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Realtors Lose $1.8B Buyer-Agent Commission Jury Trial


On Halloween the Realtors received something very scary indeed - a $1.8 Billion verdict against them in a Missouri federal lawsuit. The Plaintiffs' central issue was that sellers shouldn't have had to pay the buyer's agent, and this caused inflated commissions. I can tell you that here in Western PA agents and brokers are actually not required to advertise buyer's agent compensation. The listing agent can literally enter "0" into the field for buyer's agent commission into the MLS system and that is perfectly fine -- if the seller really wants to do that. However, since all the seller really wants is to sell their home and they are willing to pay for that, in my experience no seller actually wants to do that. The buyer's agent is the only one actually bringing a buyer to the seller, so why wouldn't they want to pay them?

If you're a buyer and think that buyer's agent commissions are too high, guess what you can do? You can hire my real estate brokerage, Insight Realty. Insight Realty has a minimum buyer's agent commission of only 1.5% on most transactions, and the remainder (up to 50% of the commission), gets issued back to the buyer at closing as a cash rebate, reducing closing costs. That's right, instead of the buyer paying us, we actually pay the Buyer. Alas, if only the Plaintiffs in the lawsuit had known about Insight Realty.

The whole premise of the lawsuit is incorrect to me because it assumes that sellers are in fact paying buyers agents in the first place. In reality and according to any listing agreement I've ever seen, sellers only pay their broker, not the buyer's broker. The system is set up so that if the buyer comes directly to the listing agent (and there is no buyers agent) the amount of the commission is the same - it just gets paid all to the listing broker. The agreement to pay commissions is only between the listing broker and seller. Listing agents want buyers to come to the property and most serious buyers are working with buyer's agents.

Additionally, since the whole point of the multi-list is to cooperatively share listings, rather than greedily hording them, there would be no point in listing a property on the multi-list if you weren't going to offer those cooperating brokers some sort of compensation. It would be like posting a job on job board but listing the salary at zero. It is possible to do this, but why?

But to understand where buyer agent commissions are now, you have to look at the history of residential real estate commissions. Prior to around 1990 there was no such thing as a buyer's agent and real estate brokerages did not share their information on a centralized system. They mostly kept the information to themselves, which would have undoubtedly limited exposure. If a buyer came and wanted to be "represented" by an agent other than the listing agent (dual agency) they were given a subagent. That subagent did not work for the buyer and had no duty to them. Also - guess how much commissions were back then? They were still around 6.0% or more, so the addition of buyer's agents did not increase commissions. If real estate goes back to subagency, that would be a step backwards for real estate consumers as they would have no one working for them.

Some like the Plaintiffs in the lawsuit make the analogy to attorney transactions and say something like "we would look askance at a defendant who offered to pay the plaintiff's attorney." However, this is exactly what happens with personal injury cases. Plaintiff's attorneys who take personal injury cases on contingency are notoriously paid by the other side - and quite a bit more than 5 or 6 % .... closer to around 40% of an injured person's settlement. Oddly no class actions have been filed regarding this practice.

Likewise, many make the argument that since the advent of the internet age agent fees should have fallen dramatically akin to travel agent fees. I have no knowledge whether travel agent fees have actually fallen or not, but the analogy to travel agent fees is very flawed. Residential Real estate is unique and is owed by non-professional laypersons. Airline tickets are largely interchangeable and sold by publicly traded companies . The travel agent does not have to drive to each plane on a moment's notice or in the middle of the night, inspect it, value it, and make a unique offer. Many take for granted that a buyer's agent will work around the clock, evenings, weekends, and holidays because "time is of the essence" in real estate. To my knowledge other professionals who work around the clock or liquidate illiquid assets have not seen a decrease in fees due to technology. Take, for example, estate sale liquidator, or estate attorneys, who will charge in excess of $50,000 on a million dollar estate based on court-approved percentages.

There also is no singular multi-list and each multi-list has its own rules. In Western PA our multi-list is not connected to and does not require membership to the Realtors Association. It is therefore difficult to see what changes would occur from this lawsuit. The only possible changes in my mind could be (1) listing brokers pay buyers' agents after closing, therefore making it more clear that the compensation is not paid by the seller, rather from the listing broker's compensation; (2) sellers are continued to be allowed to offer buyer's agent compensation, but have to sign even more paperwork stating they acknowledge they know what they are doing; (3) Sellers and their listing brokers are prohibited from advertising buyer agent commission, in which case the buyers agent will likely negotiate and build their fee into the agreement anyway; or (4) Nothing will change but perhaps more buyer will use rebate brokers (like Insight Realty). The third option seems the least likely and least legal to me because clearly a large percentage of sellers clearly want to advertise their property. It is difficult for me to see how this lawsuit will change anything, but hopefully people will realize that Insight Realty is the answer if they think agent fees are too high!

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