Realtors face billions in damages for overcharging home buyers and sellers


Things are not OK in Realtorland. The US housing market is still reeling from pandemic-era shocks, home sales are stuck in a rut, and mortgage rates, while inching downward, are still near two-decade highs. It’s a bad time to be a buyer, and maybe a worse time to be a seller.

Despite all this upheaval, there’s another story brewing in which the stakes for everyone in real estate, from agents to the average consumer, are even higher. It won’t have anything to do with the debate over whether you should put your hard-earned cash toward rent or a down payment. Instead, it’ll be about court cases.

The biggest threat facing the industry is a mounting wave of class-action lawsuits that accuse the National Association of Realtors, along with some of the country’s biggest real-estate brokerages, of conspiring to rip off consumers by keeping the commissions paid to agents unfairly high. These cases are expected to reach major milestones in the next year, and the ramifications could be staggering: Tens, if not hundreds, of billions of dollars hang in the balance. Hundreds of thousands of Realtors could see their commissions slashed, which might force many out of the business. The old way of buying and selling homes could go away forever.

2024 will mark the beginning of a great experiment in real estate. The status quo won’t change overnight — there will be more courtroom showdowns before that happens — but some forward-thinking brokerages and agents, as well as a handful of startups, are already trying to figure out what comes next. Things are about to get really weird — and for American homebuyers, that could be great news.

The old way in jeopardy

If you’ve bought a home, you probably never cut a check to the agent who held your hand through the ordeal. For decades, agent commissions have been mostly out of sight and out of mind for homebuyers. But in 2024, many buyers and sellers may have to start thinking hard about just how much they’re willing to pay their real-estate agents.

When a house trades hands, the money usually works its way down a circuitous path — the buyer pays the seller, who uses a slice of that sum (usually 5% to 6% of the final sale price) to pay their agent, who then splits that money with the buyer’s agent. I’ve previously written about why the system works this way and the arguments for and against the model, but as a recap: Consumer advocates say this setup discourages market competition between agents. If you’re a buyer, you want to pay as little as possible, but your agent stands to make more if the home price goes up. Plus, it’s the seller who decides what percentage each agent will make before even listing their house. As John Kwoka, an economist and antitrust researcher at Northeastern University, told me: The incentives aren’t aligned.

There are going to be real-estate agents who are not able to articulate, let alone demonstrate, their value. Those folks will probably be out of the business very quickly.

On the other hand, the NAR argues the system is designed to get a deal closed as efficiently as possible. When an offer comes in, there’s no bickering over commissions — everyone already knows who will get paid what. And the NAR, as well as the brokerages named in the lawsuits, has maintained that commissions are always negotiable. If you’re a seller and you want the agents to split only 1% of the sale price — or even 0% — you can do that.

The first major lawsuit to put this argument to the test, Sitzer/Burnett v. NAR, went to trial in 2023 — and it wasn’t pretty for the real-estate establishment. On Halloween, jurors deliberated for just a few hours before finding the defendants liable, siding with thousands of home sellers who claimed they’d been strong-armed into paying their agents the customary 5% to 6% of the sale price and dishing out $5.3 billion in damages.

And if the case has cracked open the door to major changes to the commission model, 2024 is shaping up to be the year it’ll be knocked down. The first thing to watch for will be an official ruling from the judge in the Sitzer/Burnett case, expected sometime in the spring. While the jury has already sided with the plaintiffs, the judge still needs to decide which kinds of actions the NAR and the brokerages will need to take to remedy the situation. In this case, it’s pretty clear what the plaintiffs and their lawyers want: They argue for “decoupling,” or changing the rules to make sure that buyers and sellers pay their agents separately. At the most extreme end, buyer’s and seller’s agents might be expressly prohibited from splitting commissions. The NAR has vowed to appeal the verdict, and said it expects arguments to take place later in 2024.

In addition to a ruling on the issue of decoupling, a larger case, Moehrl v. NAR, should reach trial in the last quarter of 2024. That suit involves sellers from a broad swath of the US, including Dallas, Phoenix, Philadelphia, and Miami, and damages could stack up to more than $40 billion.

Other class-action attorneys are bringing lawsuits as well. The two big cases so far have focused on home sellers, but a new case filed in November, known as Batton 2, takes aim at brokerages such as Douglas Elliman, Compass, and Redfin on behalf of a nationwide group of buyers. It’s not yet clear how big the damages could be in this case, but the sheer size of the plaintiff class points to a much-larger figure than that of the Moehrl case.

Meanwhile, the head plaintiff in the Sitzer case has filed another nationwide class-action suit against the NAR and brokerages that weren’t included in the original case, including Compass, eXp, and Redfin. While these cases won’t reach trial anytime soon, they put increasing pressure on the industry to find ways to settle, rather than risk years of time-consuming and costly litigation.

