WASHINGTON — The residential real estate industry is bracing for a challenge over the commissions charged by its sales agents, a challenge that could put downward pressure on the fees paid by home buyers and sellers.
The Justice Department is investigating home sales commissions, and in a broad executive order, President Biden called on the Federal Trade Commission to pass rules to address unfair or exclusionary practices in the real estate industry.
Several civil lawsuits challenging industry commission rules and practices have survived the initial procedural challenges and won the support of the Department of Justice, putting additional pressure on traditional brokerage fees.
The politically powerful real estate industry has survived past challenges to its commission structure, but consumer advocates say rising home prices have exacerbated concerns about excessive fees.
“The litigation and government attention the industry is receiving today is unprecedented,” said Stephen Brobeck, senior researcher at the Consumer Federation of America and longtime industry critic.
What is at issue are the commissions that real estate agents earn for the sale of a home, typically between 5% and 6% of the sale price. For a home sale at the recent national median price of around $ 375,000, a 5% commission would be $ 18,750 – or for a $ 1 million home, it would be $ 50,000.
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Very high end properties tend to have slightly lower commission rates.
Home buyers end up contributing these commissions as part of the purchase price, but often have little negotiating room since it is the home sellers who usually set the commissions for the agents on both sides of the transaction.
Consumer advocates say this contributes to excessive commissions and point to the National Association of Realtors rules as the biggest barrier to change. These rules require sellers to offer commissions to brokers of potential buyers, which consumer groups believe encourages sellers to charge high rates to buying agents in order to attract more potential buyers.
Industry critics also say the fees are opaque to most buyers, and claim that the advent of online home search engines has diminished the traditional role that buyers’ agents play in matching buyers. buyers and sellers.
The National Association of Realtors says a tight selling market and rising prices have made realtors more important than ever, and they say commissions are fully negotiable and falling. The national average commission rate is currently between 4.9% and 4.94%, according to news and research site RealTrends, up from 5.40% in 2012.
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The NAR says the current commission structure also encourages more competition by giving all participants in local multiple listing services equal access to available property information. It also helps make homes more affordable for first-time buyers and low-income buyers, according to the trade group, since they don’t have to pay their own agents up front.
“NAR remains committed to promoting and championing independent local brokerage organizations that provide better economic and equity opportunities for small businesses and consumers, including first-time, low- and middle-income homebuyers,” NAR General Counsel Katie Johnson said.
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Under the Trump administration, the Justice Department and the National Association of Realtors struck a deal to provide more disclosure on brokerage fees and make them more competitive. But this summer, President Biden’s Justice Department said it was withdrawing from the settlement so it could continue a broader investigation into brokerage commissions.
The Justice Department said Americans paid more than $ 85 billion in home sales commissions last year and that industry practices “can hurt home buyers and sellers.” Last week, the NAR challenged the ministry’s withdrawal, saying it would fight a civil summons from the Justice Ministry.
The civil summons issued by the Justice Department in July largely focuses on the NAR and industry policies that could shape the structure of the commission, court records show. For example, the subpoena requires that NAR “submit all documents relating to any policy, directive, rule or practice: a. requiring listing brokers to make a compensation offer to buying brokers for listing a home ”on a multiple listing service.
The summons is also investigating practices that may restrict the marketing of non-MLS ads, another subject of recent private lawsuits.
A further sign of growing risks to the industry, the Justice Department has taken sides against NAR and other industry defendants, filing statements in several civil lawsuits. The Justice Department’s statements generally challenge the NAR’s claim that a 2008 settlement with the Department gave the government’s blessing to the current structure of the commission.
Mr. Biden also pushed the Federal Trade Commission to launch its own review. The president said in a recent executive order targeting competition concerns that the FTC should consider rules to address “unfair tied selling or exclusionary practices in the brokerage or listing of real estate.”
The FTC did not respond to a request for comment.
The Justice Department’s investigation could lead to an antitrust lawsuit and possible sanctions against the industry. The prospect of FTC action is more distant, given the procedural hurdles the agency faces in adopting new rules.
The current Justice Department investigation began earlier this year. After the change of administration, the department was keen to pursue a broader view of the industry and unilaterally withdrew from the settlement pact with NAR.
The ministry is concerned that a range of practices could create a closed market for buying and selling homes, blocking higher fees and preventing maverick businesses and agents from successfully offering lower-cost models.
These concerns are especially true at a time of potentially disruptive change in the industry, accelerated by the Covid-19 pandemic, which has for example seen a boom in virtual models to visit homes and navigate the real estate market.
Several civil lawsuits against the industry seeking class action status have been filed by private law firms, including one by Cohen Milstein and Susman Godfrey filed in U.S. District Court in Chicago which survived initial procedural challenges but did not has not yet obtained class action status. .
The lawsuit argues that NAR rules stifle competition, which Ms Johnson disputes. Real estate agents “already compete on commissions, ranging from offering varied commission models to fixed fees,” she said.
U.S. District Judge Andrea Wood in Ill. Sided with the plaintiff home sellers in dismissing the defendants’ motion to dismiss the case.
“The plaintiffs’ allegations plausibly show that the buy-broker commission rules prevent effective negotiation of commission rates and cause artificial inflation of buy-broker commission rates,” the judge wrote last year. “Had it not been for the defendants’ conspiracy, each plaintiff would have paid ‘significantly lower commissions’. “
—Brent Kendall contributed to this article.
Write to John D. McKinnon at john.mckinnon@wsj.com
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