by Joshua B. Rosenzweig (Spring 2019)
Anyone who has purchased a home knows that one of the most significant expenses in the entire process – aside from the purchase price for the home – is the fee paid to the realtors representing the seller and buyer. The standard practice in the residential real estate industry is to compensate brokers and agents with commissions that are calculated as a percentage of a home’s sale price. Commissions are paid when the home sells. In most cases, realtors receive up to six percent of the purchase price. In a $200,000 transaction, the seller’s proceeds are diminished by a whopping $12,000, which is then split between the seller’s agent and the buyer’s agent.
If the buyer has a broker, the seller — or the seller’s broker — pays the buyer’s broker half of the total commission paid by the seller. In other words, buyer brokers — who assist their clients in negotiating against the seller — receive their compensation from the total commission paid by the seller, not from the buyer they represent. In fact, a standard of conduct in the National Association of Realtor’s (“NAR”) Code of Ethics permits and encourages buyer brokers to tell their clients that their services are free. The payment of the broker’s commission from the sale price is known as the “Buyer Broker Commission Rule,” and it is now the subject of a class-action lawsuit filed on March 6, 2019 in the Federal District Court in Chicago.
In the case of Moehrl v. National Association of Realtors, et al., the lawyers that took on the tobacco companies are challenging the propriety of how commissions are paid to realtors. The class-action lawsuit, which is filed on behalf of anyone who sold a home through one of the 20 largest listing services in the country, the NAR, Realogy Holdings Corp., HomeServices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc., alleges the defendants engaged in a conspiracy to restrict competition. The complaint provides that the defendants have conspired “to require home sellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount, in violation of federal antitrust law.” Further, the complaint states that the conspiracy is “centered around NAR’s adoption and implementation of a rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation (the “Buyer Broker Commission Rule”) when listing a property on a Multiple Listing Service (“MLS”).”
The plaintiffs allege that, as a result of Buyer Broker Commission Rule, home sellers are saddled with a cost that would be borne by the buyer in a competitive market. Furthermore, the complaint alleges that most buyer brokers refuse to show homes to their clients where the seller is offering a lower buyer broker commission or will show homes with higher commission offers first.
Opponents of the Buyer Broker Commission Rule contend that if buyer brokers were paid by their clients, the result would be lower commission amounts because buyer brokers would then compete to be retained by offering a lower commission. “The Buyer Broker Commission Rule ensures that price competition among buyer brokers is restrained because the person retaining the buyer broker, the buyer, does not negotiate or pay his or her broker’s commission.”
The results of this lawsuit will have far-reaching implications for anyone involved in the real estate industry. Obviously, it impacts the individuals that home-sellers and buyers rely upon to assist them in selling/finding a home.
As a real-estate practitioner, I rely heavily on the assistance of my client’s agents – regardless of whether I am representing the buyer or the seller – to move the transaction along. Regardless of what side of the transaction I am representing, I need brokers to communicate with each other about various issues during the pendency of a transaction including, but not limited to, the terms of the deal, repair issues to be resolved and appraisal scheduling. Additionally, from the buyer side, brokers provide a helpful source of inspectors for their clients to use and lenders for their clients to talk with about obtaining a mortgage.
Some brokers will reduce their fees to accommodate some buyers. But, the reality is that a number of brokers could elect to not reduce their fees, thereby limiting certain buyers’ abilities to even enter into the transaction. For example, on a $200,000 transaction, a buyer broker may indicate she wants to be paid 3% of the transaction amount “up front.” A “cash-strapped” buyer, who has saved every penny just to afford a down payment, now has to use a portion of those savings – $6,000.00 to be exact – to pay her broker. What happens if the buyer simply can’t afford the additional expense?
It will be interesting to see how the Northern District of Illinois handles the Buyer Broker Commission Rule because, without it, the transaction process will completely change. Whether you are thinking of buying or selling your home, investing in real estate, taking on a second job as a broker or entering into a new career as a broker, this case should be closely watched to see how it will impact the largest transaction that most of us will ever enter into – buying/selling a home.