NAR Slapped with $1.8B Lawsuit Payout, Ripple Effects Could Be “Enormous”

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer. Today, we’re bringing you a bonus episode to discuss the breaking news that has come out of the real estate industry. If you haven’t already heard, there was a very big lawsuit that alleged that National Association of Realtors, NAR, and several large brokerages had conspired to keep agent commissions high. We did a show on this back on August 28th to explaining in detail what the lawsuit was all about. If you want to catch up on that, you can go check out that episode first. But today, we have some more information for you. Because the jury ruled last week in favor of the plaintiffs and awarded damages of about $1.8 billion. That number could actually swell to more than $5 billion depending on what we hear from the judge in a couple of weeks. Now this lawsuit is about more than just damages.
It’s actually about the way that agents are compensated, the way that people buy and sell homes in the United States altogether. That’s how we went out of our way to get James Rodriguez, who’s a senior real estate reporter for Business Insider, back to explain to us what is going on. Now this is one of those situations that is ongoing and unfolding, and as you’ll hear, we don’t know the full implications of this decision just yet. I know for the people who are involved in this industry, people like me who are investors or real estate agents, loan officers, buyers, sellers, this is a emotional and often scary thing for people, this level of change. So while we don’t know exactly what’s going to happen yet, here at On The Market, we’re going to do our best to keep you informed so you at least know what is going on in as close to real time as possible. With that, we are going to bring on James Rodriguez from Business Insider. James, thank you so much for joining us again.

James:
Thank you for having me. Great to talk with you again.

Dave:
For everyone who didn’t listen to your recent appearance on this podcast and maybe isn’t as familiar with the lawsuit we’ll be discussing, can you give us a brief summary of what this lawsuit is all about?

James:
Back in June, I wrote about these two massive multi-billion dollar class action lawsuits that really are accusing the National Association of Realtors and some of the largest brokerages in the country of this vast conspiracy to use the rules of the multiple listing services, the MLS, to charge sellers inflated agent commissions. So really they’re claiming that sellers as a result of the rules that govern the multiple listing service, that they’re forced to pay these unfairly high commissions to the tune of tens of billions of dollars every year. Back in June, I wrote about these lawsuits that had been simmering for several years at that point. The damages in both these cases could reach to the tens of billions of dollars. But a lot of people weren’t talking about these lawsuits at the time. They really were focused on all the other issues that are going on in the real estate industry right now.
The first of these lawsuits originally was called Sitzer versus NAR. Now it’s Burnett versus NAR. It was scheduled to reach trial in October. So you had these plaintiffs, this massive class of sellers in Missouri, Illinois, and Kansas who were saying that they’d been ripped off between the period of 2015 and 2022. In this small of a two cases, the damages could reach more than $4 billion. These cases that I mentioned were working their way through the system for a while. Then in October you had the jury trial, and over the course of two weeks, all these details came out about the NAR and some of the largest brokerages think of Keller Williams, RE/MAX ended up actually settling ahead of the trial, but RE/MAX was originally named in the lawsuits as well, Coldwell Banker, Century 21. They were arguing that this was the most efficient way of doing things where basically you have the seller who pays out both the buyer’s agent and the seller’s agent.
That was really the crux of the lawsuit here is the way that agents get paid. So the plaintiffs were arguing that if the seller has to pay out both the buyer’s agent and the seller’s agent, that they’re effectively forced to pay unfairly high commissions. This is the way that things have been done for decades now. As the lawsuit played out in court, you had two sides of this where you have people that really haven’t been paying attention for a while who were thinking that things might just continue the way they always have been. Then on the other side, you have people who saw this as potentially a seismic decision for the real estate industry, one that could eventually force buyers’ agent commissions to lower dramatically to maybe reach zero, maybe force people to not use buyer’s agents altogether.
Earlier last week, the jury actually deliberated for less than three hours, and they came back with a guilty verdict and $1.8 billion decision for the plaintiffs. An antitrust case like this that’s automatically tripled to more than $5.3 billion. So this is a really staggering decision. There were people sounding the alarm all the way throughout this process, but you had many people who predicted that the status quo would remain as it was. So we’re starting to see the initial fallout. Of course, that’ll be appealed, but it’s the first step in this process, and this will continue to likely play out for years, but a really staggering decision that we saw last week.

