Short-term Vs. Long-term Impact Of The NAR Verdict On Real Estate Commissions Lawsuit

Agent Advice
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Written by

Attila Szabo

Published date:

Updated: Feb 20, 2024 by

business people humanoi ai robot sittingMore recently, a unique verdict of $1.8 billion is making headlines that can potentially rewrite real estate history and turn the status quo upside down. Is the 6 percent real estate agent’s commission in jeopardy? Join us as we discuss the NAR commission lawsuit and its probable short-term and long-term impacts. So hang tight as we discover everything related to the NAR buyer commission lawsuit's inception, key players, aftermath, and possible ramifications!

 

Do professional local realtors have a place in this technology-driven world?

As the world changes and technology evolves at a breakneck pace, it’s only inevitable that many question the legitimacy of “old institutions.” For instance, why use travel agents when one can book a flight, accommodation, and everything related to a memorable vacation? The same approach applies to many other “obsolete” domains. No wonder we can’t escape the futuristic vision of automation replacing humankind. 

 

How about real estate? Can online platforms take over the place of the established and experienced local real estate agent? Is their commission justified in exchange for their vast knowledge of local and national real estate market trends, neighborhood know-how, and reliable experience in the homebuying and property-selling processes? Obviously, it’s up to you to decide. 

 

However, many parties involved in real estate transactions raised their eyebrows at the "exorbitantly" costly commission fees. Subsequently, they filed a lawsuit against the National Association of Realtors, resulting in the famous NAR commission lawsuit. 

 

What went down at the NAR commission lawsuit?

court law justice trial session imparcialOn October 31st, 2023, a Kansas City, Missouri, verdict was announced in one of the most mediatized lawsuits (first called Sitzer, then Burnett Lawsuit) to face the real estate industry in the last few decades. CBS News, AP NEWS, and CNN were filled with headlines heralding a possible new age in home sales. 

 

Some would go so far as to announce a ticking clock on the longstanding rules setting the five to six percent commission. Contrary to everyday belief, most agents earn their salary by commission and aren’t granted a regular wage.

 

Who were the plaintiffs, and what ailments did they have against brokerages and the NAR?

The plaintiffs, approximately 500,000 home sellers from Kansas, Missouri, and all across the Mid-West, assembled in 2019 to file a class action lawsuit against the National Association of Realtors, the agency responsible for managing most of the Multiple Listing Services (MLS). In a word, imagine the MLS as a technology that fuels property listing online platforms. 

 

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Artificially inflated commissions

close up house models percentageThe complainants alleged that the NAR and various distinguished and high-profile real estate brokerages, such as Re/Max, Keller Williams Realty, etc., conspired to keep commissions heightened at the expense of home sellers. This is the so-called “cooperative compensation agreement” basic NAR policy. 

 

As we all know, the home seller exclusively pays the 5-6 percent commission on the home value. Long story short, the property owner pays their agent (the seller’s agent), who, afterward, shares or splits the commission with the buyer’s agent. Only this way can home sellers gain access and list their assets on Multiple Listing Services, which, according to sellers, is an unfair practice.

 

NAR responds to conspiracy claims.

This was the tipping point when the plaintiffs sensed a “conspiracy.” According to them, the buyer’s agent receives payment on the sellers’ backs. In addition, the directly involved parties, the owner and the buyer, don’t have the opportunity to negotiate a fair price. The NAR replied that the model of the seller paying both the seller’s and the buyer’s agent is the traditional and most effective way to uphold order in the otherwise chaotic real estate market. Plus, commissions have always been negotiable. 

 

Who agreed to settle out of court, and which agencies went on with the lawsuit?

two lawyers shaking hands outsideThroughout the summer of 2023, several real estate brokerages settled out of court, establishing about $140 million in compensation paid by all the companies involved. These were Anywhere Real Estate Inc. (known as Realogy in the past), Re/Max, Corcoran, Sotheby’s International Realty, and Century 21. Secondly, they agreed to amend their company policies and business practices. Furthermore, they wouldn’t require its realtors to be NAR members for any longer.

 

Those who didn’t settle initially have to pay a more substantial compensation.

On the other hand, the other companies, most notably NAR, Keller Williams, and HomeServices of America, chose not to settle and went on with court hearings. This is how the heated NAR buyer commission lawsuit came into existence. The Missouri court trial took place in October, and after two weeks, the jury sided with the plaintiffs! In other words, the jury agreed with the home sellers that NAR and the other agency conspired to keep these commissions superficially high. 

 

As a result, the judge awarded the complainants $1.8 billion in damages. However, the judge can increase those damages to $5.3 billion in the foreseeable future.

