A Challenge to Real Estate Commissions Gains Ground
Consumer advocates have long criticized traditional real estate commissions as confusing and too high. Now, those commissions are coming under increasing legal pressure.
A federal judge in Illinois ruled last week that a potential class-action lawsuit against the National Association of Realtors and four major brokerage companies could proceed.
The lawsuit, filed last year in Federal District Court in Chicago on behalf of several home sellers, alleges that the way brokerages charge commissions and run property databases called “multiple listing services” is anticompetitive and artificially inflates commission rates paid to real estate brokers. (A similar lawsuit filed in Missouri is also pending, after a federal judge declined last year to dismiss it.)
Mantill Williams, a spokesman for the Realtors association, which represents more than 1.3 million real estate professionals, said in an email that the trade group was “disappointed” in the ruling but was confident that it would prevail in the suit. As the case moves forward, he said, “we intend to demonstrate how the M.L.S. system creates competitive, efficient markets that benefit home buyers and sellers as well as small business brokerages.”
Home buyers in many parts of the country are facing a strong sellers’ market. A lack of houses for sale is pushing up prices, impeding first-time and lower-income buyers even as mortgage rates remain low.
In an order denying requests by the Realtors association and the brokerages to dismiss the suit, Judge Andrea R. Wood said the plaintiffs would have paid “substantially lower” commissions if not for the rules established by the Realtors association and followed by the brokerages.
The suit takes aim at the way brokers who represent home buyers are paid. Typically, people seeking to sell their home agree to pay a listing agent a commission — usually 5 to 6 percent of the sale price — to place it on a listing service maintained by local Realtor groups and to market the home. The seller agrees that the listing agent will offer to split the commission — say, a 2.5 percent share — with the agent representing the buyer. (Agents may share part of their commissions with their brokerages.)
Home buyers pay nothing directly to their own agent and may believe they are paying no commission because, according to the lawsuit, the Realtors association allows buyers’ agents to tell clients that their services are free.
“In a competitive market,” the suit says, “the seller would pay nothing to the buyer broker, who would be paid instead by the buyer, and the commission paid by the seller would be set at a level to compensate the seller broker only.”
In effect, the suit argues, the home seller is paying an inflated commission that is covering the buyer’s share as well. By that analysis, a seller paying a 5 percent commission on the sale of a $500,000 home is overpaying by about $12,500.
Consumer advocates and some analysts say the practice pushes up home prices because the commission for the buyer’s agent ends up being added to the asking price of the home so the seller can get a particular net price.
“The money comes out of somewhere,” said Mark S. Nadel, a lawyer who has published research on broker practices.
In a report last year, the Consumer Federation of America found that few people understood the commissions they paid when buying or selling a home, partly because most agents don’t make it easy for consumers to learn about them.
Also, the complaint says, buyers’ agents can see, through the listing service, the commission split offered for each home — but home buyers generally cannot. Buyers’ agents, then, may tend to “steer” clients to homes paying higher commissions.
Mr. Williams, the Realtors association spokesman, maintained that the broker commission structure “ensures greater access for first-time, low-income and many other home buyers who otherwise couldn’t afford a home purchase.”
That echoes an argument made by agents: that if buyers had to pay brokers directly, many would find it difficult to afford a home. Many buyers already struggle to save enough to cover a down payment and to secure a mortgage.
Others, however, dismiss that concern. Stephen Brobeck, a senior fellow at the consumer federation, said buyers wouldn’t have to come up with the cash upfront. Rather, they could finance the commission through their mortgage just as they finance other closing costs. And paying their agent directly would allow them the opportunity, perhaps, to negotiate a lower commission.
The plaintiffs, who are seeking class-action status for the suit, are asking for damages and a halt to the practice of having sellers’ agents pay commissions to buyers’ agents.
The brokerages named in the suit are Realogy, the parent of Century 21, Coldwell Banker and others; HomeServices of America, a Berkshire Hathaway affiliate; Re/Max; and Keller Williams. HomeServices and Keller Williams declined to comment. Re/Max said it would “continue to vigorously defend” itself against a “baseless” suit. Realogy said in a statement that the case was “without merit.”
Here are some questions and answers about real estate commissions:
Can I negotiate the commission I pay a real estate agent?
The National Association of Realtors says all commissions are negotiable. But in practice, that may be difficult. In its research, the Consumer Federation of America found that only about a quarter of agents interviewed said they would consider adjusting their commission.
Mr. Brobeck at the consumer federation suggested that home buyers interview several agents and ask about commission splits. Some agents may be agreeable to different approaches, such as being paid by the hour.
Sellers do have other options. They can try to sell their home themselves, but it can be difficult to market a property without the help of an agent to list the home on multiple listing services.
Or they can work with some online brokerages that offer lower commissions. Redfin, for example, charges a 1.5 percent listing fee to sellers, and lowers the fee to 1 percent if the seller also buys a home on Redfin within a year.
What are commission rebates?
Some brokers may offer commission “rebates” or refunds to home buyers. If, for example, a buyer’s agent received a typical 2.5 percent commission, the agent may return part of that amount — say 1 percent of the sale price — to the buyer. Such rebates can save home buyers thousands of dollars, according to the Justice Department.
But at least 10 states ban such rebates.
What are current home mortgage rates?
Mortgage rates remain historically low. The average rate for a 30-year, fixed-rate mortgage was 2.87 percent for the week that ended Thursday, according to Freddie Mac’s weekly survey.