Press on Justice Catalyst Law Case: The internet didn’t shrink 6% real estate commissions. But this lawsuit might
(Cross-posted from CNN)
After moving eight times as her husband’s job transferred them around the world, Lindy Chapman felt she knew a thing or two about selling real estate.
Unlike her first home purchases, by 2015 she could do most of the initial research online, narrowing her home search to a few contenders before even bothering with a Realtor. Plenty of agents, it seemed to her, no longer did enough work to justify the traditional 6% commission: 3% on the seller’s side, and another 3% for the buyer’s agent.
So by the time Chapman moved to Dallas — a particularly frustrating relocation in which she ditched her agent and bought a home that was for sale by owner — she got her own Realtor’s license, thinking she could do a better job and charge less for it.
“It was obvious on this move that the traditional system no longer operates in line with what the consumer needs in the 21st century,” Chapman said. “I literally had everything I needed in the palm of my hand to find homes and all the related facts. I just needed someone to open doors, write the contract, and connect me to schools and the community.”
But in trying to offer cheaper services to others, Chapman realized just how entrenched the commission structure is. When she listed homes for sale, the system boxed her in: If she didn’t offer the standard 3% to buyers’ agents, she worried they wouldn’t show the home to their clients.
“The client wants Netflix and the technology for Netflix is here,” Chapman said. “And it’s like Blockbuster saying, ‘no, this is the only way to watch videos.'”
A wave of disintermediation has squeezed margins in many sales and advisory professions. Travel agencies have shrunk from 100,000 employees in 2000 to 53,000 in America today, as websites like Expedia, Priceline and Kayak have allowed travelers to book their own itineraries. Financial advisors, who used to charge between one and two percent of the assets they managed for clients, have been shifting to fee-for-service models in order to compete with automated advisers and low-cost index funds.
Real estate agents have been a puzzling exception to that trend. Half of buyers now find their homes independently online, according to a survey by the National Association of Realtors. Yet 87% of them still end up retaining an agent, and the commissions rates have barely budged. According to data collected by the brokerage consulting firm T3 Sixty, the average commission has declined from 6.1% in 1991 to 5.1% in 2016, but most of the drop came in luxury homes. On a $310,000 house — the median home price in America — a 6% commission comes to $18,600, and it’s usually baked into the price of the home.
The ability to make a decent living has kept drawing people to the profession. The National Association of Realtors now has 1.36 million members, surpassing the previous height reached during the the housing boom.
It’s not always a full-time gig. About 6 million homes are sold in the US per year — amounting to just a few transactions per agent on average — but the median annual income for real estate agents is still $50,300, according to the Bureau of Labor Statistics. For decades, Realtors’ earnings have been maintained through an opaque structure that allows home shoppers to believe that the seller covers the agents’ costs, and that the consumer has little choice in the matter.
That entire system could crumble, if a trio of recently-filed lawsuits are successful.
In a complaint filed in early March in the Northern District of Illinois, five law firms teamed up to allege that high commissions were a result of collusion by the National Association of Realtors and the nation’s largest brokerage franchises in violation of federal antitrust laws. The firms include heavy hitters like Hagens Berman, which boasts work on cases including the state tobacco lawsuits that led to a $206 billion settlement, as well as Cohen Milstein, which co-led a case against Apple for monopolizing the market for e-books.
The class so far consists of just one person — a home buyer in Minneapolis. But the lawyers are currently recruiting more plaintiffs, and stand to gain millions in attorneys’ fees if a jury awards damages. In April, two nearly identical lawsuits were filed, one by two home sellers in Missouri and one by a Minnesota corporation.
On the other side of the suits, the National Association of Realtors is a powerhouse trade group organized in active chapters across all 50 states. It spent about $150 million on federal lobbying and elections in the 2018 cycle, according to the Center for Responsive Politics. More importantly, it also controls access to the Multiple Listing Services that Realtors need in order to list and show homes.
A NAR spokesman responded that the suit is “utterly without merit,” and that the current system “promotes efficiency and helps advance the best interests of all clients.” The association also distributed an FAQ for its members on what they should know about the case, saying that the complaint is “wrong on the facts, wrong on the law, and wrong on the economics.”
But it’s still sending shivers through brokerage offices, which have a lot invested in the status quo. Without it, the United States could end up looking more like Australia and the United Kingdom, where buyers’ agents are rare. In most developed countries, according to a survey by the discount brokerage Surefield, commissions range between 1% and 4%; buyers depend much more on online portals to find their desired home and seller’s agents can represent both parties.
“It kills the industry,” said Rob Hahn, a real estate marketing consultant with the firm 7DS Associates, who predicts the number of people in the profession would drop to just 200,000 if the lawsuit is successful. “A lot of things that we as consumers value go away.”
Why the 6% model has endured
The current way in which Americans buy homes is a combination of intentional design, historical accident and litigation.It all started in the late 1800s, when boards of local brokers convened at their meeting halls to swap information about properties their clients had for sale, hoping to find a buyer at the highest price.
In 1908, the predecessor to today’s National Association of Realtors officially created the “Multiple Listing Service,” a corporation owned by local agents, who contributed listings to a shared repository of available houses in a given market. As hundreds of MLSes sprung up across the country, listings were usually published in the form of a book, to which only licensed realtors had access.
Controlling information about properties for sale allowed the Realtors’ association to set rules for how the market functioned. It also allowed them to set up a way to get paid: The listing agent would stipulate to buyers’ agents what their cut would be if their client bought the house.
It’s not clear exactly how the rate came to be set at 6%, but the commissions were laid out in a schedule by local boards of realtors, whose codes of ethics forbade undercutting the prevailing rate. In 1950, the Supreme Court ruled that constituted an illegal price-fixing conspiracy. After that, there was no official rate, but 6% commissions lived on through unspoken rules.
Now, here’s why listing agents set the fees for buyer’s agents in the first place. Originally, the same brokerage usually represented both buyer and seller, so commissions went to the same place and were higher if the house sold for more money. In the 1990s, lawsuits mostly put an end to that practice, and buyers’ agents are now often assumed to represent their clients’ best interests. However, seller’s agents still set the commission rates, and the incentive structure remains in place: The higher the sale price, the more buyers’ agents get paid.
Other factors have pushed the industry to create this system and then maintain it. Brokerages that list homes usually also have buyers’ agents, and seller’s agents themselves often serve househunters, so they have an incentive to offer high commissions to the buy side as well. And, crucially, brokers know that buyers’ agents might skip showing a house if the listing doesn’t offer a full 3% commission.
“I’ve been in traditional offices, watching someone go through listings,” said Tom Wemett, a buyers’ agent in Western Massachusetts. “He immediately checks to see what they’re offered, and threw away two or three listings that might have been perfect for their client. The buyer doesn’t know any different, unless they’re searching on Zillow or Trulia and says ‘why didn’t you show me this one?'”
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