From: allin
The United States real estate industry is currently facing significant legal challenges due to class action lawsuits alleging artificially inflated commissions for home sales [01:17:14].
Major Verdict Against NAR
In October, a federal jury in Missouri found the National Association of Realtors (NAR) and several brokerages guilty of conspiring to artificially inflate commissions [01:17:24]. This verdict mandates them to pay at least $1.8 billion in damages to sellers of over 260,000 homes between 2015 and 2022 [01:17:41]. This ruling could potentially bankrupt the NAR [01:17:47].
Subsequent to this case, additional class action lawsuits have been filed, collectively amounting to potentially $13 billion in damages [01:18:39].
The US Commission Structure
The traditional commission structure in the United States typically involves a 6% commission on home sales, split between the seller’s agent and the buyer’s agent, each receiving 3% [01:17:53]. This 6% is a tradition, not a legal rule, and can be negotiated [01:21:45].
This system means the seller pays the buyer’s broker, even though the buyer generally doesn’t sign a direct contract with their agent [01:22:47]. This creates a disincentive for buyer agents to look out for the buyer’s best interest, as a higher sale price directly increases their commission [01:23:28]. The argument is that if buyers had to directly pay their agent 3%, few would agree to such a high fee [01:29:21].
The total volume of residential real estate commissions in the US is an estimated $100 billion per year, supporting 1.6 million licensed real estate agents [01:21:10]. Commercial real estate transactions also follow a similar commission structure [01:25:54].
Challenges to the System
Companies like Redfin have attempted to change this system, but have faced resistance from brokers who would refuse to show homes with lower commission rates [01:18:07].
The monopolistic aspect of the industry stems from the requirement to be a licensed broker and a member of the National Association of Realtors to list a property on the Multiple Listing Service (MLS), which feeds data to popular platforms like Redfin and Zillow [01:19:05]. This ties up the market and makes it difficult to operate outside the NAR system [01:20:00].
The process of listing a home could be reduced to a fixed fee of a few thousand dollars, rather than a percentage of the home’s value [01:20:26]. This percentage-based model for agencies transacting volume doesn’t make sense from a first principles perspective [01:21:04].
Some individuals have found ways around this, by paying a flat fee to a licensed broker to list their home on MLS, effectively using a “for sale by owner” (FSBO) approach [01:19:32].
International Comparison
The US commission rates are significantly higher than in many other countries [01:22:03]:
- United States: ~5.5% (split between buyer’s and seller’s broker) [01:22:28]
- United Kingdom: ~1.3% [01:22:09]
- China: ~2.5% [01:22:14]
- Russia: ~3.5% [01:22:16]
- Germany: ~4.5% [01:22:22]
- France: ~5% [01:22:22]
- Japan & Argentina: Comparable to US at ~6% [01:22:17]
The Role of MLS and Brokerage Control
The MLS acts as the de facto marketplace for homes [01:28:42]. Platforms like Zillow and Redfin obtain their data by sweeping the MLS [01:28:57]. The core of the monopolistic issue is the brokers’ control over this marketplace [01:29:03]. Breaking this monopoly and fostering alternative listing services is key to competing away the high brokerage commissions [01:29:07].
The situation is analogous to the travel agent industry before the internet, where agents had proprietary access to ticketing systems like Saber [01:26:49]. Just as Expedia provided direct access to flight booking, sites like Zillow provided direct access to MLS listings, reducing the need for an intermediary [01:27:06]. However, the main function of buyer brokers remains scheduling appointments, as direct tours are typically not allowed unless represented by an agent [01:27:30].
Future Impact and Industry Shift
The outcome of these lawsuits is expected to lead to a significant shift in the real estate market, benefiting consumers [01:31:01]. It could result in a change where brokers offer forms allowing sellers to pick the commission percentages they want to pay to both their agent and the buyer’s agent, or implement caps on commissions [01:31:15]. This could also lead to a shift from percentage-based commissions to a flat-rate fee, with a percentage only applied above a certain price point, to better align interests [01:31:48].
However, such changes could have a negative economic impact on the large number of people who depend on brokerage fees for their livelihood [01:31:09].