Shock as new lawsuit raises threat to co-op commission

A decision this week by the District Court in Western Missouri has sent shockwaves through the US real estate industry as it could open the door to some really profound changes, including the potential abolition of pre-agreed commission splits between listing and buyer brokers, and quite possibly the complete eradication over the next few years of separate representation for real estate buyers.

Without all the legal jargon, what the Missouri court decided was to allow a large group of home sellers to register a class action to reclaim more than $1bn worth of commissions they paid to buyer brokers between April 29, 2015 and the present – on the basis that all co-operative commission offers made via an MLS violate the federal Sherman Antitrust Act and other laws by unfairly inflating the post-sale costs that sellers have to pay.

This means that if the action succeeds, there could be far-reaching consequences for MLSs countrywide and the industry as a whole, and not only the specific buyer agents and brokerages facing hefty claims for the repayment of their commissions.

The Missouri plaintiffs, whose homes were listed for sale on one or more of several MLS groups named in their lawsuit, are taking on the National Association of Realtors (NAR) and industry giants Realogy, RE/MAX, Keller Williams and HomeServices of America over the so-called Buyer Broker Commission Rule. What is more, they are the second group of sellers to do so, with a similar application for the registration of another multimillion-dollar class action having been filed in Minnesota earlier this year.

In short, the Rule (which is actually an NAR policy supported by several rules in its Code of Ethics) is that MLSs may not publish listings that don’t include a clear statement by the listing broker of the exact share of the total commission – paid by the seller – that a “co-operating” broker representing the buyer of the property stands to earn. This share can be a dollar amount or a percentage of the sale price.

The basic premise of both lawsuits is that the NAR policy should be outlawed because it is a form of price-fixing that results in home sellers having to pay a higher commission for agent services than they would if home buyers had to pay their own brokers directly. The plaintiffs also claim that the various real estate corporations named in their class actions are complicit in this practice because they explicitly require each of their franchisees, subsidiaries, brokers and agents to abide by the NAR policy. In the Minnesota case, they have even gone so far as to term it a real estate “conspiracy”.

Both the NAR and Realogy have already indicated that they will appeal the Missouri court’s decision to allow the class action, and the other defendants will no doubt join them. Their contention is that MLSs are actually a powerful means of entrenching fair competition in the real estate industry because they give all agents and brokerages in an area equal access to listings and potential earnings – and that the co-operative commission system benefits both home sellers and buyers.

However, the courts may disagree, and industry and consumer experts are worried now that if home buyers are forced in future to pay their own brokers, sellers would suffer because the pool of potential buyers for each listing would immediately shrink due to lack of affordability. On the other hand, buyers would probably be much less inclined to hire their own brokers at all, and that could put them at risk during negotiations with sellers who are represented, while also causing buyer brokerage to go into terminal decline.