 

As soon as the verdict was announced, NAR said they would appeal. Simultaneously, they pledged to fight for consumers’ rights and advocate homeownership. Therefore, the legal process is far from over, and we’re ahead of several years of trials and hearings.

 

What is NAR, and what does it stand for?

person holding cellphoneLet’s examine the main protagonist of the NAR homebuyer commission lawsuit! In the vast American real estate landscape, the NAR stands as a guiding beacon, steering the ship through stormy waters and ensuring that realtors stick to a standard code of ethics and professionalism. But what exactly are the responsibilities of this powerhouse organization?

 

The upholders of the code of ethics and fair pricing

With over 1.5 million US members (more precisely, 1,578,077 in October 2023), this colossal organization sets the bar high, demanding a commitment to integrity, fairness, and transparency from its members. The NAR has established a Code of Ethics that every realtor must pledge to maintain professionalism, honesty, and integrity.

 

Moreover, to keep its members on the cutting edge, the NAR takes on the role of an educational enterprise. Through workshops, seminars, and online courses, the Association guarantees that agents stay well-informed and equipped to navigate the real estate market.

 

NAR builds bridges between parties involved in a real estate transaction.

With strong political ties, the lobby group is critical in influencing laws and regulations that affect the real estate industry. Additionally, it works to establish an environment that promotes fair and sustainable practices. The National Association of Realtors is more than a faceless bureaucratic machinery regulating real estate brokers’ behavior. 

 

It is a force to reckon with that molds the industry, establishes ethical standards, and fights for its members. Last but not least, it guarantees that the American ideal of homeownership remains accessible and impartial to all parties involved. 

 

How did the Association respond to the NAR commission lawsuit?

Of course, the Association is not taking these allegations lying down, and the NAR buyer commission lawsuit is far from over. They argue that their policies assure fairness and collaboration among real estate specialists. Therefore, both buyers and sellers ultimately benefit from their practices. It’s a classic case of he-said-she-said, with the future of the real estate landscape hanging in the balance.

 

The plot thickens with the DOJ probe.

department of justice building signThe NAR buyer commission lawsuit couldn’t have come at more challenging times. The US market is already battered by high interest rates, skyrocketing property prices, construction material shortages, and general global inflation. To make things worse, around 1.6 million people’s livelihoods can be at stake. 

 

In December 2023, the NAR buyer commission lawsuit was brought to the federal court, where the US Justice Department and NAR lawyers faced off. The topic of the discussion was the Biden administration’s probe investigating the commissions of homebuyers’ agents. Critics declare that these compensations inflate housing costs. Moreover, it can create a monopoly. 

 

Analytics say that even with such a powerful lobby that NAR has, the series of investigations can’t be stopped. The appellate court in Washington will determine whether the Department of Justice Antitrust Division can proceed with the probe. Simultaneously, various real estate agents are involved in about ten private lawsuits countrywide.

 

What possible scenarios can we expect?

crossroad sign solutions realted namesSince the verdict on the NAR commission lawsuit apparently didn’t end the case, we can’t be sure about the ramifications and future consequences. All we can do is examine the highly probable income of the NAR homebuyer commission lawsuit. 

 

At this point, we know that lawyers for the Missouri plaintiffs, led by Michael Ketchmark, are preparing an initiative for an injunction to stop the commission-splitting practice so that it won’t be required when listing a home on MLS. However, this injunction motion could be applied nationwide as Michael Ketchmark plans to file it soon. It’s only reasonable to wonder whether the NAR is put in an inescapable corner this time. The Department of Justice backs lawyers for the plaintiffs. “Our goals are aligned,” said Mr. Ketchmark.

 

One thing is sure. Realtors, companies, sellers, investors, and all industry insiders closely monitor the proceedings as the NAR buyer commission lawsuit unfolds.

 

What is the short-term impact of the verdict on the US real estate industry?

caucasian male real estate brokerWe have already seen that several real estate companies and brokerages settled out of court. Besides agreeing to pay considerable compensation, they decided to make their business practices on commissions more transparent to the public. Plus, NAR membership is no longer obligatory. Are these companies ready to cut ties with the National Association of Realtors? Or is the NAR’s stronghold too tight and impenetrable? Those agents who aren’t members will still pay a substantial sum to get access to MLS.

 

Disclosure of information for home sellers is essential.

The NAR home buyer commission lawsuit hinged upon the hypothesis that homeowners willing to sell didn’t receive enough information to decide whether they wanted to use the aforementioned cooperative compensation structure. To fix this problem, judges can enforce NAR and brokerages to be more straightforward about their rules related to cooperative compensation. In addition, they must provide sellers with more varied options from which to choose.

 

Should buyers pay their own agents?

