The real estate industry's commission system, where brokers receive up to 6% of a sale, is under scrutiny and may face a federal antitrust probe. Critics argue that this commission system inflates home prices and limits competition in the residential housing market. The Justice Department's investigation follows two private class-action lawsuits aimed at challenging the dominance of the National Association of Realtors (NAR) and its control over multiple listings services.
The Impact of Commission-Sharing
The focus of the investigation is on the real estate commission-sharing system, which typically takes a 5% to 6% cut of the sale and divides it between the seller's and buyer's agents. This system, unique to the United States, contributes to higher home prices, as compared to countries like Australia and the UK, where total commissions on a home sale are around 2%.
America’s real estate-commission system charges home sellers as much as 6% — versus 2% in other parts of the world like Australia and the UK. Critics have argued that hefty rates push home prices higher. Newsday via Getty Images
The difference in commission prices can cost a US seller listing their home at the median price of $416,100, approximately $14,000 more than in other countries. The Justice Department is concerned about policies and practices in the residential real estate industry that may contribute to rising broker commissions, as stated in a recent court filing.
Lawsuits Seek Accountability
Two class-action lawsuits, one in Missouri seeking up to $4 billion in damages and another in Illinois seeking up to $40 billion in damages, challenge the commission-sharing system. These lawsuits argue that the current process of selling residential real estate, which requires sellers to list their homes on multiple listings services and agree to predetermined commissions, is anti-competitive and effectively non-negotiable.
The potential outcome of these lawsuits opens the door for the DOJ to file its own antitrust lawsuit. In the worst-case scenario for the real estate industry, commission sharing could be banned, thereby prohibiting sellers' agents from compensating buyers' agents. This would have significant implications for how real estate transactions are conducted.
The Department of Justice is reportedly gearing up to file its own antitrust lawsuit that poses a threat to the commission-sharing system altogether. REUTERS
Towards a Fair and Competitive Market
The NAR has cautioned that ruling in favor of the plaintiffs could make buyer's agents unaffordable, limit access to listings, and restrict buyer choice. They argue that their organization ensures consumers have access to comprehensive, equitable, transparent, and reliable home information, while allowing brokerages of all sizes and pricing models to compete. The NAR expresses confidence in proving the lawfulness of the rules being questioned.
Another antitrust lawsuit in Illinois is set to go to trial next year, further fueling the debate around the commission-sharing system and its impact on the real estate market. The outcome of these legal battles will undoubtedly shape the future of the industry.
As the investigation unfolds, it remains to be seen whether the commission system will face significant changes. Homebuyers and sellers are eagerly awaiting a more transparent and competitive real estate market that does not inflate home prices through hefty broker commissions. The DOJ's involvement may bring about the accountability many have been seeking.
Please note: While every effort has been made to provide accurate information, the content of this article should not be considered legal or financial advice. Readers are encouraged to consult with professionals in these fields for guidance on specific circumstances.
