Within the real estate industry, commission is one of the most hotly debated topics. Real estate is one of the few remaining industries that is primarily commission-based. While real estate agent commissions are always negotiable, most commissions tend to fall within the 5% to 6% range. This commission is traditionally split between the buyer's agent and seller's agent but paid by the seller out of the sale of the home.
A lawsuit that takes aim at that concept recently received approval to proceed from a federal judge in Illinois, the home of the National Association of Realtors (NAR). Moehrl v. National Association of Realtors et al. is a lawsuit that could become a potential class action in Illinois. It alleges commission splits and multiple listing service (MLS) organizations are inherently anticompetitive.
The suit was filed on behalf of home sellers who paid a commission within the last four years. It involves 20 different MLS groups, as well as the four largest real estate brokerages: Realogy (NYSE: RLGY), HomeServices of America, RE/MAX (NYSE: RMAX), and Keller Williams. Both the NAR and the corporate brokerages filed motions to dismiss, which were denied by U.S. District Judge Andrea R. Wood. In her decision, she notes the plaintiff's allegations do "plausibly show that the Buyer-Broker Commission Rules prevent effective negotiation over commission rates and cause an artificial inflation of buyer-broker commission rates."
The original complaint was filed in March 2019. It takes issue with the perception that many consumers think of the buyer's agent as being free, while the seller is paying the full commission. The suit alleges that a "conspiracy has centered around NAR's adoption and implementation of a rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation" when putting a property on the MLS. The suit says the existing Buyer Broker Commission Rule limits price competition among buyer brokers because the consumer can't negotiate the commission with the buyer's agent.
Does an MLS hide information consumers need to know?
One facet of the suit questions the listing of commission breakdowns inside the MLS. When a property is listed on an MLS, there is often a section called "agent remarks." This section is only visible to other agents and brokers and can contain information about commissions, specifically if there is a commission split that may result in a smaller commission for the buyer's agent. This, the suit says, could result in some agents steering clients away from properties where they know they will receive a smaller commission.
Another part of the suit says the buyer's agent commission itself may be too high. It cites the trend of many buyers discovering homes themselves through websites like Zillow (NASDAQ: Z) (NASDAQ: ZG) or Redfin (NASDAQ: RDFN) as a sign the buyer's agent role is diminishing and the commission may be too large. While this is a very reductive conception of what a buyer's agent actually does, it may be one that resonates with many consumers.
The plaintiffs are currently seeking three main things: class-action status for the lawsuit, damages for overpayment of commission, and an end to having seller's agents pay commission to buyer's agents.
It's that last request that could completely upend the real estate industry. While Redfin and other brokerages currently offer a reduced commission, the bulk of the industry still maintains the existing commission structure. Should the plaintiffs win this suit, there's the potential for massive change within the residential real estate industry. Even if the plaintiffs are not victorious, the suit itself and its media coverage have called into question existing practices. This might be good news for any real estate investor seeing to negotiate a commission.