The first of two class-action lawsuits with the potential to bring major changes to the home-selling industry is set to go to trial Monday in a federal courtroom in Kansas City, Missouri.
Plaintiffs seek to eliminate what they see as billions of dollars of unnecessary agent commissions, while the National Association of Realtors says it is fighting against what could become a “Wild West” of decentralized property listings should it lose.
Results of the case, and a larger one expected to go to trial in Chicago next year, are expected to have significant ramifications for the Chicago-based NAR, as well as multiple listing services throughout the country and rank-and-file residential brokers.
A group of Missouri home sellers brought the Burnett v. NAR suit headed to U.S. District Court in Kansas City, arguing that the longstanding process by which residences are sold is anti-competitive because it requires sellers to list their properties on an MLS, while agreeing to a predetermined commission — typically 6% split evenly between seller and buyer brokers — with few realistic options to reduce the amount of those fees.
Plaintiffs in both Midwest cases say preset commissions artificially push up home prices.
Because of the lawsuits, the NAR faces, at the least, major changes to the way its members do business.
“We are confident we will prevail in proving the lawfulness of the rules under attack,” the NAR said in a statement to CoStar News.
Industry professionals have told CoStar that in the worst-case scenario for the NAR, the organization could be hit with billions of dollars in legal penalties, putting many multiple listing services out of business and erasing billions of dollars in future broker commissions.
In recent weeks, two major brokerages named in the lawsuits agreed to settlements, and some companies have made other moves to distance themselves from the NAR.
That led the NAR’s deputy general counsel, Lesley Muchow, to warn of a potential scenario in which databases of available homes are decentralized and consumers are left to sort through piecemeal information.
"We will be forced back into the 19th century or what we see as the Wild West where unscrupulous people can regularly defraud clients," Muchow said in a recent online presentation, according to Real Estate News. "If MLS broker marketplaces didn't work the way they do now, there would be no centralized hub and source of available homes. Buyers would have to visit every single broker in town in order to see all of the available inventory that is out there."
Both class-action lawsuits are regarding the so-called participation rule, in which the NAR long has required home sellers to use their members’ MLS databases of homes, while also requiring sellers to declare the commission available to both brokers in advance. That has included a requirement to specify the commission available to agents representing homebuyers.
The NAR has said sellers are allowed to go well below the 6% standard, but critics point out that homes not offering a high enough buyer broker commission are likely to languish.
The NAR has argued that the longstanding buyer-seller broker commission split encourages cooperation between agents, creating an effective marketplace for sales.
“NAR’s guidance for local MLS broker marketplaces ensures consumers get comprehensive, equitable, transparent and reliable home information and that brokerages of any size, service or pricing model get a fair shot at competing,” the NAR said in its statement. “The result is an efficient model for brokers to serve sellers and buyers and market-driven pricing for consumers.”
‘Stunning Admission of Guilt’
In a recent twist, the NAR appeared to step back from its longtime requirement that a seller offer at least some broker agent commission, now saying sellers can offer $0 to buyer brokers.
The lead counselor for the Missouri plaintiffs, Kansas City-based Michael Ketchmark, described the move to allow $0 buyer commissions as a change from previous NAR guidance and “a stunning admission of guilt,” according to an Inman report.
In its statement to CoStar News, the NAR downplayed the recent shift in guidance.
“NAR’s policies require that an offer of compensation be made without specifying an amount,” the statement said. “Practically speaking, the difference between an offer of one penny and $0 is negligible, and regardless, those offers are always negotiable.”
The NAR’s apparent change in guidance comes amid a whirlwind of changes for the organization, including former President Kenny Parcell’s resignation after a New York Times report in which he was accused of sexual harassment and fostering a toxic workplace. Parcell has denied the allegations.
Two of the other defendants in the Missouri case and the upcoming Moehrl v. NAR trial in Chicago, Anywhere Real Estate and RE/MAX, have agreed to pay more than $138 million combined as part of legal settlements.
They also said their brokers no longer would be required to belong to the NAR or follow the organization’s rules, including guidelines on setting commissions. Redfin, which is not involved in the lawsuits, recently made a similar move.
Other remaining plaintiffs in the two antitrust cases are HomeServices of America and Keller Williams Realty.
In the larger potential hit, the remaining defendants face maximum potential damages of $41.1 billion if the Moehrl case goes to trial. A judgment anywhere close to that amount would put the NAR out of business, industry professionals told CoStar News last month.
Potential changes that could emerge from the lawsuits include requiring buyers to pay their broker’s commissions, which the NAR has argued would harm first-time and lower-income homebuyers. New commission structures could include flat rates or hourly rates.
The NAR has more than 1.5 million members, and the organization sets guidelines on how homes should be listed and sold. Its members have about 560 MLS systems in the United States and about 40 more in Canada, according to the NAR.