Dave:
Thank you for that summary and just want to call out a couple of things that you mentioned here, James. First of all, as of this recording, which is on November 6th, we do have the decision from the jury, but we haven’t yet heard from the judge in terms of what injunctions might come, which we’ll get to in a minute. You also mentioned that the jury only debated for three hours, which seems extremely quick. I’ve been following this, but one of those people who thought it was unlikely that this result would come because NAR has faced a lot of lawsuits, and a lot of people have come after commissions historically, and they’ve successfully defended the model. What is different about this case that NAR wasn’t able to defend?

James:
We saw this go to a jury trial. I think that’s one factor here that is really important to consider because you have a jury of regular Americans, and I think there’s been a lot of sentiment recently around… A lot of anger just toward the real estate industry in general toward rising home prices. I think you have people looking for some way out of this system in which people not only feel like they’re paying unfairly high home prices but also feel like they’re paying unfairly high agent commissions. As you mentioned, agent commissions have been in the spotlight for a little while now. You’ve also had the Justice Department circling and trying to investigate the National Association of Realtors for business practices there.
I think really what you saw here is the law firms that were going after these companies, these are big-time class action law firms that really special in these types of cases. You also have that momentum. These cases predate the pandemic, but you have that momentum as well with just the way that we’ve seen the home-buying landscape reshaped during the pandemic. Also, I think it’s the culmination of all of these years of that negative sentiment toward real estate agents and feeling like there must be a way to get this done more cheaply. At the same time, you’ve had commissions. Despite all of these technological innovations that we’ve seen over the past few decades, commissions have remained relatively steadfast at between 5% and 6% for the total home sale price.
I think it’s a culmination of all those factors. When you go to a jury trial like this one where you have regular people who might be able to sympathize more with your average home buyers and sellers than they do with these big corporations that have immense sway in the housing market, the NAR is one of the most powerful lobbies in the country and a huge trade organization. I think when you have that scenario and you leave it up to a jury… If you’re the NAR and the plaintiffs, you really take NAR and the defendants, you’re taking a risk when you go to a jury trial like this one. We saw that with, for a case that is so complicated, that has so much money at stake, and the ramifications of this decision were huge for them to deliberate for less than three hours. I mean, it was surprising.

Dave:
Clearly, some of the other defendants in the case maybe didn’t want to take that risk and settled beforehand. But for the two biggest defendants, NAR and Keller Williams who have been found liable for these huge sums, what have they said since the ruling? Can these companies even afford to pay this huge of a penalty?

