RE/MAX has agreed to pay $55 million to remove itself from two class action lawsuits that allege a violation of the Sherman Antitrust Act. In addition, the brokerage has committed to changing some of its business practices, including ending the practice of requiring sellers to pay commissions to buyer’s agents. These outcomes could have industry-wide ramifications, impacting the way investors compensate their real estate agents in the future.
RE/MAX is the second brokerage to agree to settle claims that the defendants’ commission tactics inflated costs for sellers. Anywhere Real Estate agreed to an $83.5 million settlement earlier this month and also removed the requirement for sellers to pay buyer’s agent commissions. If approved, the settlement would release RE/MAX from ongoing litigation without holding the brokerage responsible for the claims.
The Two Lawsuits
Sitzer/Burnett and Moehrl, two lawsuits that gained class-action status in 2022 and 2023, respectively, named the following defendants:
- The National Association of Realtors (NAR)
- Keller Williams
- Anywhere (the parent company of Sotheby’s, Coldwell Banker, and Century21)
- HomeServices of America and its subsidiaries
Both lawsuits allege that certain NAR regulations violate the Sherman Antitrust Act.
At the heart of the issue is an NAR mandate requiring listing brokers who use a multiple listing service (MLS) to offer compensation for buyer’s agents. The suits argue that the requirement keeps commission costs for sellers unfairly high, preventing competition in the industry from affecting commission rates.
Local MLS access is a primary reason most home sellers hire real estate agents since it’s the best way to attract buyers. The plaintiffs say that because MLS access is so necessary, sellers are forced to abide by the rules for its use, effectively inflating commission costs for the benefit of the defendants.
The NAR doesn’t specify how much commission the listing broker is required to offer buyer’s agents. They could offer as little as $0.01. But the Moehrl lawsuit alleges that the named corporate brokers, including RE/MAX, were colluding with the NAR to set high commission standards, while some NAR rules prevented sellers from negotiating the costs.
The defendants contend that the seller and the buyer’s agent can always negotiate the commissions, however, and that the plaintiffs misunderstood the rules.
Proponents of decoupling seller’s and buyer’s agent commissions point to lower average real estate agent commissions in comparable countries like Singapore and the U.K., which may have fallen due to the rise of online real estate technology and increased competition in the industry when compared to the high rates that real estate agents continue to expect in the United States. Some argue the NAR’s policies are to blame.
The two lawsuits are not the first attempt at challenging the current commission rate arrangement. The U.S. Justice Department requested to continue an antitrust probe into the NAR earlier this year after a previous settlement blocked the investigation. But the system remains unchanged thus far.
Will the Lawsuits Change Anything?
The RE/MAX settlement could, in theory, move the needle since the company has agreed to change its practices. Or it may not have any effect on the industry if sellers still choose to compensate buyer’s agents for their marketing efforts.
RE/MAX and Anywhere have both agreed to stop requiring sellers to pay buyer’s agent commissions, making the seller’s compensation of buyer’s agents optional. However, that doesn’t necessarily mean anything will change. Listing brokers set buyer’s agent fees at the typical rate of between 2.5% and 3% of the home purchase price in order to incentivize buyer’s agents to show the listing to their clients.
A study published in 2017 shows that listings that offer buyer’s agent commissions below 2.5% experience unwanted outcomes. Those properties take 12% longer to sell and are 5% less likely to sell at all. A good listing agent will, therefore, set a competitive commission for the buyer’s agent to ensure a speedy sale with favorable offers. The seller is essentially paying for the buyer’s agent’s role in marketing the property.
After RE/MAX and Anywhere agreed to settlements in the Sitzer/Burnett and Moehrl suits, and New England’s MLS PIN agreed to a settlement in the similar Nosalek lawsuit, it’s clear that there’s a real threat of legal action for inflating commissions. That threat may cause listing brokers to be more cautious of their actions and transparent with their clients and may motivate transparency among local MLSs as well.
Related: How Much Do Real Estate Agents Make?
That could leave more room for sellers to negotiate commissions overall, which would benefit buyers and sellers, but the effect remains to be seen. And it’s unclear whether a few brokers changing their business practices will be enough to shift the industry away from the custom of sellers paying both agents’ commissions.
Some local MLSs, including Bright MLS and Northwest Multiple Listing Service, have already done away with the requirement for sellers to offer buyer’s agent compensation, with support from the NAR. Those changes and other efforts to increase transparency have had no noticeable effect on commission costs so far.
How Would a Change Impact Investors?
If the lawsuits did have ramifications for how agents were compensated, what would the impact be on the real estate industry and investors? If buyers chose not to pay full commission to their agents or skip hiring agents at all due to the cost, that could create enough competition to drive a share of the surfeit of real estate agents out of business.
But for most real estate investors, having an investor-friendly agent is crucial to a successful deal. Real estate agents with market knowledge and experience are invaluable and may even find you an off-market listing. But the most competent agents will likely continue to charge top rates, even if there’s a shift in who’s responsible for the expense, according to Stephen Brobeck, a senior fellow at the Consumer Federation of America, as reported in Insider.
He also notes that the industry would likely respond by offering financing for buyer’s agent fees and that a change to the system would mean both sellers and buyers would be more likely to negotiate rates with their agents. But would negotiating a lower rate mean your property for sale wouldn’t get as much attention or as many offers?
There are many “what ifs” here. If the NAR is actually engaging in price fixing, as the lawsuits allege, and stopping the supposed conspiracy would have an impact on commission rates overall, and buyers were able to finance buyer’s agent fees, the net impact on the average homeowner could be positive.
But those assumptions may not be true. And investors might be negatively impacted more than the average homeowner if they purchase more properties than they sell.
First-time investors would also feel the pain of higher upfront costs. Right now, 30-year fixed mortgage rates are still hovering above 7%, and after a correction, home prices are nearing a record high, according to the Case-Shiller National Home Price Index. Redfin reports that August saw a 3% year-over-year home price increase.
In addition, in most markets, buying an investment property is more expensive than ever. In May, we reported that rents exceed mortgage payments in only four cities, a number that has been shrinking. And tacking on a 3% commission fee means even fewer deals will generate cash flow.
To the extent that sellers build commission into home prices, buyers are already paying for the expense of their agent. But if a shift occurs, sellers’ agents will continue to price homes based on what the market will bear. And as the low supply of homes keeps prices elevated, listing prices may not fall due to buyers taking on some of the expense. That means more cash could be required from the buyer overall.
The Bottom Line
So far, there have been no widespread changes to the real estate industry as a result of the RE/MAX or Anywhere settlements. It may take more pressure to change a process that has been in place since 1913.
But these lawsuits open the door for potential shifts, including lower overall commissions and a transfer of responsibility for buyer’s agent commissions. If the latter occurs, it could be bad news for some real estate investors.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.