THE BIGGEST-FASTEST JUDGMENT IN BUSINESS LITIGATION HISTORY

The lawsuit was filed back in 2019 on behalf of 500,000 Missouri plaintiffs claiming almost $2 billion in damages. They alleged that they paid thousands more than they should have to sell their homes. I’ve written about this often since the lawsuit (and another one like it) was filed four years ago. The title of my first article was: The End of Traditional Real Estate (which can be found at GregHague.com).

IS IT FAIR?

The crux of the plaintiffs’ case was the fairness of the U.S. commission structure in which sellers typically compensate their own agent as well as the agent who represents the buyer. It’s common for sellers in the U.S. to pay one commission (often 5% to 6%), with half of that offered by the listing agent to the agent who finds a buyer for the home.

EASY TO SEE COMING!

When this case was filed in 2019, I saw last week’s blockbuster court decision coming. The argument that buyers should pay their own agent is intuitive. The argument that sellers should not have to pay the agent who negotiates against them is intuitive. And who in the consumer world thinks real estate commissions are too high?… Most everybody (except real estate agents). $5.4

BILLION IN DAMAGES

After a two-week trial the eight-person jury took only 2 hours, 28 minutes to find in favor of the home selling plaintiffs and award them everything they asked for…over $1.8 billion in damages. Since this was an antitrust based case, the court trebled the damages to almost $5.4 billion.

BUYER AGENT STEERING

A big part of the plaintiffs’ case was a uniform expectation among buyer agents in most every market that they should receive a certain amount of commission from sellers, with the tacit threat that when the expected amount isn’t offered, they won’t show the home. 

Obviously, this would be a reprehensible practice, horribly unfair to innocent buyers who miss out on what might be their perfect home. It’s also potentially a breach of the agency relationship 

and fiduciary responsibility buyer agents have to their buyers. Nevertheless, the plaintiffs produced studies and expert witnesses that demonstrated homes are shown less, take longer to sell, and are less likely to sell when the commission offered to buyer agents is below what is expected in the market.

HOUSINGWIRE STATS

A study I saw published in HousingWire showed that the odds of selling a home ranged from 48% to 78% depending on the amount of buyer agent commission offered. Also, from market to market across the U.S. the overwhelming majority of home sellers offered buyer agents at least a 2% commission to increase the probability their home would be shown. The plaintiffs used these types of statistics to illustrate that buyer agents steer buyers away from homes when the sellers offer a lower than expected commission.

NEGATIVE INDUSTRY PR

Since this buyer agent commission trial started and the mainstream press became aware of the issue, the comments and observations have not been kind to the real estate industry. Even the business-friendly Wall Street Journal published an article the morning the trial began that pretty much toasted the real estate industry and its commission structure.

“Home Sellers Win $1.8 Billion In Damages In Realtor Fee ‘Conspiracy’” – Wall Street Journal

Here is a widely publicized quote from Michael Ketchmark, the lead attorney for the plaintiffs:

“It’s been a long four-and-a-half-year fight. But the truth has come out. The jury heard all the evidence and today’s the day of accountability. The message was sent out loud and clear from Missouri that what’s happening in the real estate market is wrong. The National Association of Realtors and the corporate real estate defendants have been found liable for a conspiracy to rip homeowners off when they sell their homes.”

NATIONWIDE IMPACT

It’s too early to assess the full impact of the court decision and the changes that will occur in the real estate industry. In addition to the $5+ billion damages award, the trial judge will likely craft rules that mandate significant change in the U.S. commission structure. In support of this change, the Department of Justice is involved and has scrutinized and often objected to the U.S. real estate commission structure since the 1950s. 

While this case was in Missouri, and only relates to Missouri home sellers, there are several other identical cases pending that encompass every home seller in America. Therefore, I expect a “global” settlement to be reached in the weeks/ months ahead that revamps the way homes are sold and the way compensation is paid to real estate agents. 

MY TAKEAWAYS

Because this landmark case affects anyone who owns a home, with the probability of greatly reducing the cost of selling, I will keep you informed when major developments occur. Some of the agents I train around the country are already reaching out to me, asking if they should remove the offer of buyer agent compensation from the MLS when their sellers request it (to reduce the commission they pay).

Here are my preliminary takeaways as to what’s likely to happen: 

• Listing agents will stop making an offer of buyer agent compensation through the MLS.
• More homebuyers will begin looking at homes directly with listing agents because they won’t want to pay the cost of a buyer agent out of pocket.
• The average commission home sellers pay will drop to 2%-3% from the current 5%-6%.   
• The percentage commission will be challenged by agents who offer fixed fees and hourly rates.
• Specialized real estate firms (and agents) will emerge that offer an “a la carte” menu of fixed-fee and hourly home buying and home seling services. 
• Buyers who want help from buyer agents without paying them out of pocket will try to negotiate that cost into their purchase offer, thereby enabling them to finance it into their home loan.
• Lenders may change the rules and allow buyers to finance the cost of a buyer agent without having to negotiate it into the price they pay for the home.
• It’s even possible that the courts and future laws will prohibit home sellers and listing agents from paying buyer agents at all.

As I said, my observations are preliminary. I expect many significant developments on this issue in the near future.

The amount of money at stake is historic. The changes that are likely to occur in the real estate industry may be seismic, similar to the disruption that occurred in the communications industry after the AT&T breakup in the 1980s by the Justice Department.

One thing is for sure, the real estate industry just got a big wake-up call from what appears to be the biggest-fastest judgment in business litigation history.