Washington, DC (CNN) 鈥� Using a travel agent to buy a plane ticket聽or a stockbroker to trade equities seem like relics of the past. And yet, every day, people across America hire a real estate agent to help them sell a home. It鈥檚 one of the few industries that has been able to largely avoid the disruption that has helped consumers cut costs in the Internet age.
And that is largely because of the power of the National Association of Realtors, the largest professional organization in America and a significant lobbying group for the real estate industry.
But the verdict handed down in a Missouri court on Tuesday that found NAR and two brokerage firms, Homeservices of America and Keller Williams Realty, were liable for $1.8 billion in damages for conspiring to keep commissions artificially high,聽may mark the beginning of the end of how homes are bought and sold.
Two other firms initially named in the suits brought by home sellers 鈥� and , formerly known as Realogy, which is the parent company of Coldwell Banker, Century 21, Sotheby鈥檚 International Realty and Corcoran 鈥� settled out of court for a combined $140 million. As a term of the settlement, they each announced a commitment to make changes in their business practices 鈥� including not requiring agents to be members of NAR.
While state governments license real estate agents, NAR has an extensive code of ethics it expects members to adhere to.
NAR and the brokerages have vowed to appeal the verdict, which means real estate commissions aren鈥檛 going anywhere immediately.
NAR has been fighting off US antitrust officials and litigation for years regarding anti-competitive practices and this verdict is the association鈥檚 biggest setback yet.
This verdict is just from one of several聽lawsuits currently filed against NAR, which is also facing scrutiny from the US Department of Justice.
NAR has already faced a difficult year, setting aside the verdict and the troubled housing market.
In August, the NAR president, a member agent named Kenny Parcell,. Last month .
On the commissions, NAR has said they will appeal the verdict and that the issue won鈥檛 be resolved for years.
鈥淭his matter is not close to being final as we will appeal the jury鈥檚 verdict,鈥� said Mantill Williams, NAR vice president of communications. 鈥淚n the interim, we will ask the court to reduce the damages awarded by the jury.鈥�
鈥淭his is not the end,鈥� said Darryl Frost, spokesperson for Keller Williams.
What was the case about?
The cornerstone of the plaintiff鈥檚 argument is that NAR is forcing homesellers to pay an inflated commission that is then split between their agent and the buyer鈥檚 agent.聽The homesellers argued commission sharing as a condition for access to the Multiple Listing Service was unfair and kept commissions artificially high.
Typically, when a home goes on the market for sale, the seller offers their broker a set commission. For decades, the commission has聽consistently been around 6% of the sale price, usually with a 3% split for the buyer鈥檚 and seller鈥檚 agent.
In a competitive market, the homesellers argue, the cost of the buyer鈥檚 agent鈥檚 commission would be paid not by the seller, but by the buyer who received the service. The sellers said that the buyers should be able to negotiate the fee with their agent, and that the sellers should not be on the hook for paying it.
NAR and the other defendants argued in court that their commissions are always negotiable. They also said that the system of having the seller鈥檚 agent split the commission with the buyer鈥檚 agent allows 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.
Consumer advocates celebrated the verdict and hoped that plaintiffs would also receive their request for the judge to order changes to how commissions are structured in the industry.
While already large, the award could grow even more 鈥� to a total of $5 billion, depending on what the judge decides.
The jury clearly saw the industry had restricted price competition to a point where it could ensure nearly uniform 5%-6% commissions, said Stephen Brobeck, a senior fellow at the Consumer Federation of America. Jurors made their decision quickly, he said, deliberating for only a few hours.
鈥淭he extent of injunctive relief decided by the court will strongly influence whether a price competitive system develops that lowers consumer costs and increases quality of services,鈥� Brobeck said. 鈥淲e hope that the court will sever the ties between listing agent and buyer agent compensation, freeing sellers from the obligation and need to compensate buyer agents.鈥�
Impact of commissions on buyers and sellers
Not much is expected to change in the near term with regard to how commissions are set, agents say.
The longer-term impact of the verdict may be that the pairing of buyer鈥檚 agent commission and seller鈥檚 agent commission will eventually be separated.
Analysts from Keefe, Bruyette & Woods, an investment banking firm, said in report released ahead of the verdict that the NAR litigation and related government action is likely to reshape the residential brokerage industry鈥檚 commission structure, by eliminating the buyer-broker commission rule, and eventually the practice of listing agents and sellers setting and paying buyer agent commissions.
And since the commission paid to an agent is typically baked into a home price, if they were reduced聽or were to become more negotiable, home prices could drop as well, they said.
鈥淪hort term nothing changes,鈥� said Jen Davis, a Keller Williams agent with Holt Homes Group, in Springfield, Missouri. 鈥淐ommissions have always been negotiable. That will continue to be the case.鈥�
But there could be unintended consequences if changes come about, she said.
鈥淭here are buyers that aren鈥檛 going to know the steps to buy a home,鈥� Davis said. 鈥淭hey have to pay for a down payment, closing costs, appraisals, inspections. If they also have to come up with money to pay for a buyer鈥檚 agent, some just won鈥檛 and they鈥檒l get in over their heads or they won鈥檛 buy at all. Not having representation will make the market less inclusive.鈥�
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