If you’ve sold a home in the past you know that sellers typically pay a 5%-6% real estate commission, with about half (2.5%-3%) paid to the agent who represents the buyer. This “sellers pay the buyer’s agent” commission structure goes back as far as I can remember, even before my dad (Chubby) built his Cincinnati real estate firm in the 1940s.
Is it fair that home sellers have to “foot the bill” so buyers can have an agent help them? Is it fair that home sellers have to pay the agent whose job is to protect the buyer? This “sellers foot the bill” structure has never been seriously questioned… until recently.
It happened with the filing of two lawsuits. Both challenge the fairness of sellers having to pay buyer agents, arguing that this effectively doubles commission rates from 2.5%-3% to 5%-6%, costing home sellers billions of dollars in exorbitant and unfair sales cost.
One of the lawsuits was filed by Josh Sitzer and Amy Winger (the “Sitzer” lawsuit). The defendants are the National Association of Realtors, several of the largest national real estate firms, and many large multiple listing services (MLSs). Sitzer alleged that the commission sharing practice between listing agents and buyer agents, as facilitated by existing MLS rules, violates the Sherman Antitrust Act by inflating (effectively doubling) real estate commissions paid by home sellers.
This lawsuit alleges that listing agents commonly tell sellers that if they fail to include the “expected” buyer agent commission in the total commission, the number of showings will be diminished and the sale price will likely be lower.
A couple weeks ago Judge Stephen R. Bough granted the Sitzer lawsuit class certification, saying, “The Court agrees with Plaintiffs that a class action is the superior method for fairly and efficiently adjudicating the controversy.”
That decision sent shock waves through my industry. Hundreds of thousands of home sellers are demanding reimbursement for billions of dollars in commissions they paid to buyer agents. They are also demanding that the MLSs no longer be allowed to require an offer of compensation to buyer agents.
It’s interesting that MLSs don’t dictate how much listing agents must offer buyer agents. The rules only require that there be some offer of compensation, even if it’s $0.
The problem, according to Sitzer, is that there is an unwritten expectation that listing agents need to offer the “standard and expected” buyer agent commission or those agents won’t show the property… and that this is what sellers are told by listing agents to justify the 5%-6% commission.
Another lawsuit virtually identical to Sitzer was filed by Minnesota home seller Christopher Moehrl (the “Moehrl” lawsuit). After Moehrl filed his lawsuit, prominent real estate news outlet, Inman News, posted the headline: The bombshell lawsuit that could undo the US real estate industry.
The article said, “A home seller has filed a class action lawsuit challenging a principal tenet of how the real estate industry works in the U.S. as well as one of the main reasons behind the existence of the multiple listing services: the sharing of commissions between listing agents and buyer’s agents.”
It went on to say that this commission sharing practice is looked at as standard, expected, not practically subject to negotiation by consumers, and therefore violates the Sherman Antitrust Act “by requiring listing agents to make a ‘blanket, non-negotiable offer of buyer agent compensation’ when listing a property on the MLS, referred to as the ‘Buyer Agent Commission Rule.’”
Both the Sitzer and Moehrl lawsuits allege the same thing…that the Buyer Agent Commission Rule unfairly inflates costs for sellers because it requires them to pay a substantially higher commission than they would if buyers paid their own agents directly.
After the Moehrl lawsuit was filed CNN ran an article with the headline: The Internet didn’t shrink 6% real estate commissions. But this lawsuit might.
The CNN article continued, “It’s 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 buyer agents are rare.” In many countries, real estate commissions range from 2%-3%, with buyers using online home search portals to find properties and then connect directly with the sellers’ listing agent to effect the purchase.
One of the allegations in both lawsuits is that forcing sellers to pay buyer agents is equivalent to them “paying the competition” because buyer agents are working in the best interest of the buyer and not the seller.
The lawsuits don’t suggest that buyer agents are not deserving of compensation. In my view buyer agents often work harder than listing agents, especially in this “hard to find homes” market. But whether buyer agents deserve to be paid isn’t the point. The question is whether it’s fair that an existing structure reinforced by long standing tradition effectively forces sellers to pay buyer agents.
The Consumer Federation of America believes it’s so unfair that homesellers pay buyer agent commissions that they are now advocating it should be legally prohibited. They point to a recent report that found the vast majority of commissions are almost identical in 35 U.S. cities… a clear indication that there is a “standard buyer commission” that sellers feel obligated to pay.
There are two big questions circulating in my industry. If sellers no longer pay buyer agents, will buyers write a check for 2%-3% of their purchase price to have representation? Or in the alternative, will buyers decide to save the money and buy directly from the listing agent?
Most in my industry believe buyers won’t write the check to have separate buyer agent representation, and therefore buyer agents may cease to exist. That’s the way it is in many countries including Australia and the United Kingdom where sellers typically don’t pay buyer agents and the total real estate commission is 2%-3% instead of 5%-6%.
If future home sellers pay 2%-3% instead of 5%-6%, then the total amount of commissions received by the 1.5 million Realtors in this country will be cut in half. This will cause a massive shakeout of real estate agents and real estate firms.
The potential for massive disruption and restructuring of the real estate business, one of the largest industries in America, comes down to one simple question:
Will buyers foot the bill?
Watch 72SOLD CEO Greg Hague’s morning news TV interview on the effect of today’s fast-rising interest rates on home values.