typically baked into a home price, if they were reduced or were to become more negotiable, home prices could drop as well, they said.

“Short term nothing changes,” said Jen Davis, a Keller Williams agent with Holt Homes Group, in Springfield, Missouri. “Commissions have always been negotiable. That will continue to be the case.”

But there could be unintended consequences if changes come about, she said.

“There are buyers that aren’t going to know the steps to buy a home,” Davis said. “They have to pay for a down payment, closing costs, appraisals, inspections. If they also have to come up with money to pay for a buyer’s agent, some just won’t and they’ll get in over their heads or they won’t buy at all. Not having representation will make the market less inclusive.”

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