- A huge victory for home sellers in federal court may completely change the residential real estate market.
- A jury awarded home sellers a $1.8 billion verdict against their brokers.
- This verdict could also affect commercial real estate brokers.
There was a pretty huge lawsuit verdict a couple of weeks ago that affects the real estate world. And while the lawsuit focused on residential real estate sales, there’s little doubt that it could potentially have a big effect on commercial as well.
So lets talk about it.
Lawsuit Against Residential Brokers
On October 31, a jury in Missouri handed down a landmark $1.8 billion verdict against the National Association of Realtors (NAR) and two of the nation’s largest real estate brokerages, Keller Williams Realty and HomeServices of America. The plaintiffs, a class of Missouri home sellers, alleged that the defendants conspired to artificially inflate real estate commissions, resulting in overcharges to home sellers.
The plaintiffs’ case rested on two primary legal theories: antitrust violations and breach of fiduciary duty.
- Antitrust Violations
The plaintiffs argued that the NAR and the two brokerages engaged in anticompetitive behavior by colluding to maintain artificially high commission rates. Specifically, they alleged that the defendants used their control over multiple listing services (MLSs) to enforce a policy of “co-brokering,” which requires sellers to pay a commission to the buyer’s agent even if they do not use one.
- Breach of Fiduciary Duty
The plaintiffs also alleged that the defendants breached their fiduciary duty to act in their clients’ best interests. They argued that the defendants failed to disclose the full impact of the co-brokering policy on commission rates, thereby depriving them of the information they needed to make informed decisions about their home sales.
Implications for Residential Brokers
This case actually went to trial. And at the end, the jurors returned a stunning verdict for the plaintiffs – $1.8 billion. The Defendants have said that they will ask the court to reduce the verdict. And undoubtedly they will appeal. So this case will likely go on for a while. But that does not mean it won’t have a profound effect on the real estate industry.
So what will it all mean for buyers, sellers, and brokers? It will undoubtedly be more difficult for brokers to demand the customary six percent fee that they usually command now. Buyers and sellers will have more transparency and a better idea of what options are available. And I think its likely that you will see buyers and sellers each become responsible for their own broker’s fee. As you probably know, now it is customary for the seller to pay both buyer and seller brokers.
I think this is likely going to drive home prices down some. And perhaps buyers will be less likely to hire a buyer broker to help them find a house. And that could, potentially, lead to a lot of agents exiting the business.
Implications for Commercial Brokers
While the verdict was focused on residential real estate, it could also have ramifications for commercial brokers. Commercial real estate transactions typically have a similar system to residential transactions in that the buyer pays both the seller and buyer broker. Its possible that could be adjusted after this lawsuit. Having said that, commercial transactions are usually conducted by well-informed parties who are both represented by lawyers. And the agreements that commercial parties reach are often more likely to be upheld by a court. While there may be some fallout on the commercial side, therefore, its possible it will not have a great influence.
Having said that, commercial brokers should be prepared for increased scrutiny of their commission rates and may need to adapt their business models to remain competitive in the post-verdict landscape.
The $1.8 billion verdict is a stark reminder that the real estate industry is not immune to legal challenges. As the industry evolves and technology plays an increasingly prominent role, it is likely that the traditional commission structure will continue to face scrutiny.
Real estate brokers, both residential and commercial, will need to stay abreast of legal developments and be prepared to adapt their practices to ensure compliance with the law and meet the changing expectations of consumers.
