Real estate commission lawsuit nears conclusion

A proposed settlement in a case that pitted a group of home sellers against the National Association of Realtors could result in home-price reductions.

The settlement, in which the NAR would pay $418 million and agree to change its sales commission rules, means that the standard 6% commission that home sellers pay in Realtor-assisted sales may be more negotiable than what has been the case.

When a homeowner sells a property, the 6% commission is often split 50/50 between the seller’s agent and the buyer’s agent — meaning that the seller is paying a buyer’s expense. To make up for this cost, the price of the property is often inflated by the amount of the commission.

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According to a report in the New York Times Friday, residential real estate experts predict that Realtors will be more likely to compromise on their fees and that home prices will be reduced.

Last fall, Realtors discussed the issue at the BizWest Boulder Valley Real Estate Conference. Just days prior, the jury in the case determined that NAR and real estate brokers with Home Services of America and Keller Williams were guilty of colluding to inflate real estate commissions. They assessed a judgment of $1.78 billion against those entities. Earlier, Re/Max and Anywhere Realty agreed to a $139 million settlement in the case — a settlement that has yet to be confirmed by the judge in the case. The judge is expected to act May 9 on that settlement.

The lawsuit involved how broker fees are assessed, specifically the share of the sales commission that is paid to the buyer’s real estate agent. NAR’s Clear Cooperation Rule requires that the seller of property include a fee to the buyer’s agent — usually a share of the overall real estate commission. The buyer’s agent fee is visible to the buyer’s agent but might not be visible to the buyer of the property. 

The lawsuit alleged that the fees artificially drive up home prices as agents for buyers direct buyers to properties that offer compensation. The lawsuit also alleged that sellers were not aware that they could negotiate the commission that they ultimately pay.

Duane Duggan, who sits on the management team for Re/Max of Boulder, told BizWest Friday that the settlement was “a big number” but it has little impact on Colorado.

“In Colorado, the system wasn’t broken,” he said. Real estate professionals in Colorado have always been required to disclose what is charged and who is paying. Colorado’s real estate contracts were designed by the Department of Regulatory Agencies, and they include the language that helps agents provide the disclosures. 

“Other states didn’t have the disclosure rules, and if those had been in effect, there maybe wouldn’t have been a lawsuit,” he said.

“It doesn’t change our life much. We can’t offer compensation to the buyer’s agent, and in other markets that have tried that, the market seems to take care of itself,” Duggan said. “It’ll be good to have this settled across the country as the spring sales market gets underway.”

Likewise, Larry Kendall, the founder of The Group Inc. Real Estate in Northern Colorado, said that good Realtors have always disclosed their fees.

“I think what this will do is force Realtors to articulate their value proposition to a buyer. Many sellers see the benefit of offering a fee (to the buyer’s agent) and some will continue to do so also though they won’t be required to.

“They’ll (sellers) see that homes will sell faster and for more money. You may also see buyers offering compensation to their Realtors,” Kendall said.

Nathan Klein, managing broker with LC Real Estate Group LLC in Loveland, said one potential drawback of the decision will affect buyers. If the buyer’s agent is not compensated through the sale, the buyer will be unable to finance the commission through the bank as is now the case. That means the buyer may be able to finance the sales price but will need to find another source of cash to pay the commission.

Like Kendall and Duggan, Klein also said that commissions have always been negotiable in Colorado. The approved contracts have a blank line where the agreed commission amount needs to be filled in, he said.