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It’s easy to forget how much we used to rely on real, physical paper and, like, other people to buy basic things. It wasn’t all that long ago that you’d call a travel agent to book a flight. Maybe you’d pick up the telephone (a landline, even) and ask your broker to buy some stocks, rather than simply tapping a few buttons on an app.
And yet buying a home remains firmly, painfully undisrupted by technology. For now.
A verdict in a Missouri court last week may finally help pry the door open on real estate’s arcane, expensive infrastructure, my colleague Anna Bahney writes.
ICYMI: The National Association of Realtors, a massive trade and lobbying group, along with two brokerage firms, Homeservices of America and Keller Williams Realty, were ordered to pay $1.8 billion in damages to a group of 500,000 home sellers who argued that the groups had conspired to keep commissions artificially high.
A couple of days later, the NAR’s chief executive, Bob Goldberg, stepped down.
The plaintiffs’ main beef: An NAR rule that requires sellers to agree to pay a commission to both the buyer’s and seller’s agents before their home can be listed on a database called the Multiple Listing Service, or MLS. (Basically, if you don’t get your listing on the MLS, you seriously limit the number of people who’ll see it.)
Usually, when you put your house on the market you and your broker will agree on a set commission — usually 5%-6% of the sale price — to be paid to both your agent and the buyer’s agent.
But the sellers argued that in a competitive market, the buyers should pay their own agent’s commission, and negotiate that fee separately. Which makes sense, because buyers are the ones receiving the service from their agent.
The NAR and the other defendants argued in court that their commissions are always negotiable, and that the commission-sharing arrangement saves buyers, who are already weighed down with expenses like a downpayment, closing costs, inspections and appraisals, to avoid the added expense of having to pay an agent as well.
Still, consumer advocates celebrated the verdict. Because even though the NAR says fees are negotiable, the industry has made 5%-6% commissions so standard that most people wouldn’t question it.
Some background
It’s hard to overstate just how powerful the NAR is. The term “Realtor” (note the capital R) for example, is trademarked by the NAR, and if you’re not a dues-paying member, you’re just a real-estate agent. With about 1.5 million members, it’s the largest trade group in America.
That power pays. According to Bloomberg, Realtor commissions are high by global standards. Let’s say you have a median-priced home listed at $431,000. A US standard 6% commission will net the Realtor nearly $26,000.
In the UK and Australia, total commissions are about 2%.
What now?
If you’re selling your home, you’re probably still on the hook for that 5%-6% payout.
But the Missouri case is just one of several fronts on which the commission rule is being attacked. Other plaintiffs have sued the NAR, and the Department of Justice is also scrutinizing the system to see whether it violates antitrust law. The outcome of that investigation could have huge implications if the feds try to ban commission-sharing agreements altogether.
And because commission rates tend to be baked into a home’s price, changing the commission structure could help take the heat off home prices.
The NAR vowed to appeal last week’s ruling.
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