Lawsuits Challenge a Central Part of the Real Estate Business
When shopping for a new home, most buyers focus on the listing price, the interest rate for their mortgage and the monthly payment they’ll have to pay for the loan. Real property tax and insurance payments are included in the monthly price they pay, and if they’re buying a condominium, they’ll have to consider the monthly maintenance fees too.
One cost homebuyers don’t often think about: paying their real estate agent.
But at least two class-action lawsuits moving through federal courts on the mainland have the potential to disrupt the traditional commission model for paying real estate agents.
Commissions are traditionally charged to sellers and paid to agents as a percentage of the sales price at closing, along with other closing costs. Traditionally that’s been 6% shared equally by the buying and selling agents, but can be lower depending on the services provided by an individual brokerage firm, says Kalama Kim, 2023 president of the statewide Hawaiʻi Realtors association.
It can also depend on the location of the property and the circumstances of the sale.
Kalama Kim is 2023 president of Hawaiʻi Realtors, a statewide association, and president of Berkshire Hathaway HomeServices Hawaiʻi Realty. | Photo: courtesy of Kalama Kim.
“For lower-priced and land properties, which are more challenging to market and sell, I’ve seen up to 10%, whereas if you’re seeing a median-sales-price property on Oʻahu, you could see anywhere from 6% or you could see 5% or 4%. We see advertisements for flat fees,” says Kim.
“Like any other industry you see pricing all over the board, because we’re a professional services industry, and it’s driven by what the consumer wants and expects from their brokerage firm.”
How Commissions Work
A residential home sale commission is initially paid to the listing agent’s brokerage firm, which then will typically split the commission with the buying agent’s firm. The firms then pay a percentage to their respective agents.
For example, a 6% commission on a single-family Oʻahu home sold for $1 million would be $60,000, charged to the seller. Assuming a 50-50 split between seller’s agent and buyer’s agent, each agent’s firm would receive $30,000, and, assuming a 50-50 split between the firm and the agent, each agent would receive about $15,000, or 1.5%.
In cases of dual agency transactions – when both the buying and selling agents work for the same firm – the firm is required under MLS rules to disclose to any buyers that it will charge the seller a discounted commission, Kim says. By providing that disclosure, other brokerage firms understand the competition, he says.
“How it’s split depends on what the seller decides,” says Kim, who is also president of Berkshire Hathaway HomeServices Hawaiʻi. “The listing contract has an area that you fill in based on discussion with the seller on that cooperating brokerage and data.”
What percentage the listing firm is offering to pay a buyer’s agent must be shown in the listing on multiple listing services, per a National Association of Realtors rule that went into effect on Jan. 1, 2022, Kim says.
“The brokerage firm charges the seller a percent and then a portion of that is offered to other brokerages to bring in the buyer,” Kim says. “The brokerage is offering and paying the buyer-side cooperative commission and that’s being advertised on the MLS.”
In other words, the seller’s firm uses a share of the commission as an incentive to other brokers as a way to expand the pool of potential buyers for a home or condo.
Kim also notes that buyers are already paying fees on the mortgage, along with fees for inspections and other closing costs, so paying a commission on top of that might make it more challenging for some to buy.
“If they are paying additional fees in addition, it’s more challenging for them to purchase a property,” he says. “That’s the dynamic we’ve had in the country for as long as I can remember.”
Antitrust lawsuits filed in federal courts in Missouri and Illinois by home sellers against the National Realtors Association and some of the largest real estate brokerage franchisors in the U.S. are challenging the assumption that a seller must pay the commission for a buyer’s agent.
Both cases have been granted class-action status, and some people familiar with them have calculated potential damages to exceed $54 billion. The corporate real estate defendants in both cases also have significant market share in Hawaiʻi. They include:
Anywhere Real Estate Inc., formerly known as Realogy, whose brands include Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, Corcoran and Sotheby’s International Realty.
The larger of the two cases, Moehrl v. National Association of Realtors, was initially filed in the U.S. District Court in the Northern District of Illinois in 2019. It was granted class–action status on March 29. The other case, Sitzer/Burnett v. National Association of Realtors, was filed in Missouri in 2019 and was granted class-action status last year, although a trial in the case was postponed in December.
The law firm Cohen Milstein, co-lead counsel for the plaintiffs in the Illinois case, alleges that buyer broker commissions have been kept at 2.5% to 3% “despite the diminishing role of buyer brokers due to buyers independently identifying homes through online services and retaining buyer brokers only after they have found the home they wish to buy.”
NAR said in August 2019 that the complaints “misrepresent rules which have long been recognized by the courts across the country as protecting consumers and creating competitive, efficient markets that benefit home buyers and sellers.”
While the lawsuits don’t directly involve any firms in Hawaiʻi, Kim says he and his colleagues in the industry are watching them. NAR keeps its members at Realtors associations and multiple listing services around the country aware and Kim says Hawaiʻi Realtors has already been talking to its members across the Islands to make sure they know about the issue.
“We’re focusing on what we already do well, and what we already do well is to make sure we’re providing quality service to our consumers,” he says. “And if we do that, then we’re focused on earning the commission that we charge on the seller side. That’s within our control.”