Real Estate Industry Faces Seismic Shift as Antitrust Lawsuits Challenge Commission System
The real estate industry is experiencing a wave of legal challenges that could reshape the way residential transactions are conducted, as class action lawsuits target the commission system that has been a longstanding practice in the United States.
In the aftermath of a case in Missouri, the Southern District of New York is now grappling with a similar lawsuit against the Real Estate Board of New York and several major real estate brokerages, with potential ripple effects across the nation, reported Reuters.
In November 2023, the class action lawsuit, March vs Real Estate Board of New York et al., was filed in the Southern District of New York, alleging collusion to artificially inflate commissions under the traditional industry rule. This rule mandates that, at the closing of a real estate sale, the seller pays a commission of 5-6% of the purchase price to the seller’s broker, who then splits it evenly with the buyer’s broker. The lawsuit claims that this practice, widespread for decades, violates antitrust laws and artificially raises prices in a monopolistic manner.
This legal battle follows the Sitzer case in Missouri, where a jury ruled in late October 2023 in favor of the plaintiffs, awarding damages of $1.8 billion. The Sitzer case argued that the National Association of Realtors (NAR) and other brokerage firms engaged in collusion to inflate commissions, violating antitrust laws.
NAR and its co-defendants are expected to appeal the Sitzer ruling, setting the stage for a prolonged legal battle. The U.S. Justice Department, a longstanding critic of NAR’s alleged antitrust behavior, is closely monitoring developments. If the Sitzer ruling stands and similar cases, including March, rule in favor of the plaintiffs, it could prompt a significant transformation in the negotiation and payment of residential real estate commissions.
In response to the mounting legal challenges, REBNY has indicated that it will vigorously defend itself. However, anticipating potential changes in the industry landscape, REBNY has implemented new rules effective January 2024. Under these rules, buy-side broker compensation must originate from the seller, prohibiting listing brokers from making or paying compensation offers to buy-side brokers.
The industry could see a shift towards the decoupling of commissions, allowing sellers to negotiate directly with buy-side brokers. This potential change may align with practices seen in international markets, such as the United Kingdom and Australia, where a 1-2% commission is more customary, reported Reuters.
The repercussions of these legal battles may extend beyond the courtroom. A significant reduction in the number of real estate agents, particularly those who work part-time, could be anticipated. The future viability of Multiple Listing Services (MLS) and other exclusive listing services may also be at risk.