James:
Well, the financial stakes, again, are huge. When you have the damages troubled to $5.3 billion, again, you had two defendants drop out ahead of the trial Anywhere Real Estate and RE/MAX, they settled for more than $100 million dollars combined. That was a pretty eye-popping figure at the time when they reached that settlement. Now it looks like pennies compared to what has ultimately been awarded. Again, we haven’t heard from the judge who could potentially bring those damages down a little bit. But I think when you look at the situation that Keller Williams and NAR are in today, they’ve both promised to appeal this verdict, and they’ve said they will try to get the damages brought down in the meantime. When you think about the appeal process moving forward, that’s going to likely play out over several years. They fiercely denied these claims, and they’ve vowed that to fight them to the best of their ability.
Really their argument continues to be that the current setup is the most efficient, consumer-friendly way to get a home sale done. When you think about listing your home on the MLS, really what they’re trying to protect right now is what’s known as the Cooperative Compensation Rule, which is when you list your home on the MLS, you have to offer some compensation to the buyer’s agent. That could be as little as a dollar, it could be a cent. The NAR actually in the runup to this trial changed their interpretation of that rule so that you could offer the buyer’s agent as little as $0 and technically comply with the rule. The plaintiff said that that was basically an admission of guilt. The NAR is basically saying that it makes the most sense for the seller to pay out both the buyer’s agent and the seller’s agent because the buyer’s agent is already faced with all these fees and having to come up with a down payment for a mortgage.
You can’t roll agent commissions explicitly into a mortgage right now. So if the seller doesn’t pay out the buyer’s agent, basically, the argument is that the buyer’s agent would have to just pay out-of-pocket for those services themselves. The crux of this argument here is basically the plaintiffs are pushing for in an ideal world to just have the buyer and the seller pay for their agent separately. They say that’s the most transparent way to do things. It’ll encourage the most negotiation between buyer and their agent and seller and their agent. The NAR and the Keller Williams of this world are trying to preserve the current system which the seller pays out both the buyer and the seller’s agent. That’s really what’s at stake here. They have vowed to continue to fight to uphold the current system.

Dave:
Do we have any sense of when the judge might rule on the Cooperative Compensation Rule?

James:
I was speaking to a lawyer who’s familiar with these types of cases, and he said that the judge in this case is known to move fairly quick, but there will have to be another hearing, basically another proceeding to gather more information before the judge makes his decision. It could be a matter of weeks, potentially even a couple of months. I think we should be getting some update soon on at least the timing of that initial proceeding and then where we’ll go from here. Then, again, after that, there will likely be an appeals process. The other thing is you have not only this case working its way through the system, but you also have the larger the two cases Moehrl, in which the damages could stretch north of $40 billion.

Dave:
Oh, my God.

James:
That case is scheduled to reach trial sometime in 2024. Not only do you have this initial case, but you have that one waiting in the wings. You have also these… It was interesting at mere minutes after the verdict came down. In this case, the same had plaintiff’s attorney filed another lawsuit against NAR and some of the other brokerages like Compass that weren’t named in this initial lawsuit. You’re going to see all copycat lawsuits as well. This is really just the beginning of what could be a really fundamental reshaping of the real estate industry as we know it. There’s a lot more to go from here.

Dave:
Just to be clear for everyone listening, we can speculate about some things that are happening, but as of right now, we haven’t gotten a ruling from the judge about the collective compensation rule. My understanding is, at this point, we know that there are damages and we know what the jury ruled, but in terms of long-term implications, even short-term, we don’t yet know. Now, of course, James, a lot of our audience are either active real estate investments, many are likely real estate agents themselves. People do want to understand what this might mean. Do you have any sense of what the judge could do at least? Let’s start with the short term. Does the judge have the power to dictate what the rules will be? Or is it really the judge’s job to say the current system is not working and then the real estate industry will have to figure out a new system?

