Commission-sharing lawsuit – will it lead to major changes?

Ultimately, the buyer may have to go their own way

Commission-sharing lawsuit – will it lead to major changes?

The recent multibillion-dollar verdict against shared commissions on home purchases continues to have a major ripple effect on the real estate industry. But for the CEO of Aalto – a self-service real estate platform built for sellers and buyers first – the landmark decision came as no surprise.

A jury last week found the National Realtors Association (NAR), Keller Williams and HomeServices of America liable for colluding to inflate agent commission rates, awarding, as a result, $1.7 billion to home sellers.

 A similar class action lawsuit is awaiting judgment with more such lawsuits likely to follow.

“This is highly relevant to our business,” Aalto CEO Nick Narodny (pictured) told Mortgage Professional America during a recent telephone interview. “We let consumers buy homes entirely online and keep us in commission.”

Business shaped for this verdict

While many in the industry were taken aback at the verdict over a long-held commission-sharing practice between buyer and seller agents, Narodny said he built his business all but in anticipation of the case outcome. “It’s like TurboTax,” he said of his company’s business model. “We actually let you do everything online,” he added, referencing elimination of commission sharing.

“We’ve almost been building our platform for this,” Narodny said. “So, we’ve been paying very close attention to all these lawsuits and there are many more to come. I won’t say we were surprised. I was surprised at how fast it took and the fact the award was tripled. The named participants, and NAR, now are on the hook - held liable for over $5 billion, which is more than their combined balance sheets.”

A Missouri jury last week found NAR and others guilty of collusion to maintain commissions, giving rise to speculation on how the decision could transform the way homes are bought and sold in the US. The jury demanded nearly $1.8 billion in damages to compensate around 500,000 plaintiffs who recently sold their homes in Missouri.

Following the verdict, a law firm representing plaintiffs escalated the stakes by initiating a more extensive class-action suit seeking more than $100 billion in damages on behalf of US home sellers who paid commissions over the last four years. “It’s $1.7 billion, but for anti-trust cases – and I’m not an attorney – they’re automatically tripled. Their assets aren’t public,” he said of the defendants, “but from calculations I’ve read and understood, it is more than their assets, that is correct. For them to appeal, they would have to post a bond. That’s the big question now: ‘Can they appeal?’ Remember, this is just Missouri; there are many, many more lawsuits that are being filed across the country.”

Be prepared for changes

Known as Sitzer/Burnett, the anti-trust case revolved around the buyer-broker commission rule, a standard practice in the real estate industry – a rule mandating that sellers’ agents must compensate buyers’ representatives as a prerequisite for listing a property on a multiple listing service (MLS), the primary tool for marketing homes.

The verdict has created ripple effects across the real estate industry as brokerages and agents face the very real possibility that guaranteed shared commissions – which are agents’ primary source of income – will go away for good.

The son of real estate agents, Narodny was following the case even more closely and as the founder of Aalto – a platform that digitizes the home buying process.

“This is one of the biggest amounts,” Narodny noted. “And it did not settle but went to trial. That’s why you have so much attention here.”

He noted the implications of the case: “You’ve got a couple of different levels,” he said “If you think about traditional brokerages, this now paints a target on the back of every brokerage in America. A target means class actions are going after historical commissions. They also need to prepare for a future where buyers need to pay their own commission. That’s the way it’s done in other countries, but not the way it’s done here.”

The one silver lining for defendants is if the award ultimately is appealed. But even if it is, the rules are more than likely to change, he said. “The jury was asked to find evidence of conspiracy among those groups,” he said of NAR and the other defendants. “And you have to remember where we are – the judge hasn’t ruled his final judgment. The jury has presented but the judge still has to rule on the final judgment. “We know about the monetary damages, and the judge could reduce that.”

Either way, he said, the landscape is likely to change: “What we don’t know is if there’s going to be any rules changes,” Narodny asked. “And I think that’s the interesting thing. What kind of rule changes will come of this? People need to not bury their head in the sand and better prepare for an ultimate outcome where buyers pay their own way.”

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