Real estate commission system is under fire

By: Michael L. Diamond
Asbury Park Press
USA Today Network

..... Home sellers in New jersey long have been responsible for paying the commission on a real estate transaction both for their own agent and for the buyer's. But that arrangement is coming under fire after lawsuits alleged the setup is anticompetitive and leaves sellers paying for too much.
..... The cases are winding their way through court, but they are prompting the industry to rethink what it would look like if each party paid commissions for their own agents. Sellers could pay less. Buyers could pay more. But consumer groups say it would be the first step to increase competition and eventually lower costs.
..... "Essentially, it's important to completely separate the listing agent compensation and the seller from the buyer,"said Stephen Brobeck, senior fellow for the Compuserve Federation of America, an advocacy group. "But that condition alone is not sufficient to ensure price competition."
..... The issue of real estate agent commissions was put in the spotlight recently after a jury in Missouri found that the National Association of Realtors, HomeServes of America and Keller Williams conspired to keep commissions artificially high. The jury awarded $1.8 billion in damages, a figure that could have rise to 45 billion under antitrust rules.
..... The verdict isn't final, and the Realtors group said it will appeal.
..... Another class-action lawsuit with similar allegations has been filed in Illinois.
..... New Jersey real estate agents are keeping a close eye on the outcomes. If the changes went into effect now, they said, sellers could get relief, but buyers, already facing record-high prices and the highest mortgage rates in 40 years, would face another cost.
..... It means a buyer paying a 2% commission on a $500,000 home would need to come up with another $10,000.
....."There's not a lot of inventory, and buyers are absolutely getting hammered right now,: said David "DJ" Ten Hoeve, an agent with Keller Williams Realty in colts Neck. "So the thought of them now having to pick up an additional 1% to 3% commission on top of what they're paying in closing costs, rates, all of that stuff just seems like it;s an impossibility."

How the system works

..... Home sellers aren't required to hire a broker, but most do. The seller's agent typically lists the home on the Multiple Listing Service, where buyers' agents can see what's for sale in the area.
..... The seller's agent negotiates a commission with the owner - usually 5% to 6% of the sale price - and decides how much, if any, to share with the buyer's agent. the buyer;s agent doesn't receive a commission directly from his own client.
..... Bryan Hunchison, chief executive officer of the Monmouth Ocean Regional Realtors, said the listing service, a nonprofit that is maintained by the association's members, is an efficient way for sellers and buyers to come together in one marketplace.
..... "The cooperative availability of property is really what the MLS is," Hutchison said. "The MLS is a data depository. It's a facility that is intended to cerate a consumer-friendly model for brokers to both compete with each other and cooperate together."
..... Two class-action lawsuits filed in 2019, however, said the existing system is anticompetitive and keeps commissions artificially high. the case in Illinois takes aim at the Buyer Broker Commission rule that the National Association of Realtors established in 1996.
..... The rule requires sellers' agents to compensate buyers' agents. In a completive market, the buyer would pay their agent; commission, the lawsuit says.
..... Critics say the rule:
* Eliminates price competition that would come from the negotiating power that buyers could bring to the table.
* Incentives buyers' brokers to show clients not the best home for them, but the house being sold with the highest buyer's agent commission.
* Leaves consumers with few alternatives. The National Association of Realtors requires members to comply with the commission rule as part of its code of ethics. If brokers and agents don't follow suit, they can lose access to the MLS, a service that the lawsuit says is a "commercial necessity."
..... The structure has kept average commissions near 5%, even though technology has made the home-buying process more efficient and the number of real estate agents has climbed, making competion mroe intense, according to a 2019 report by the Brookings Institution a Washington, D.C., think tank. by comparison, the report's authors said, the sellers' commission is less than 2% in countries such as the United Kingdom, where buyers pay their agents directly.
..... If the sellers and buyers were each responsible for their own fees, "it would allow buyers to shop for the level of service that suits their needs and bargain for its price," the author wrote.

What do agents think?

..... In the aftermath of the jury verdict in Missouri, the National Association of Realtors said it would appeal and ask the judge to reduce the award, adding that it could take several years for the case to be resolved.
..... "The reality is the NAR rules prioritize consumers, support market-driven pricing and promote business competition," the group said. But the lawsuits have caused local agents to consider what life would be like if they had to operate in a new financial world where sellers and buyers pay their own agents.
..... One consequence: When buyers sign a contract to work exclusively with an agent, they would need to agree to pay a commission, too.
..... "Some agents use them now. It's a buyer's agreement, where it says if the seller is not offering a commission, you will pay me 2.5% of the home as a commission," said Pamela Volek, broker owner of RE/Max New Beginnings in Toms River. "It's pretty rare. But we've always used buyer agency agreements saying 'I'm working with you, and here's the deal, you can't work with somebody else,' because people like to jump around."
..... Still, some agents wonder just how much buyers would shop for the agent with the lowest commission, noting that buying a home isn't going grocery shopping. "People don't necessarily pick you on your fee," said Diane Turton, president and founder of Point Pleasant beach-based Diane Turton Realtors. "They pick you for the value they bring to them."

What's next?

..... Two major companies agreed to settle the lawsuits and have proposed changes to their operations.
..... Re/Max agreed to pay 455 million, and anywhere Real Estate, the Madison-based company that owns Caldwell Banker and Sotheby's International Realty, agreed to pay $83.5 million. and both said they would make changes to their practices.
..... For example, Anywhere said it would prohibit company-owned brokerages and affiliated agents from claiming that the buyer agent services are free. It would prohibit its affiliates from suing technology to sort listings by offers of compensations, unless the client requested it. and its brokerages would clearly disclose that commission are negotiable. Meanwhile, agents and consumer advocates say separating the compensation package between sellers and buyers could increase the cost of the home for buyers.
..... "The real solution is a complete separation in which buyers are able to finance buyer agent commissions as part of their mortgages," said Brobeck, from the Consumer Federation of America. "I think eventually we'll get there. right now there are regulatory barriers strongly supported by the industry. But I believe the industry is going to realize if buyers cannot finance the buyer agent compensation as part of the mortgages, the future for buyer agents is not very bright."

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