For the average Houston home, priced at $310,700, real estate agent commissions cost $18,600. If the same deal had closed in London, the homeseller would have only paid agents about $3,700.
The reasons for the difference are at the center of a class-action suit that could fundamentally change the way real estate sales are handled in the United States.
If the case, brought by a Minnesota homeowner seeking to strike down the standard practice of agents splitting commissions, is successful it could pave the way for the end of traditional real estate brokerages. If defeated or dismissed, as the National Association of Realtors has requested, it will mean business as usual for years to come and, perhaps, pose a stumbling block for a number of startup companies that are seeking to shake up the real estate business through the use of technology.
The case, brought by lead plaintiff Christopher Moehrl, argues that if not for rules put in place by the National Association of Realtors and used by local groups including the Houston Association of Realtors, commissions in the U.S. would be similar to those in the U.K., where sellers only pay the agent who lists the home, not the agent who helps the buyer make the purchase.
In the U.K., the average listing agent fee has been falling steadily since 2011, according to a survey by the homeseller website The Advisory, sinking to a mere 1.18 percent in 2018.
NAR, which is being sued along with Austin-based Keller Williams Realty, Re/Max Holdings, Homeservices of America and Realogy Holdings (owner of Century 21, Coldwell Banker, Sotheby’s International Realty and other household-name brokerages), argued the complaint characterized its rules incorrectly.
On Wednesday, a Federal Judge in Illinois allowed Moehrl to file an amended complaint by June 14. Now both sides are retrenching, the Department of Justice has opened its own investigation and the property data company CoreLogic has been dragged into the fray.
“The claims are devoid of accuracy,” said Mantill Williams, vice president of public relations at the National Association of Realtors. “They withdrew their complaint and are going to regroup to try to salvage what we see as a baseless claim.”
Court filings also showed the Department of Justice has opened an investigation into real estate agent fees. In the investigation, which is separate from the Moehrl case, the DOJ has demanded information from CoreLogic, which provides many real estate agents with platforms where they can share listings, known as multiple listing services. The inquiry centers on whether or not multiple listing services prevent competition in the real estate agent fee structure.
Multiple listing services are drawing scrutiny for their central role in negotiating these fees. Homesellers in the United States pay both the listing agent and the buyer’s agent. And when listing agents add homes into the National Association of Realtors’ listing service — which holds the majority of listings and often syndicates it to other real estate search sites such as Zillow and Realtor.com — they must say upfront how much they’re offering to pay
The commission on the sale of a home is usually 6 percent, which is traditionally split between the agents for the buyer and seller. As a result, Moehrl alleges buyers’ agents have little motivation to sell their clients on homes that will offer them less than the industry standard of 3 percent.
The Department of Justice has requested information regarding whether buyer agents can sort listings by fees paid.
By the numbers
Regardless of whether that is the case, Alex Doubet, chief executive of the discount brokerage Door, said he’d seen the system’s upward pressure on pricing firsthand.
When the company started in 2015, it listed comparable homes priced at the same price in the same gated community at the same time. One said it would pay the buyer’s agent the standard 3 percent, while the other offered 2 percent.
“The 2 percent one was getting half the showings than the 3 percent one was,” Doubet said. “The seller finally agreed to offer 3 percent, and then the houses went one for one, equal showings… If you’re a seller and you don’t offer a 3 percent buyer’s fee, your listing gets discriminated against.”
Others have found success in circumventing the multiple listing services altogether. When Houston resident Larry Lanclos was looking to sell his home, he searched for a way around paying the buyer’s fee. But Lanclos’ real estate agent friends who offered to list his home at cost said he would have to pay 3 percent to the buyer’s agent, even if he found a buyer himself.
“It kind of gets into a Catch-22,” he said. “You’re having to give money to someone who really didn’t do anything — they’re just called in by the Realtor who is representing you.”
He ended up going with REX, a discount brokerage charging only 2 percent to sell a home. The price is made possible by not paying the buyer’s agent. But not making the buyer’s agent an offer also means that the listing cannot be advertised on multiple listing services, such as HAR.com and Realtor.com.
Instead, REX’s homes can only be advertised directly to customers or on websites such as Zillow and Trulia, which only receive part of their listings from multiple listing services. Jonathan Friedland, the company’s head of communications, said such restrictions are worth it in order to offer lower fees.
“If you’re in the (Multiple Listing Service) you’re bound to live within these rules. That’s what makes the MLS so problematic for anyone who is really trying to innovate in the industry,” he said. “If you don’t abide by some of these rules, you are kicked out.”
Kara Biggs found Lanclos’ home through Zillow and closed four weeks after it went on the market, even though it meant paying for her own buyer’s agent.
The United Kingdom provides an example of what an alternate system could look like. That’s because in the U.K., sellers only pay the agent who lists the home, not the agent who helps the buyer make the purchase. That’s up to the buyer, many of whom opt out of using an agent altogether, instead hiring a lawyer to guide them through paperwork.
But what has changed in the U.K. during the internet era is an intensifying competition among real estate agents, who have dropped their average fee from 1.8 percent in 2011 to 1.18 percent in 2018.
Brazg said the internet made it too easy for real estate agencies to set up shop, and the oversupply of brokers is driving down revenues and pushing many brokerages to the financial breaking point. Shares in the major agencies have plummeted. Countrywide PLC’s share price has fallen to £7 from £272 in 2015, and Foxton’s share price is £60, down from £283 in 2015.
“There’s just too many real estate agencies in our countries,” Brazg said. With the low fees come financial issues for the agencies. “There’s going to be massive closures,” he predicted.
Doubet of Door said that he foresaw a similar winnowing of real estate agencies in the U.S. if real estate agent fees fall to U.K. levels.
That could greatly impact Houston’s economy, where the Houston Association of Realtors has 37,000 members.
“If the average fee on the buy side is going to go from $6,000 or $7,000 to $1,000 or $2,000, you now have a situation where you have to do more volume to make that an economic business,” Doubet said. He suggested that large firms could invest in technology allowing real estate agents to increase their volume of deals, but traditional firms without such technology may struggle. “You can’t survive if your fee is cut by two-thirds.”