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Lawsuit: Realtors Must Change Co-op Commission Practices

In November 2020, the Justice Department and the National Association of REALTORS® (NAR) settled a federal lawsuit in which the government alleged realtors were engaging in anticompetitive behavior. The lawsuit was filed by a class of buyers who alleged price-fixing. The federal government involved itself after the lawsuit was filed. The settlement extracted several commitments from NAR, for example, forcing buyers’ agents to disclose their commission to buyers and forbidding them from stating that the seller pays their commission.

The Basis for the Lawsuit

The Justice Department argued that realtors engaged in price-fixing with buyers’ and sellers’ agents. Buyers’ and sellers’ agents receive a commission from the sales price in a typical transaction. The buyers’ agent is supposed to represent the buyers’ interests; however, the structure of the real estate market often distorts this.

Buyers’ agent commissions were obscured from buyers. The agents would tell their clients (the buyers) that their commission is paid for by the seller. However, the buyer could not see the buyers’ agent commission rate – only the seller can. The effect of this obscurity is that buyers’ agents can be incentivized by sellers who offer higher commission rates to “close” the deal. Moreover, buyers’ agents do not promote homes that offer lower commission rates. The effect is to encourage collusion between buyers’ and sellers’ agents and the seller to close deals.

Finally, buyers’ agents deceived their clients because they represent that the buyer doesn’t pay for their commission – the seller does. However, the seller usually increases the price to pay for the higher buyers’ agent commission rate. The net effect is to pass on all the commissions to the buyer who cannot see the buyers’ agent rate. Therefore, the price increases and the buyer can’t tell how much is allocated to the commission rates versus the house itself.

Contours of the Settlement

The settlement forbids realtors from stating that sellers pay for buyers’ agent commissions. It also forces realtors to disclose to buyers the buyers’ agent commission rate. The lawsuit’s goal is to ensure that all parties have all the same information, which should promote fairer and cheaper rates and home prices. This can greatly reduce the stress associated for homebuyers looking to relocate. Previously, the hidden rates obscured the cost of the home and passed along those costs to buyers. Now, buyers should see their agents’ rates; therefore, they may forgo a buyers’ agent or find a new one.

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Author: nohoarts