In recent years, the real estate industry has faced legal challenges related to commissions, particularly within the National Association of Realtors (NAR). These developments have significant implications for home buyers, sellers, and real estate professionals. Let’s delve into the key points:
The Actions
A recently proposed class action lawsuit alleged that the NAR, along with several corporate home brokerages, conspired to artificially inflate real estate commissions. Home sellers from 35 states claim that these practices violate U.S. antitrust law and increase the cost of homes for sale nationwide1. U.S. District Judge Andrea Wood in Chicago ruled that the NAR and other defendants would face the proposed class action lawsuit where the plaintiffs seek unspecified monetary damages under antitrust and consumer protection laws.
Simultaneously, the Antitrust Division filed a proposed settlement requiring the NAR to repeal and modify its rules. The changes aim to provide greater transparency to home buyers about broker commissions, eliminate misleading claims that buyer broker services are free, and allow filtering of multiple listing services based on buyer broker commissions.
While it denied any wrongdoing, on March 15th the NAR announced that they reached a proposed settlement to resolve the nationwide claims brought by home sellers.
The Issue
The heart of the matter lies in how sellers inflate home prices to compensate for commissions paid to buyers’ agents. These commissions, regulated by industry rules and practices, typically range from 5% to 6% of the house’s cost, with a portion paid to the buyer’s broker. But we need to understand what commissions are in the first place:
Commissions Explained
1. What is Commission?
Rather than hourly or weekly fees, most agents earn money only when a real estate deal successfully closes. This is known as commission.
2. Who Pays the Commission?
In the past, the seller often paid the full commission for both their own listing agent and the buyer’s agent (if the buyer has one). Now, sellers are not required to offer to pay for buyer’s agent commissions, though they still can.
3. How Much is the Commission?
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- Real estate commissions are negotiated on a case-by-case basis when the seller signs a listing contract with their agent and when a buyer signs a representation agreement with their agent.
- Commissions are always negotiable. Attempting to impose a standard, non-negotiable fee violates federal antitrust laws.
- The commission is usually a percentage of the final selling price.
4. Where Does the Money Go?
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- Buyer’s and seller’s agents split the commission between themselves and their real estate brokerages.
- The commission split can vary based on the original agreement between the agents.
- The commission covers various costs, including:
- Advertising
- Error and Omission insurance
- Other brokerage services
Moving Forward
In the ever-evolving landscape of real estate, significant changes are on the horizon. Starting mid-July 2024, all agents under the National Association of Realtors (NAR) will adopt new practices due to the battle over commissions. Among these changes, home buyers working with realtors will now be required to enter into written representation agreements during the home buying process.
As we move forward, we’ll diligently monitor any further updates and assess the impact of this litigation on the local real estate industry. Whether you’re selling or purchasing a home, rest assured that we’re committed to keeping you informed.
Disclaimer: This blog post provides an overview of recent legal developments related to real estate commissions. For specific legal advice, always consult a qualified attorney.
1: Proposed Class Action Lawsuit Alleges Realtor Conspiracy to Inflate Commissions