James:
The plaintiffs were seeking injunctive relief in this case to basically get rid of that Cooperative Compensation Rule. They say that without this rule and with perhaps increased regulation to enforce or to encourage negotiation between buyer’s agents and buyers and then sellers and their agents that… Basically, getting rid of that rule could potentially force a system in which the buyers pay their agent separately. The seller pays their agent separately. That’s what the judge could set in motion here. The ripple effects from that could be enormous because if buyers have to pay their own agent out of pocket, you might see many of them just choosing to forego those services altogether to perhaps negotiate those commissions down from the typical 2.5% to 3%. You might see them move to more of a flat fee system or just pay by the hour.
You have all kinds of ways in which buyers without this rule in the MLS and with perhaps increased attention to agent commissions, buyers might start negotiating down. Sellers too might feel that they have more reason to negotiate down as well, especially in a market where competition has been so fierce for homes, they might feel like they should be negotiating those commissions down as well. I think buyer’s agents in particular, and especially consumer advocates that I spoke to have said that the good agents, the ones who can consistently demonstrate their value and successfully guide somebody throughout the entire process that those will still be in demand that people still do want someone to hold their hand throughout this oftentimes complicated, frustrating process. Actually, what we saw during the pandemic is that more people started using agents. You had 82% of people using agents prior to the pandemic in 2019, 88% of buyers in 2023 using agents.
So there’s still a lot of demand for those services. It’s really just how they get paid and who ends up surviving in the system. If things are to change, if the judge does order changes to the MLS rules, that could require the system to change and move away from the seller paying out both agents. You do have some people that argue for the status quo that say that even if sellers aren’t required to pay out the buyer’s agent, they’ll continue to do so because it’s just the most streamlined way to get a deal done that you want this deal to close. You want buyers to be able to navigate this system and you want to encourage buyer’s agents to bring their clients to your home.
The way that you’re going to encourage them to do that is by offering a commission. On the other hand, you have people that scoff at that idea, that think if sellers are aware that they don’t have to be paying out these tens of thousands of dollars that they will, why would they choose to do that? I think that’s really the question here is what happens to buyer’s agents commissions if we do move toward a world in which each side pays out their agents separately?

Dave:
I would think that certain real estate brokerages or individual agents would try to get ahead of this and perhaps want to come up with a new business model. But to me, it seems like a lot of the future rests on NAR. That’s because NAR controls most of the MLSs, the multiple listing services, which if you’re not familiar with, it’s basically there are hundreds of individual MLSs across the country that agents have to work with to post listings for sale, and then those get fed out to all the different websites that you’re used to looking for properties on. Because NAR controls this technology in many ways, it’s up to them to set the rules, which is I guess the crux of this lawsuit. But does that mean that all the agents and buyers and sellers who are wondering what happens next are just going to have to wait to see what NAR decides to do?

James:
I think in a lot of ways, yes. There’s still the possibility of a settlement as well here. The NAR and these brokerages do have a lot of incentives right now to ward off this financial calamity and potentially reach some nationwide settlement that could remove the risk of further copycat lawsuits to get rid of this cloud over the real estate industry. On the other hand, there’s a lot of money tied up in the current way of doing things. So it’ll be really interesting to see how NAR pursues this moving forward. I think there is within the industry some angst as well to the decision to risk a jury trial in the way that NAR and the brokerages did. Obviously, that bet did not pay off for them. They figured that they could successfully argue that, yes, agent commissions have remained relatively steady over for decades.
But that’s because this is an efficient system and one that benefits consumers by not having buyers have to pay out of pocket. I think that was what they were betting on there. There’s a lot that’s in limbo right now. I think it’s a little bit of a waiting game. What you do see though is you do see brokerages taking steps to shore up their businesses and to really effectively communicate to consumers the value that they provide, but also really clearly how they’re compensated and why the system works the way it does. They’re trying to explain to consumers why this is the most beneficial system and emphasize that there is room for negotiation, but explain their cost structures as well and why it makes sense for them to get paid the way that they do and get buyer representation agreements. You working with a buyer and you’re being promised a certain commission so that even if the seller does end up offering a little bit less, that you can, again, get that full commission and being really clear about what you expect to be compensated.
That’s the ways in which we see companies already taking steps to, again, shore up their business and ensure that they can keep going. But when you have these lawsuits and the potential for many more lawsuits in the future, again, this first case is really just for… It really just concerned home sellers who sold about 260,000 homes in Missouri, Illinois, and Kansas between 2015 and 2022. While that’s a lot of home sales, this is a huge country where there are many other areas that aren’t represented in these initial cases that could be covered under future lawsuits. As I mentioned, it’s a big first step, but it really is just a first step in what happens to agent commissions moving forward.

