The Journal. - A Case of Conspiracy in Real Estate

Episode Date: November 6, 2023

Home buyers and sellers face the prospect of major changes to the ways they pay their real-estate agents, following a historic verdict against the National Association of Realtors and large residential brokerages. WSJ’s Laura Kusisto explains the stakes. Further Reading: -The Way You Pay to Buy or Sell a Home Is About to Change  -Jury Finds Realtors Conspired to Keep Commissions High  -Real-Estate Commissions Could Be the Next Fee on the Chopping Block  Further Listening: -Homeowners Don’t Want to Sell. So Builders Are Cashing In.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Laura, have you ever sold a house? I've never sold a house. I have bought twice. And, you know, it's like a funny thing, actually. I have no idea how much my agent got paid. In the U.S., when someone decides to buy or sell a house, they typically pay a real estate agent to get the job done. Here's our colleague, Laura Casisto. So I decide to sell my home and I go out and I find an agent and I'll talk to the agent.

And one of the things, one of the first conversations that we'll have is about the commission and what is it going to be and what are we going to offer to the buyer's agent? Laura says that those commissions are often one of the more nebulous parts of a home sale. This is sort of an important thing to understand, that I, as a seller, in effect, to sort of a chain of different people, but I, in effect, as a seller, when I sell my home, am the one who pays the buyer's agent.

For a long time, this is how many real estate transactions have played out. Critics have said that it's a system that lacks transparency and keeps home prices high. And now, a historic verdict in a federal class action lawsuit could upend how it all works. A bombshell court ruling in the real estate industry could affect those who are buying or selling a home. A federal jury in Missouri on Tuesday found that the National Association of Realtors liable for artificially inflating commissions and awarded plaintiffs $1.8 billion in damages.

The plaintiffs argued the organizations forced home sellers to pay both the seller and buyer fees, calling that practice wrong and illegal. How would you describe this moment for the real estate industry? I think it is a moment of potential change. We're going to see pressure, unlike we've seen it before on the industry, to do something to address this. Welcome to The Journal, our show about money, business, and power.

I'm Jessica Mendoza. It's Monday, November 6th. Coming up on the show, a conspiracy over real estate broker fees. Your teen requested a ride, but this time, not from you. It's through their Uber Teen account. It's an Uber account that allows your teen to request a ride under your supervision

with live trip tracking and highly rated drivers. Add your teen to your Uber account today. Who came up with this system of commissions for real estate agents? So there's a long history to this, but I think for the sake of sort of time and just to not overcomplicate it, let's go back to the 1990s, because that's where I think the particular points that we're going to talk about today really originate. You know, a lot of times buyers were not using their own broker. The seller's broker would kind of facilitate the whole transaction. And there was an argument that buyers were going unrepresented, that they were

not kind of having their own kind of advocate in the process. Right. Because the seller's agent's job is to sell the house to someone, regardless of what the terms are for the buyer. Exactly correct. And I mean, you can certainly make the argument that at the end of the day, everyone has the same goal, right, which is for the buyer to get the house. But sometimes things get more complicated. You know, buyers aren't sure how much they should offer for the home. The inspection report comes back with some warts on it. And so the idea was that it was helpful for them to have their own advocate through that

process. idea was that it was helpful for them to have their own advocate through that process. So how much of the final sale price goes to the commission? So in the 5% to 6% range, and another way I like to think about it is, so if now a typical home in the U.S. sells in the $400,000 range, you're talking about a check in the $20,000 range. And how is that commission shared between the seller's agent and the buyer's agent? So I say I'm a seller's agent. I generally sort of split the commission with the buyer's agent. So usually probably down the middle.

But the seller is going to essentially write me a check. And then I'm going to split whatever the commission is that I get, whatever the fee is I get with the buyer's agent. This system basically requires that sellers say up front what they'll pay the buyer's agent. It's a condition for marketing their homes on the Multiple Listing Service, or MLS, which is a database of properties used by agents. The requirement was established in most markets by the National Association of Realtors. Most agents are not salaried, so that's something that's important to understand. They're people who work purely on commission, and so this is how they get paid. They get paid by the seller of the home. And so everything I have is invested in the idea that this deal is going to close

and that hopefully that at the closing table I get this very large check. This commission model hasn't shown many signs of changing. And that was true even after sites like Zillow started popping up that made it easier for buyers to find listings on their own without agents. But then last week, a jury reached a verdict in a class action suit in Kansas City, Missouri. The lawsuit is filed by just kind of ordinary home sellers, people who have sold a home in several Midwestern states in recent years. And they file the lawsuit alleging that the National Association of Realtors

and these major national brokerages have, in the words of antitrust laws, sort of conspired to keep commissions high. That these rules that you and I are talking to amount to, you know, a joint effort, a collective effort to try to fix prices in the industry, to prevent them from going down. And that this is costly sellers' money. The defendants could now be on the hook for $1.8 billion in damages. The National Association of Realtors said it plans to appeal. And it said that upending the current model could hurt inexperienced homebuyers who benefit from the expertise of a buyer's agent.

Another much larger class action suit could go to trial in an Illinois federal court next year. That case involves 20 housing markets across the country. And according to one industry analyst, the damages in that trial could top $40 billion. One home seller who says he'll be watching the trial is John Anderson. I move around quite a bit for work, so I've sort of lived all over the place. But right now I am in Omaha, Nebraska. John has bought and sold multiple houses. And when he would sell a house, he usually relied on a traditional agent. Then, in 2019, John was selling a home in Colorado Springs.

He wanted to see if he could avoid shelling out a lot on agent commissions. So he hired a startup whose goal was to keep those commissions low. But John wasn't getting any bites on his house. I do remember several weeks into the process being surprised that we hadn't had so much as a showing. Like no one had even requested to see the house at that point. And we were pretty surprised by that, given the speed at which houses were going under contract in the area. What did you think was going on? I do know that my wife and I at least had those conversations. Like, I wonder if we're being blacklisted. But of course, you know, you can think it, you can feel it all you want.