A new age of experimentation

Some real-estate agents may wait until a ruling from the judge in the Sitzer/Burnett case before changing their practices, or hold out hope until the last appeal has worked its way through the courts. Others have read the writing on the wall and are already starting to get creative with how they get paid.

“It’s a matter of allowing alternatives to be experimented with and see what sticks,” Kwoka, the Northeastern economist, told me. “We’re about to do that, ready or not.”

Even those who think the jury got it wrong are accepting that commissions are likely going to change. That group includes Brian Boero, the CEO of 1000watt, a brand and strategy agency that advises real-estate brokerages and mortgage companies. Boero said he’s busy prepping his clients for the reality of decoupling, a scenario that he expects to arrive “sooner rather than later.” According to Boero, the key for agents is to clearly explain to buyers what they do, how they get paid, and why they may need to start getting paid differently. In many instances, those conversations have been conveniently swept under the rug for decades.

“There are going to be real-estate agents who are not able to articulate, let alone demonstrate, their value,” Boero told me. “Those folks will probably be out of the business very quickly.”

Many buyer’s agents — at least the competent ones — will be fine. After all, despite all kinds of technological advances, more people are using agents today than they were before the pandemic.

“You would be foolish to buy a home without an expert helping you,” Boero said. “But I also think that a smaller, smarter, more professional real-estate industry is going to come out of this, and I think that’s a good thing.”

“In this new world order, the agent and the client will have the flexibility to negotiate something that makes sense for them both.”

The Good Brigade/Getty Images

Decoupling also opens the door to further experimentation with agents’ fees. Joe Stockton, an attorney who previously worked at Zillow and has spent years thinking about creative fee arrangements, described to me one possibility: a tiered system in which buyers pay more for progressively broader offerings. At the top would be the “white-glove service,” or what you might expect of a sought-after agent today — the market insights, the pavement pounding in search of the best deals, all those hours spent advising and consoling and haggling with the sellers. Something like this could command $250 an hour, like a good lawyer, but be capped at some percentage of the sale price, like 3.5%. The tier below would offer good service but wouldn’t go above and beyond, and would notably exclude all that initial legwork; the agent could step in once you’d already found your options online and would command a smaller fee, like 1.5% of the sale price. At the most basic level, an agent could charge $2,000 for just making sure that nothing goes awry — you’d get none of the hand-holding and advisory services, but you wouldn’t have to pay for them, either.

“In either situation, a one-size-fits-all compensation model and fee structure doesn’t make sense,” Stockton told me. “In this new world order, the agent and the client will have the flexibility to negotiate something that makes sense for them both.”

It’s a matter of allowing alternatives to be experimented with and see what sticks. We’re about to do that, ready or not.

Right now, agents are mostly incentivized to close a transaction quickly — a $10,000 difference in the sale price would shift the amount an agent gets paid by only about $300 on the high end. But there’s a world in which a buyer’s agent’s cut goes up if they’re able to knock $50,000 off the list price, or if they find you a deal below a certain dollar amount that meets your criteria. Similar incentives could be baked into the commission for a seller’s agent as well. Nic Johnson, the CEO of ListWise, is working on such a solution: The company proposes a model in which agents bid for listings, which effectively sets the terms for how much they want to make if they’re able to boost the price of your home. So while an agent might be guaranteed only a 0.75% commission if the home sells for a predetermined baseline price, they may stand to increase that cut by several percentage points if the price goes up by $50,000 or $100,000.

“You need to make it so that the agent’s pay meaningfully varies based on different sale prices,” Johnson told me. “To me, that’s really the important thing: making sure the agent’s incentives are aligned with the homeowner’s.”

This all sounds pretty good for regular buyers and sellers — lower fees, a clearer picture of what you’re paying for, and a greater emphasis on negotiating rather than accepting the status quo. An analysis from a senior fellow at the Consumer Federation of America estimated that American consumers could save as much as $20 billion to $30 billion every year if commission rates fell in line with those of other developed markets, such as Australia, the Netherlands, and the UK. But there may be downsides, particularly for buyers who might not have enough cash on hand to pay their agents out of pocket. There are possible solutions — industry bigwigs could push for changes to mortgage rules so that commissions would be folded into a loan, or sellers could agree to give buyers rebates so they can pay their agents after a sale closes — but they’re far from guaranteed at this point. In the absence of those kinds of fixes, some homebuyers might be forced to accept less help on their purchase or even decide to brave the market alone.

These kinds of questions won’t all be resolved in 2024, but this coming year will mark the beginning of an experiment that could alter real estate beyond the typical boom-and-bust forces of mortgage rates and home prices. It’s time to prepare for a new world that’s rapidly approaching — one in which tinkering with agents’ fees will migrate from the periphery to the mainstream.

“It’s a matter of driving out excess costs,” Kwoka, the economist, said. “But more importantly, it’s just a matter of allowing for new arrangements to see if they work.”

James Rodriguez is a senior reporter on Business Insider’s Discourse team.



This article was originally published by a www.businessinsider.com . Read the Original article here. .