In line with the real estate commission, the judge rejects the request for arbitration
Looking back to 2022, the biggest real estate story may be a market downturn. But it could be a story that transcends economic cycles: a lawsuit that has upended the way sellers and buyers pay real estate agents.
This week, a federal judge in Missouri denied a motion by the National Association of Realtors, HomeServices of America, RE/MAX and Keller Williams to force arbitration in a class action lawsuit on behalf of hundreds of thousands of people who sold their homes.
At issue is an NAR policy that a home seller’s agent must split their commission equally with a buyer’s agent. The rule has been around since 1913 and, according to the consumers and their attorneys who brought the lawsuit (the main named plaintiffs are homebuyers Rhonda and Scott Burnett), it artificially inflated real estate commissions to 5-6% total of the home. selling price.
Consumers also claim that the nation’s largest brokerages are agreeing with NAR to maintain this commission scheme.
In April, Judge Stephen Bough certified a class of hundreds of thousands of housing consumers, a decision that was quickly upheld by the United States 8e Circuit Court of Appeals.
After their appeal was dismissed, the defendant’s next move was to invoke an agreement that a private arbitrator would settle any dispute between them and their broker.
Bough admitted that the plaintiffs had used Reece & Nichols Estate Agents to sell their home, a longtime Kansas City brokerage 100% owned by HomeMokan Services, which, in turn, is owned by HomeServices of America. But the judge argued that HomeServices waived its right to arbitration, first litigating the case instead of arbitrating it.
“HomeServices has filed a briefing on the plaintiffs’ motion for class certification,” Bough wrote. “HomeServices also appeared in oral argument,” while the company “failed to mention its right to arbitrate against unnamed class members in its responses and all of the defendants.”
The next step in the case is likely to be for the accused to file a motion for a pre-trial judgment. If this motion is denied, this case involving consumers in Missouri, Kansas and part of Illinois could go to trial. Or it may result in a settlement that changes the NAR policy.
Meanwhile, several other lawsuits against NAR relating to the commissions remain active. Additionally, the Department of Justice is in the second year of an investigation into US real estate commissions. The DOJ did not respond to messages this week regarding the status of their investigation.
HomeServices of America and NAR are increasingly taking the battle beyond the courtroom. On Monday, NAR released a commission study funded by HomeServices of America.
Written by financial services consultants Ann Schnare, Amy Crews Cutts and Vanessa Gail Perry, a professor at George Washington University, the study presents some arguments in favor of maintaining the current commission structure.
First, echoing NAR’s position, the authors argue that having the seller and buyer individually negotiate commissions would lower the price for many first-time homebuyers. This new financial imposition could disproportionately affect blacks and Hispanics, the study found, who already have significantly lower homeownership rates than whites.
The minimum down payment for a Federal Housing Administration loan is 3.5% of the sale price of a house, the author points out. Using the basis of a sale price of $250,000, if a buyer were to pay a 3.5% deposit plus a 3% realtor’s fee, the cash required at closing would increase by 42%.
Even if the commission rate dropped to, say, 1.5% per transaction, the buyer would still pay an additional 19% upfront.
“The households that would seem to need the services of a real estate agent the most and value them the most – specifically, first-time home buyers who have never gone through the process before – are the least able to pay their agents directly,” said the reasoned study.
The commission’s changes will then place an undue burden on homebuyers, the study says, or create a domino effect whereby changes are made to mortgage qualification.
“Changes to underwriting guidelines are complex processes that require regulatory approval and coordination among multiple parties throughout the mortgage supply chain,” the author writes. “The transition period would likely be disruptive, sporadic and prolonged.”
Proponents of changing real estate agent compensation would likely concede this point. But they argue that the change is worth it.
One of these defenders is the Consumers Federation of America, which published a report this week indicating that the commission rate does not drop when the selling price is higher. In 35 cities surveyed, a home that sells for $1 million pays each party the same percentage commission as a home priced at $200,000.
“At the same commission rate, brokers selling a $1 million home receive ten times the compensation of those selling a $100,000 home,” notes the study, authored by Consumer Federation senior researcher Stephen Brobeck. of America. “Yet scholars and real estate agents have questioned whether older brokers spent 10 times more money and time selling than late brokers.”
In fact, in eight of the 35 cities surveyed — including Dallas, Las Vegas and Miami — agents tend to be paid at one time. upper commission percentage – when the price of a house goes up.
The debate over commission rates comes as the rates themselves have remained stable over the past few years, even amid rapidly rising house prices. The rate hovered around 5%, according to RealTrends and PSTN advice data, ending at 5.06% in 2021, after reaching 4.94% in 2020.