Zillow – The internet didn’t shrink 6% real estate commissions. But this lawsuit might
Unlike her first home purchases, by 2015 she could do most of the initial research online, narrowing her home search to a few contenders before even bothering with a Realtor. Plenty of agents, it seemed to her, no longer did enough work to justify the traditional 6% commission: 3% on the seller’s side, and another 3% for the buyer’s agent.
“It was obvious on this move that the traditional system no longer operates in line with what the consumer needs in the 21st century,” Chapman said. “I literally had everything I needed in the palm of my hand to find homes and all the related facts. I just needed someone to open doors, write the contract, and connect me to schools and the community.”
But in trying to offer cheaper services to others, Chapman realized just how entrenched the commission structure is. When she listed homes for sale, the system boxed her in: If she didn’t offer the standard 3% to buyers’ agents, she worried they wouldn’t show the home to their clients.
That entire system could crumble, if a trio of recently-filed lawsuits are successful.
Why the 6% model has endured
The current way in which Americans buy homes is a combination of intentional design, historical accident and litigation.
It all started in the late 1800s, when boards of local brokers convened at their meeting halls to swap information about properties their clients had for sale, hoping to find a buyer at the highest price.
In 1908, the predecessor to today’s National Association of Realtors officially created the “Multiple Listing Service,” a corporation owned by local agents, who contributed listings to a shared repository of available houses in a given market. As hundreds of MLSes sprung up across the country, listings were usually published in the form of a book, to which only licensed realtors had access.
Controlling information about properties for sale allowed the Realtors’ association to set rules for how the market functioned. It also allowed them to set up a way to get paid: The listing agent would stipulate to buyers’ agents what their cut would be if their client bought the house.
Other factors have pushed the industry to create this system and then maintain it. Brokerages that list homes usually also have buyers’ agents, and seller’s agents themselves often serve househunters, so they have an incentive to offer high commissions to the buy side as well. And, crucially, brokers know that buyers’ agents might skip showing a house if the listing doesn’t offer a full 3% commission.
The internet changed everything — and nothing
Multiple Listing Services first went online starting in the 1990s. Within a decade, some brokers were allowing their clients to browse the listings on their own in exchange for lower fees, because they didn’t have to do as much work.
Although the feeds on consumer-facing real estate websites include more information than ever before, from interactive maps and historical tax information to local school ratings and commute times, they lack one important detail: How much the buyers’ agent is going to get paid.
That information is often disclosed in the contract that the buyer signs with his or her agent. But it’s not something agents usually dwell on — and even if it comes up, buyers are simply told that the seller pays the fee.
The question of who pays the buyer’s agent is an almost existential one in the debate over commissions. Technically, the seller pays the listing agent out of the proceeds from the sale, and the listing agent then gives the buyer’s agent her cut. Of course, sellers wouldn’t have the money in the first place if buyers hadn’t paid it to them. And commissions are reflected in the asking price for the home — driving up the amount buyers pay.
“The way the industry says commissions work is that the buyer pays nothing and our services are free,” El-Ghoul says. “I’m saying ‘no, this is actually costing you money.’ I do the exact same thing, I just charge less, and try to be transparent about it.”
Traditional agents see the continued prevalence of high buyers-side commissions as evidence that consumers prefer the full package, even at a hefty price.
But those who are still trying say lack of information about how buyers’ agents get paid and what they actually do makes it incredibly difficult to use lower rates to attract clients.
“We receive a bunch of pushback from traditional agents,” Doubet said. “They badmouth us. The classic refrain is, ‘you get what you pay for,'” Doubet said.
“It’s really hard to educate consumers that their broker is making 3%,” said Paul French, Door’s chief marketing officer. “Today there’s an artificial barrier around the old way that’s being defended to the death.”
The case that could break the system
That’s where the lawsuit comes in.
It begins with a professional land surveyor in Minnesota named Christopher Moehrl who bought a house in 2017, with a combined commission of 6%. The class action case alleges that the NAR, in requiring MLS listings to include a uniform offer of compensation to buyers’ agents, is functionally fixing prices. Moehrl did not respond to Fintech Zoom Business’ request for an interview, and the legal teams representing him said he would not grant one.
“If buyer brokers were able to do this job for the same percentage as they did 20 years ago, and the internet has made their jobs a lot easier, and real estate values have appreciated, here is an artificial impediment to competition,” said Benjamin Brown, an attorney with Cohen Milstein, one of the five law firms on the case.
If there were no such rule, the complaint argues, agents would be paid in the same way as any service provider: Through a price disclosed at the outset, which would allow the consumer to shop around. The suit seeks damages to be determined at trial, but Brown says they could range into the billions of dollars.
Realtors have several responses to this contention.
First they argue that they do lots of work for clients. On the buyer’s side, they say, consumers still need help sorting through everything they read on the internet in order to make a wise decision. After all, they argue, buying a home is often the largest purchase a person will make in their lifetime, with potential pitfalls ranging from disputes over repairs to sudden problems with financing.
On top of that, since traditional agents don’t get paid unless their client goes through with a purchase, they have to offset all the work they do for clients who never end up buying.
Plus, closing costs are high enough already, with fees for the title company, appraisals, inspections, etc. Having the seller technically pay for the commission allows it to be tacked on to the mortgage and paid over time rather than all at once like a regular fee.
And finally, defenders of the current system argue that consumers do bargain over fees. It may happen up front when the buyer contracts with an agent, or at closing, when both agents will cover any number of expenses — from a new fridge to a thorough cleaning — in order to get the deal done. None of that, they say, is captured by the incomplete, approximate statistics gathered by industry analysts.
“What’s offered in the MLS is something that can ultimately be negotiated during the course of the deal,” said Rebecca Jensen, CEO of the Chicago-area MLS. “At the end of the day, the check that goes to the buyer’s agent is less than that.”
An industry under pressure
Whether or not the lawsuits succeed, traditional brokers and the MLSes they depend on are facing challenges from all sides.
One is a crop of startups offering private listings, off the MLS, to high-net-worth clients who might pay a premium to avoid a bidding war. That allows the property to sell more quickly, even if agents take a higher cut. Then there are a group of companies known as iBuyers, like OpenDoor, which will buy homes sight unseen and hold them only as long as it takes to sell them again, which allows sellers to skip the MLS and attendant commissions altogether.
Billions of dollars of investor capital have been flowing into these startups, allowing them to gain market share without necessarily turning a profit. Some of the more established online listing portals, like Zillow, have launched their own iBuyer platforms as well. Keller Williams, the nation’s largest brokerage franchise, just got into the iBuyer game, too.
Even companies that have tried to make the real estate industry more competitive worry that will end up fragmenting the MLS, undermining a system that — while flawed in some ways — at least allowed all listings to be broadly available. Glenn Kelman, the CEO of Redfin, describes himself as “completely unreconstructed in my ambition to make real estate better for consumers.” But he fears that if real estate agents aren’t incentivized to contribute to the MLS, the whole network could break down.
After all, the National Association of Realtors’ firm rules have created an economic contract — the prospect of earning commissions — that gives market participants a reason to collaborate and create an information commons. If that financial motivation goes away, the real estate market may turn into a collection of well-capitalized tech fiefdoms that hoard information, allowing few consumers to access all of it.
“What I feel almost protective about, in this really sad elegiac way, is the MLS,” Kelman said. “Scientists believe that the dinosaurs were living a very marginal existence when the asteroid hit. I think the ecosystem in real estate is already just extremely vulnerable.”