Residential Brokerage Commissions - A Seismic Shift?

Several days ago, a class action lawsuit (March vs Real Estate Board of New York et al.) was filed against the Real Estate Board of New York (REBNY) and over a dozen other real estate brokerages operating in New York City. The lawsuit comes on the heels of a similar case (Sitzer et al. vs. National Association of Realters et al.) filed in the State of Missouri against the National Association of Realtors (NAR) and other brokerage firms, in which the jury issued a late October 2023 ruling for the plaintiffs. 

Why is this important, you might ask? At stake is the brokerage commission system that is commonplace in most residential transactions throughout the United States. In most jurisdictions nationwide, the default practice in residential arms-length transactions is that the seller of real property will (at closing) pay the seller's broker a commission of between 5-6% of the purchase price, which is then split between the seller's broker and the buyer's broker, in exchange for access to the Multiple Listing Service (MLS), the most sought-after database used by the largest and most reputable brokerage firms to market properties for sale. However, consumers have recently begun to question whether this practice serves their best interests, and the seller in the Sitzer case eventually filed a class action lawsuit in a Kansas City court on behalf of sellers who had recently sold their homes via the aforementioned practice. A jury ultimately found that NAR and the other defendants colluded to artificially inflate commissions under the industry rule requiring commission splits in exchange for access to the MLS, and awarded significant damages in the amount of $1.8 billion, which may be trebled under U.S. anti-trust laws to $5.4 billion.

What does this mean for most sellers and buyers of residential real estate in the U.S.? For the moment, perhaps not much. As expected, the Sitzer ruling was immediately appealed, and it is likely to be several years before that case is resolved. We further expect to see a deluge of similar actions across the country, which has already begun with cases such as the March/REBNY action. The U.S. Justice Department is also said to be following developments closely. If Sitzer is upheld and additional cases are also decided in favor of the plaintiffs, however, this could result in a seismic shift in the manner in which commissions are negotiated and paid on the residential side, beginning with the decoupling of commissions that are paid to the sell-side and buy-side brokers. 

The real estate industry is already responding to these developments. REBNY has announced that beginning in January of 2024, it is adopting new rules being implemented in the Universal Co-Brokerage Agreement, which governs REBNY and the Residential Listing Service in New York City. As per the new rule, "…offers of compensation to the buyside broker [must] originate directly from the Seller/Owner. Listing Brokers will no longer be permitted to make the offer of compensation to the buyside broker – even if it is on the Seller's or Owner's behalf. Additionally, Listing Brokers will no longer pay the buyside compensation."[1] If the various cases making their way through court systems are successful, such decoupling of brokerage commissions could become standard practice in many jurisdictions.

Put simply, as is often already the case on the commercial side, sellers in residential transactions will be able to negotiate directly with the buyer's broker regarding the commission owed by the seller to the buyer's broker at closing. Agents could become incentivized to compete with each other for commissions, resulting in a fee structure that is more in line with the fee structure found in other markets across the world (e.g., the United Kingdom, Australia), where a 1-2% commission is the norm. This could also threaten the viability of the MLS and other exclusive listing services in various jurisdictions. In certain scenarios, sellers could perhaps even successfully shift the buy-side commission to buyers. The fallout, and whether this will result in lower closing costs for sellers, remains to be seen, however.

If you are contemplating selling or purchasing real property in the future, please do not hesitate to reach out to your Withers attorney to discuss this timely topic.