Blocks & Lots

Legal challenges could upend how real estate brokers share commissions

Legal challenges to co-broking likely headed to the Supreme Court were already threatening to upend the real estate brokerage business. But Compass took more direct aim at the local status quo when it filed an antitrust suit against REBNY Friday.

The Softbank-backed brokerage alleges that REBNY has been conspiring with Corcoran and Douglas Elliman to “thwart” its growth, The Real Deal reported. The startup filed for an IPO earlier this month.

Compass is particularly up in arms about what it is framing as an anti-competitive measure in REBNY’s universal co-brokerage agreement. Under the agreement, “Agents are barred from further contact with their clients if they leave the firm” with which the seller, or client, agreed to sell their home via an exclusive listing agreement, The Real Deal explained.

That’s a problem for Compass. REBNY fined the firm $250,000 in January for poaching rival brokerages’ exclusive listings. Compass claims REBNY and more established firms have weaponized the co-broking agreement in a “discriminatory manner.” REBNY said Compass’ suit is “misplaced” because its rules are based on state law.

Still, Compass’ co-broking suit is just one of a number of high-profile legal challenges to co-broking across the country. Other class-action lawsuits target the practice more directly, challenging the coupling of seller and buyer broker fees. Those suits could change the way people buy and sell homes across the US, even if could take several years for them to reach the Supreme Court.

Why plaintiffs are challenging co-broking rules

Critics of the current co-broking system claim it inflates housing prices and fees. They also say it decreases consumer choice.

Plaintiffs in multiple cases are demanding an uncoupling of negotiations over the seller’s broker’s fee and the buyer’s broker’s fee. They say this would empower buyers to negotiate their own broker commission, choosing a lower fee if they would like. Under the current system, buyers often do not even know how much the broker is getting. But the buyer helps pay the broker fee anyway, if indirectly, because it is part of the home price.

Uncoupling broker fees could affect sellers, too, because sellers officially pay both the seller and buyer’s broker. Therefore, more competition for buyer brokers, which would likely lead to lower prices, would lower the total commission sellers pay.

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The case against changing co-broking rules

The National Association of Realtors maintains that the current system fosters ample competition and that commissions are already negotiable.

“Commissions are negotiable and, in fact, can be negotiated at any point during the transaction,” wrote Katie Johnson, general counsel, in response to a class-action lawsuit seeking a co-broking rules change. “Consumers have many choices of different service and fee models among many brokers.”

Furthermore, realtors argue that lower fees stand to harm small realty businesses while emboldening large companies that can survive lower fees. The NAR legal statement appears to imply this when it says that the current system benefits “home buyers, sellers, and small businesses.”

How a co-broking rules change would affect buyers and sellers

Let’s say that plaintiffs in one of the co-broking cases succeed and their core demand, the uncoupling of broker fees, comes to fruition. How would that affect sellers and buyers?

If fees are uncoupled, sellers will not be involved in negotiations over the buyer broker’s fee. The buyer’s fee would likely be added on as a closing cost like taxes or attorney’s fees and, if possible, rolled into a mortgage.

As for New York, while the Compass suit takes aim at alleged manipulation of local co-broking rules, the national lawsuits aim to rewrite them. If one of the challenges to national co-broking rules makes it to the Supreme Court and succeeds, it would likely result in large changes to the REBNY co-brokerage agreement, too.

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Photo above courtesy of Quay Tower.