In real estate commission row, judge denies arbitration motion

The judgement comes amid dueling reports, setting the stage for an NAR reckoning

When one looks back at 2022, the biggest real estate story may be a market downturn. But it might be a story that transcends economic cycles: A lawsuit that upended the way homesellers and buyers pay real estate agents.

This week, a Missouri federal judge denied a motion by the National Association of Realtors, HomeServices of America, RE/MAX and Keller Williams to compel arbitration in a class action lawsuit on behalf of hundreds of thousands of people who have sold their homes.

At issue is an NAR policy that the seller’s agent of a home must split their commission equally with a buyer agent. The rule has been around since 1913, and, according to the consumers and their lawyers who filed the lawsuit (the lead named plaintiffs are homebuyers Rhonda and Scott Burnett), it has artificially inflated real estate commissions to 5-6% total of the home sale price.

Consumers also argue that the country’s biggest brokerages collude with NAR to maintain this commission regime.

In April, judge Stephen Bough certified a class of hundreds of thousands of housing consumers, a decision that was swiftly upheld by the U.S. 8th Circuit Court of Appeals.

After their appeal was denied, defendant’s next move was to invoke an agreement that a private arbitrator settle any dispute between them and their broker.

Bough acknowledged that the plaintiffs used Reece & Nichols Realtors to sell their home, a longtime Kansas City brokerage that is wholly owned by HomeServices of Mokan, which, in turn, is owned by HomeServices of America. But the judge argued that HomeServices waived its right to arbitration, by first litigating the case instead of arbitrating it.

“HomeServices filed a briefing on plaintiffs’ motion for class certification,” Bough wrote. “HomeServices also appeared at oral argument,” while the company, “Failed to mention its right to arbitrate against unnamed class members in its answers and all defendants.”

The case’s next step is likely the defendant’s making a pre-trial motion for judgement. If that motion is denied, then this case involving consumers in Missouri, Kansas and part of Illinois could either go to a jury. Or it may result in a settlement that changes NAR policy.

Meanwhile, multiple other lawsuits against NAR regarding commissions remain active. Plus, the Justice Department is in year two of an inquiry into U.S. real estate commissions. DOJ did not respond to messages this week regarding their investigation’s status.

HomeServices of America and NAR are increasingly taking the battle beyond the courtroom. On Monday, NAR publicized a commission study financed by HomeServices of America.

Written by financial service consultants Ann Schnare, Amy Crews Cutts along with George Washington University professor Vanessa Gail Perry, the study makes a few arguments for keeping the present commission structure.

First, parroting NAR’s position, the authors argue that having seller and buyer individually negotiate commissions would price out many first-time homebuyers. This new financial imposition may disproportionately affect Black and Hispanic people, the study argues, who already have significantly lower home ownership rates than white people.

The minimum down payment for a Federal Housing Administration loan is 3.5% of a home’s sale price, the author’s point out. Using the base of a $250,000 sales price, if a buyer were to pay a 3.5% down payment plus a 3% real estate agent’s fee, the cash required at closing would rise 42%.

Even if the commission’s rate dropped to, say, 1.5% per deal side, the buyer would still pay an additional 19% upfront.

“The very households who would appear to need and value the services of a real estate agent the most – most notably, first-time homebuyers who have never gone through the process before – are the ones least able to pay their agents directly,” the study argued.

The commission changes, then, will either impose an undue burden on homebuyers, the study argues, or create a domino effect whereby changes are made to mortgage qualification.

“Changes to underwriting guidelines are complex processes that require regulatory approval and coordination across multiple parties along the mortgage supply chain,” the author’s write. “The transition period would likely be disruptive, sporadic and prolonged.”

Proponents in changing how real estate agents are compensated would likely concede that point. But they argue the change is worth the trouble.

One such advocate is the Consumer Federation of America, which released a report this week stating that the commission rate does not dip when the sales price is higher. In 35 cities studied, a home selling for $1 million pays each side the same percentage commission as an abode priced at $200,000.

“At the same commission rate, brokers selling a $1 million home receive ten times the compensation of those selling a $100,000 home,” notes the study, written by Consumer Federation of America senior fellow Stephen Brobeck. “Yet, scholars and realtors have questioned whether the former brokers spend 10 times the money and time on the sale as do the latter brokers.”

In fact, in eight of the 35 cities studied – including Dallas, Las Vegas, and Miami – agents tend to be paid at a higher percentage commission – when the price of a home climbs.

The debate over commission rates come as the rates themselves held steady over the past few years even amid rapidly escalating housing prices. The rate has hovered around 5%, per RealTrends and RTC Consulting data, finishing at 5.06% in 2021, after clocking in at 4.94% in 2020.