Some believe the real estate industry will learn how to keep the buyers and listing agents to lessen the impact of an eventual massive unemployment wave. The system must enable buyers to pay their agents’ salary (or commission) directly so no hidden fees will emerge later. So, this amount must be added to the sale price. But will it be commission-based? Or will buyers pay their agents hourly fees? However, this practice has virtually never been implemented on a more extensive scope in US history. 

 

On the other side, NAR warns that if buyers have to pay their realtors’ commissions upfront, it can affect, most notably, first-time home buyers and underrepresented minorities. For starters, they face financial difficulties right from the get-go, putting down payment aside. And we haven’t mentioned closing costs, appraisals, and inspections yet, which also add to the homebuyers’ budget.

 

One of the short-term repercussions of the NAR buyer commission lawsuit will likely lead to restructuring of how agents’ commissions are perceived. As a result, homebuyers’ expenses might drop, and the quality of agent services can increase.

 

What could be the long-term consequences of the NAR homebuyer commission lawsuit?

unemployment rate under glassHere again, we can only theorize based on given circumstances. If the complainants have their way again, this legal showdown could result in more transparency in the real estate market. Picture that you'll be able to compare commission rates effortlessly! Subsequently, you can make more informed decisions about the biggest purchase of your life, your lovely future home.

 

Massive unemployment and substantial loss of revenue could ensue.

Suppose the Department of Justice probe goes on and finds NAR and realtors culpable of keeping commissions inflated. This can result in over 50 percent of all agents facing unemployment nationwide. If the NAR commission lawsuit is successful, it will primarily affect homebuyers’ agents and buyer representation across the United States. In addition, the yearly commission pool of around $100 billion will diminish by 30 percent. 

 

Yet, the story won’t conclude there. If the cooperative compensation rule is terminated, other agencies that secondarily depend on commissions in the real estate industry, such as Zillow, will also lose a substantial source of revenue.

 

Home buyers can end up in a challenging situation without proper representation.

confused home buyer scratching head frontIs working without a buyer’s agent a viable option? Buying a home is an arduous undertaking. For this reason, we must ask ourselves. Is it fair to limit a home buyer’s scope of action? Wouldn’t they be exposed to the seller’s terms and conditions, whom an agent professionally represents? The situation can get out of hand, and the buyer will likely be pushed into a tough situation resembling a piranha tank. 

 

To a certain degree, the same rule applies to homeowners selling their property without a realtor. Is doing business without go-betweens, i.e., real estate agents and brokerages, a far-fetched utopia or something tangible in the future? Could we get along in their absence in the perplexing labyrinth of real estate finances

 

To amend the crisis, one of the most probable outcomes of the NAR commission lawsuit can be separating the buyer’s and seller’s agent’s commissions. At the same time, they will keep the negotiable nature of agents’ commissions.

 

Stay tuned! The NAR homebuyer commission lawsuit goes on!

 

Suppose you’re in the market seeking a new place to call home. Or you wish to dip your toes in real estate investments. In that case, keep your eyes on the headlines! The NAR commission lawsuit can potentially become a game-changer in real estate. Why would you want to miss out on this rollercoaster’s latest twists and turns?

 

In the meantime, happy house hunting – and may the odds be ever in your favor in this unpredictable world of property intrigue!

 

The bottom line

The NAR buyer commission lawsuit boils down to the Association's procedures concerning commissions and how they may affect both buyers and sellers. Will they abolish the cooperative compensation agreement? The US Department of Justice and the plaintiffs' lawyers in Missouri argue that the NAR’s regulations create an anti-competitive environment. In short, they limit consumer choices and inflate commission rates beyond reason. 

 

You can picture the situation this way, too. You wish to buy a home in a trendy neighborhood. However, soon, you realize that your trusted neighborhood real estate agency is playing favorites and jacking up the prices on your dream home. Will you go along with increased prices, restricted access to property listings, and artificially boosted commissions? Or will you take the case to court? However, the other side of the coin, i.e., choosing the "for sale by owner" route, also involves risks. Home sellers can lose substantial money if they don't or can't sell their assets at the right price. Secondly, if the property stays on the market for too long, it can become a less desired or suspicious listing. It’s a genuine dilemma.

 

Will this legal battle lead to a more buyer-friendly market, or will it preserve the status quo? Only time will tell, but one thing's for sure. The outcome could have ripple effects on how we buy and sell homes for years to come.

 

What do you think about the ongoing NAR commission lawsuit? Does it have legs, or will it be forgotten soon? Which side are you on? Do you believe real estate agent commissions are too high, or are they justified for the vast knowledge they provide? Please share your opinion in the comment section below! Also, share and like this article if you’ve found it helpful!

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