- Legal Precedent: The Missouri court ruling against NAR and major brokerages for inflating commissions may set a precedent for future real estate transactions and commission structures.
- Scrutiny of NAR’s Role: NAR’s policies, particularly those mandating seller-paid buyer agent commissions, are under intense scrutiny, potentially leading to industry-wide changes.
- Long-Term Industry Impact: The outcome of this case and subsequent appeals could significantly impact how real estate commissions are negotiated and paid, potentially leading to more competitive and consumer-friendly practices.
Impact of Recent Court Rulings on Future of Real Estate Commissions
Recent developments in the real estate industry, particularly a critical court ruling in Missouri, signal potential changes to the longstanding tradition of real estate agent commissions.
This case could have far-reaching implications for the way commissions are structured and impact the roles of both sellers and agents in real estate transactions.
The Missouri Court Ruling and Its Consequences
Missouri Federal Court’s Verdict: In a landmark decision, a federal jury in Missouri found the National Association of Realtors (NAR) and several major real estate brokerages guilty of artificially inflating commission rates. The jury ordered them to pay almost $1.8 billion in damages. This verdict could lead to a major upheaval in long-established practices within the real estate industry, particularly around commission rates.
NAR’s Role in Commission Structuring: The NAR has played a significant role in shaping the real estate commission structure. A major focus of the lawsuits was an NAR rule that required home sellers to not only pay a commission to their listing agent but also cover the commission for the buyer’s agent. This practice, plaintiffs argued, kept buyer’s agent commissions artificially high and stifled competition.
Potential Triple Damages: The court has the option to award treble damages, potentially increasing the financial penalty to more than $5 billion. This possibility underscores the severity of the ruling and its potential impact on the real estate industry.
Historical Facts About the Evolution of Real Estate Agent Commissions
Establishment of Commission Structure (1913): The year 1913 was significant for the real estate industry as it marked the creation of a standardized commission structure by the National Association of Real Estate Exchanges, the predecessor to the National Association of Realtors (NAR). This structure defined that a customer selling a home would pay a percentage of the sales price to the seller’s agent, who would then share the commission with the buyer’s agent.
Commission Rates in the Early 20th Century: In the 1920s, real estate commission rates were around 2.5% of a home’s sale price. For example, in 1920, if a home sold for the average price of $6,296, the agent would earn a commission of $157.40, which was then split with the buyer’s agent, each receiving $78.70. By 1940, with the growth of communities and the need for more real estate agents, the standard commission rate increased to 5%. This rate continued to rise, reaching 6% by the 1980s, a figure that remains the industry standard today.
Reasons Behind Commission Levels: The establishment of standardized commission levels was largely due to the challenges faced by agents in the early 20th century. There was no centralized database of homes for sale, requiring agents to maintain their own records and perform extensive research. The absence of the Internet and other modern technologies meant that agents had to spend considerable time and resources on travel and communication. However, with the advent of the Internet and the development of the Multiple Listing Service (MLS), which offered a comprehensive list of homes for sale, the ease of accessing and sharing real estate information significantly improved. This technological evolution has led to changes in how agents operate and has impacted the value of the services they provide.
Change in Commission Rates Over Time: In recent years, there has been a notable decline in commission rates in the U.S., falling from about 6% to just over 5%. A study by RealTrends, cited by the NAR, reported that the average commission in the U.S. fell to 4.94% in 2020, reflecting unprecedented competition among brokers and a changing landscape in the real estate industry.
Impact of Legal and Regulatory Changes: The role of the NAR and its policies, including those related to commission structures, has been a topic of legal scrutiny and regulatory changes. For instance, a 2008 settlement with the U.S. Justice Department required the NAR to stop withholding listings from members who might post them online, allowing customers greater control over their search process and access to real estate market information.
Immediate and Long-Term Implications
No Immediate Changes for Homebuyers and Sellers: Despite the significant ruling, immediate changes in how agent commissions are handled, especially for homes listed on the Multiple Listing Service (MLS), are unlikely. NAR has vowed to appeal the verdict, indicating that any changes to commission practices may take time to materialize.
Watching for Further Court Decisions: The industry is closely monitoring what further actions the court may take, especially regarding how it might order the industry to restructure agent compensation. A critical consideration is whether buyers could potentially finance buyer-agent commissions as part of their mortgages, although current regulatory barriers strongly supported by the industry may hinder this.
Impact on Home Prices: Stephen Brobeck, a senior fellow at the Consumer Federation of America, noted that buyer agent’s commissions are typically added to the sale price of the house, inflating it. If sellers no longer had to pay buyer agents, this inflation could be reduced, allowing buyers to negotiate lower commissions and ultimately pay less.