Dave:
Just to put that in context, even though home sales volume is down quite a lot in the United States, there are about 4 million home sales per year, even at this low level. During the pandemic, it was about 6 million. As James just said, 260,000 over the course of six years, it represents just a fraction of total commissions that have been paid out over the last 8, 10 years. Now, James, you mentioned that a lot of this rides on NAR, during the midst of all this, their CEO Bob Goldberg left his post. Can you tell us a little bit about what’s going on there?

James:
Well, NAR has been dealing with some internal tumult for a while now. Over the summer, the president resigned over a New York Times investigation into allegations of sexual harassment. You have these lawsuits, you have that recommendation over the summer. Then a couple of days after the decision, in this case, you have the CEO, as you mentioned, he was originally scheduled to planning to retire at the end of next year. It was moving up that retirement.
The official statement was looked around, decided it was time to just go ahead and move up that retirement and begin the transition process to a new leader. But I think it’s hard to look at the timing of that and not infer that the decision in this case played a role there. You look around at the situation in which the NAR fights itself. Today, where it’s not just fighting off these two multi-billion dollar class action lawsuits. You have the Justice Department as well that’s looking to reopen investigation into agent commissions and NAR’s business practices. So it’s a really a pivotal moment for the organization that, as you mentioned, holds so much sway in the industry, not just in terms of advocating for policies on behalf of brokerages and agents, but also controlling the MLS and really the primary marketplace where homes are listed for sale. It’ll be really interesting to see where the organization goes from here.

Dave:
I don’t want to be overly dramatic, but it does feel like NAR is facing somewhat of an existential threat here, just given everything that’s going on. You also at the same time see the valuations, at least for public companies starting to come down based on this news. I know this is just speculation, but do you think some of these other real estate brokerages or companies that service this industry could also be facing similar crises?

James:
I think there’s a reason that over the summer… I think a lot of the industry wasn’t paying attention, but you had some people really raising the alarm bells here and saying this could be a huge deal, not just for the companies that are directly implicated in these lawsuits, but for the wider industry because so much of the industry depends upon agent commissions and referral fees and the system in which the seller pays out both agents and the agents make 5% to 6% of the home sale price.
Then you have agents paying all fees for leads and other services to keep their businesses going. You’ve seen a huge influx of agents during the pandemic. So you’ve seen the business get built up and now you have this threat to agent commissions in a way that could bring buyer’s agent commissions down. It could bring seller’s commissions down. It’s this existential threat, not just for the companies that are directly named in these lawsuits, but for companies that aren’t like Zillow. We saw Zillow’s shares sink after the initial news. I think that speaks to the way in which so many businesses in this industry depend upon the current way of doing things. If there’s uncertainty there, I think that introduces a lot of uncertainty for their business practices and their income moving forward as well.

Dave:
All right. Well, James, thank you so much for sharing your reporting and knowledge about this issue with us. We really appreciate it and hopefully, we can have you back in the near future as this situation unfolds.

James:
Thanks so much, Dave.

Dave:
Another big thanks to James for joining us and talking about this breaking news. I just want to iterate that this is unfortunately one of those frustrating situations where currently we know that something is happening, but we don’t fully understand the implications yet. As of this recording, we just know that the jury has made a decision and the really big thing for the future of real estate, which is the judge’s potential injunctions and decision about the collaborative compensation rule are yet to come. According to James, hopefully, we’ll hear about that in the coming weeks so all of us who are in the real estate industry can start understanding what this lawsuit and this decision means for our industry.
We will make sure on this podcast to continue to update you about this topic as frequently as is appropriate. If you appreciate this type of breaking news, we would love to hear from you. We haven’t really done a lot of this in the past, but given the importance of this decision, we wanted to get something out to you as quickly as possible. If you liked it, we always appreciate a great review. If you know someone in the industry who is going to be impacted by this potential decision, please make sure to share this episode with them. Thanks again for watching. We’ll see you next time.
On The Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content. We want to extend a big thank you to everyone at BiggerPockets for making this show possible.