A landmark ruling against some of the most powerful players in the real estate industry could lead to major changes in how homes are bought and sold.
Last month, a federal jury in Missouri found that the National Association of Realtors and several large brokerages had conspired in a price fixing scheme that inflated the commissions agents earned from each sale.
So what does this mean for the Florida housing market? Here’s everything you need to know.
What was the lawsuit about?
The suit centered around the group’s rules for commission sharing.
In order to list a home on the Multiple Listing Service– an online database agents use to find available properties – the national agency requires seller’s agents to offer a commission. The industry standard is usually between 5%- 6%. That commission is taken from the proceeds of the sale and split between the buyer’s agent and the seller’s agent.
“The home sellers in this lawsuit said ‘you are forcing us to pay these artificially high fees because you have all the power,’” said Lei Wedge, a professor of finance at the University of South Florida’s Muma College of Business.
Though technically a seller could choose not to list on the MLS or offer a lower commission, Wedge said this would make it almost impossible for them to compete under the current system.
“All Realtors look on the MLS for the listings,” she said. “Most of the time, Realtors will only show homes that pay that 6% commission.”
What was the outcome?
The jury sided with the plaintiffs. The group of home sellers were awarded $1.8 billion in damages, though that number could spike to $5 billion depending on the judge’s decision.
The National Association of Realtors plans to appeal.
What does this mean for buyers and sellers?
The lawsuit could bring an end to commission sharing. Instead, the buyer’s agent would be paid by the buyer and the seller’s agent would be paid by the seller.
Some argue that this would place an undue burden on lower-income buyers since they would be forced to pay that cost upfront in addition to their down payment.
Others say this could bring costs down by giving buyers and sellers more freedom to negotiate a fair commission instead of defaulting to 6%.
“People are going to look more closely at what real estate agents do and what their value is,” said CB Williams, broker and owner of People’s Choice Realty Services LLC in Tampa.
What does this mean for real estate agents and brokerages?
Agents’ commissions could fall by as much as 30%, according to analysts at the investment bank Keefe, Bruyette & Woods. This could lead to a mass exodus from the industry, driving down the number of agents by as much as 80%.
Several of the country’s biggest brokerages could face massive losses as a result of litigation.
Along with the Realtors association, Keller Williams and HomeServices of America will also be on the hook for damages in the $1.8 billion lawsuit out of Missouri. ReMax and Anywhere real estate were named as defendants in that case as well, but those companies chose to settle for a combined $140 million.
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Similar lawsuits have been filed in Missouri, Illinois, Texas and South Carolina, and more are likely on the horizon. No suits have been filed in Florida yet.
What happens next?
Now that one of the National Association of Realtors’ rules has been deemed anti-competitive, it could lead to further scrutiny of the organization’s business practices.
“The truth is, most people don’t want to be a part of (the association) but it’s forced on them,” Williams said.
He noted that agents have to pay dues if they want access to crucial tools such as the MLS and a so-called digital master key that’s used to unlock homes before each showing.
If the group loses its power as a gatekeeper, it could lead more people to forgo using a real estate agent, said Lei.
“Buyers and sellers can now connect more easily through the help of the internet,” she said. “It’s like what happened with the old industry of travel agents. Now everyone just goes to Expedia or Travelocity.”
Florida Realtors, the state-wide association, did not respond to requests for comment.