The question is, can you prove it and do you have evidence of it, right? And I certainly did not. Outside of, you know, I guess at best you could say circumstantially, why is my house not being shown while people down the street's house is being shown? Turns out, John's house was sort of being blacklisted. That's after the break. At Air Miles, we help you collect more moments.

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That's the powerful backing of American Express. Visit amex.ca slash yamx. Benefits vary by card. Terms apply. The startup that John Anderson used to list his Colorado home was a company called Rex. We were getting ready to move out of state. We needed to sell the house. We weren't too worried about it because the market was so hot at the time. I mean, they were just selling so fast. And that's when we went with Rex, which, you know, they are licensed real estate agents and it's sort of this

new way of doing business is sort of how they marketed it. Rex is now defunct. But back then, instead of the typical 5% agent fee, its fees started at around 2%. The buyer's agent was not promised a cut of that, and that became a problem for John. Thank you for calling Rex. This call may be recorded. Please hold while we connect you to the next available Rex agent. Connect with a dedicated Rex agent. Rex had a record of a call from a local buyer's agent. She was interested in John's house, but couldn't find the property in the multiple listing service. Thank you for calling Rex. This is Logan. Hey, I'm calling because I

see an active listing on your website here, but it's nowhere to be found in our MLS. All right. I do see that one here. And the reason why you didn't see it on the MLS is because we actually don't advertise any of our properties on the MLS. So with that being said, our sellers are not obligated to pay that buyer's agent commission. However, we'd never want you to work for free. Typically with a buyer agent in your position, the way you're compensated would be by the buyer, but we do make that process very simple with our offer online submission process. Don't worry about it. I won't bother to show it. Who's your local agent, though? Because I'll make sure and tell people not to work with them. John's house eventually ended up selling $15,000 below the asking price.

And he said it took about two months, when his neighbor's homes were selling in weeks or even days. John, how'd you feel when you learned about that call? Not shocked that people would do this. So unfortunately, I've become a little cynical and it's not all that surprising. But, you know, it makes you wonder how often this happens when people don't know about it. And we'll never know about it, right? Now, that recording with a buyer's agent is one of 600 calls offered as evidence in the Illinois class action lawsuit.

offered as evidence in the Illinois class action lawsuit. It gives us insight into what the plaintiffs are sort of arguing happens, right? Which is that, you know, it's a very kind of chummy kind of close-knit business and the agents are steering their clients away from homes where they're not going to get paid as much. and that that in turn kind of essentially penalizes sellers who might want to try a new option, an option that is a lower commission option. If the Illinois case goes the way the Kansas City one did, it could shake up the way commissions work in the real estate industry. Americans currently pay $100 billion in real estate commissions every year. One analyst predicts that changing the system could cut that figure by 30%. It could also push more than half the agents in the U.S. out of the industry.

As for what those changes could look like... So one possible scenario, I would say the most modest possible scenario, is that they just make it optional for the seller to offer the buyer's agent a commission. And so they say, you don't have to do this. You can choose to do this. It's a way to market your home. But we're no longer going to require it if you want to put your home on the multiple listing service. That would be a pretty modest step because what we're hearing is sellers felt like, I'm not going to kind of risk, right, trying something different.

The incentives didn't change. Exactly. So why would the behavior? Right. That's exactly it. Another possible scenario is that you have a very just bright line rule change that sellers cannot cover the buyer's agent commission, that everyone must pay their own agent. And the argument for this is that would probably be the most powerful in terms of ensuring competition, right? You would just no longer have a world where the seller felt any kind of pressure to cover the cost. I think that would

be a world where you'd see a lot more buyers going without agents, where you'd see buyers, I think, being a lot more aggressive in terms of negotiating down the cost of their agent. But the argument against it is that then you do also have a world where buyers are having to figure out a way to come up with the money for this potentially out of pocket. So if buyers have to pay their own agents, does that actually lower the sticker price on a house? It's a super good question. And I think one we don't fully have the answer to. I think many people I talk to, the answer would be slightly. Right now, sellers, let's say on a typical home, they're paying somewhere in the $20,000 range. And if they paid somewhat less, maybe they do take a little bit of that off the price of the home, maybe they do take a little bit of that off the

price of the home. Maybe they have just a little bit of extra wiggle room in terms of negotiation. And so there's, you know, I think there's a possibility that home prices prove pretty sticky. How much, you know, are sellers going to kind of give the savings back to buyers versus pocketing it themselves, assuming that we sort of see a savings at all. Yeah, for the buyer, it would be one more thing that they would have to think about that right now is sort of just baked into the list price. Yeah, and I mean, I think that the argument, that kind of economist type argument for this is that the world is sort of a better place when people think about what they pay for things, right? That right now, really, neither buyers nor sellers are thinking very much about this as like a cost and as a cost that they could potentially try to bring down to make their home more affordable. And so the really kind of

pure free market economist argument is that we're just like in a better world where people know how much this costs and people can think about whether it's worth it to them or not. Ironically, one person who's going to stick with the old way of doing things, at least for now, is John Anderson. And now, John, you're selling a house again, right? I am. How are you going about it this time? Oh, very, very traditional. Now, it's not a seller's market where I'm selling this house. And I'm in Omaha now, and the house is being sold in a different state.

When we sold the house in Colorado, my wife and I just concluded that it just wasn't worth it. So now we've come crawling back to the MLS, begging and pleading for forgiveness, and our house is now listed on there. That's all for today, Monday, November 6th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Nicole Friedman. Thanks for listening. See you tomorrow.