A jury in Kansas City awarded almost $1.8 billion in reimbursements to Missouri home sellers who accused the National Association of Realtors and some residential real estate brokerages of unnecessarily driving up the cost of home sales because of their long-running practice of buyer and seller agents splitting commissions.
The more than $1.78 billion awarded by the jury will be trebled, or effectively tripled, so the damages total almost $5.4 billion, pending appeals. Two defendants said they plan to appeal while another is considering doing so.
Though that process is likely to be lengthy, the ruling on Tuesday in the class-action lawsuit could be a major step for the plaintiffs and other critics of the cooperative compensation model long used in home sales, with brokers on each side of the deal typically sharing commissions of about 6% per sale.
The amount awarded is significantly less than the maximum of about $41 billion that the same plaintiffs face in a trial, Moehrl v. NAR, that's expected to reach a federal courtroom in Chicago next year. The verdict followed more than two weeks of testimony in U.S. District Court in Kansas City.
It has been closely watched in the industry because of its potential to upend the longtime process by which homes are sold, with sellers potentially no longer being expected to also pay for the buyer agent’s commission.
The Chicago-based NAR has contended that the system provides an efficient marketplace accessible to all consumers. But the complaints, including the one for the lawsuit resolved in Kansas City, alleged that the practice is anticompetitive because it requires NAR-member agents to list all properties on regional multiple listing services, with broker commissions agreed to before a home is listed for sale.
The jury ruled that the NAR and the other defendants, Keller Williams and HomeServices of America, had conspired to maintain high commission rates, leaving home sellers with few realistic options to negotiate lower rates.
Leading into the Kansas City trial, the other defendants in the two cases, Anywhere Real Estate and RE/MAX, agreed to settlements for more than $138 million combined.
Heading into the first trial, the NAR and remaining defendants faced more than $400 billion in total damages if lawsuits were expanded to include all areas of the country, according to a recent report by Keefe, Bruyette & Woods, often referred to as KBW, which predicts the trials will usher in major changes to the industry.
Rather than the worst-case scenario that has been described by some industry professionals, judgments so large as to send the NAR and its members’ multiple listing services into bankruptcy, KBW concludes that a likely scenario is an eventual settlement just large enough to shake up the industry and likely to require the NAR to assess members with higher dues to cover settlement costs over time.
If Tuesday's judgment and potentially others to come were to be deemed insufficient by the U.S. Department of Justice or the Federal Trade Commission, those agencies could intervene, according to Ryan Tomasello, a KBW real estate analyst and one of the authors of the report.
Appeal Expected
Mantill Williams, NAR's vice president of communications, said in an emailed statement that the organization will ask the court to reduce the damages awarded by the jury in the near term, with plans to appeal the verdict over what could be the next several years.
"We stand by the fact that 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," Williams said in the statement. "We will continue to focus on our mission to advocate for homeownership and always put consumer interests first."
HomeServices told CoStar News it plans to appeal the ruling, while Keller Williams spokesperson Darryl Frost said the firm “will consider all options as we assess the verdict and trial record, including avenues of appeal.”
Frost said in an email that “we are disappointed that before the jury decided this case, the court did not allow them to hear crucial evidence that cooperative compensation is permitted under Missouri law. This is not the end. Keller Williams followed the law regarding cooperative compensation and stands by the evidence presented on the 100-year-old practice of sellers’ agents offering commissions to other agents who help market and sell homes.”
In an email, HomeServices said the ruling could cause consumers to take on a major financial transaction without expert representation.
“Buying or selling a home is a complicated process, and it’s essential to have a knowledgeable, experienced advocate to support buyers and sellers throughout their journey and protect their interests,” a HomeServices spokesperson said in the email. “Cooperative compensation helps ensure millions of people realize the American dream of homeownership with the help of real estate professionals."
The jury deliberated for less than three hours Tuesday before reaching the unanimous verdict, real estate news publication Inman reported.
As it seeks an appeal of the Burnett case, the NAR faced another legal challenge within minutes of Tuesday's verdict.
That is when Michael Ketchmark, a lawyer for plaintiffs in the previous two class-action lawsuits, filed another lawsuit against the NAR and several new defendants the U.S. District Court for the Western District of Missouri. Defendants named in that case, filed by a new group of home sellers, are Compass, eXp World Holdings, Redfin, Weichert Realtors, United Real Estate, Howard Hanna Real Estate and Douglas Elliman, Ketchmark told CoStar News.
Wide Impact
Even before the jury verdict, the business of selling homes appeared destined for sweeping changes that could result in commissions being slashed, more than 1 million agents leaving the industry, and upstart home-selling technologies grabbing market share from established players, according to the analyst's report.
Before the trial, some companies and Realtor organizations already had begun distancing themselves from longtime NAR guidelines, and as federal agencies consider regulatory actions if the trial and another that's scheduled to begin next year don’t garner significant enough changes to the way U.S. homes are sold, Tomasello said.
Changes resulting from the trials could include significant alterations of the home-selling model, the overall pool of potential commissions could shrink as much as 30%, and as many as 80% of the nation’s approximately 1.6 million agents could leave the business, according to his report.
Court verdicts could reduce home prices and have major effects on the broader economy, including having significant effects on share prices of publicly traded companies in the sector, such as residential property websites and home builders, the KBW report said.
Platforms such as Zillow and Realtor.com that provide broker leads could be set back by reduced commission fees, while home builders such as Lennar, Toll Brothers and D.R. Horton could benefit from reduced costs of selling large numbers of homes, according to the report.
One product poised for growth if the commission structure is upturned, according to the report and other industry professionals, is Homes.com. It is owned by CoStar Group, the publisher of CoStar News. Homes.com makes its money from home advertisements, which differs from portals that sell leads to brokers or require them to split their commissions with the portal as a referral fee.
Though portals such as Zillow and Realtor.com are not named in the lawsuits, their leads-based business could be negatively affected by a reduction in the pool of available commissions and by changes in how commissions are paid, according to KBW and other professionals.
Changes Underway
Signs of industry changes already were apparent before the start of the first trial, including the NAR stepping back from its longtime requirement to offer at least some compensation to buyer brokers in new listings, saying $0 could now be offered.
In other recent developments, Redfin announced it would no longer require its agents to be NAR members and the Real Estate Board of New York — whose Residential Listing Service differs from the MLS network — said sellers in the city would now be required to pay buyer agents’ commissions directly, rather than passing payments through seller agents.
KBW’s Tomasello describes individual rule changes and settlements as relatively minor on their own, but he said that “it just shows there are more and more cracks.”
He added that “the important thing to realize is that the brokers are not the agents of change. The NAR makes the rules. We don’t view settlements with those brokerages as something the industry should be focusing on. Those are just a sideshow and a distraction from what will ultimately happen with the NAR.”