Issue 93 – A New Year, A New Real Estate Concern

As we embark on a new year, I am looking into what we can expect to take place in the real estate industry. More importantly, I am analyzing how the changes that are transpiring will impact properties being bought and sold.

One of the most significant developments that our industry is dealing with is a slew of anti-trust lawsuits involving commission fee structure.

Let me provide some background: In the fall of 2023, in Missouri, “a federal jury ruled that the powerful National Association of Realtors and several large brokerages had conspired to artificially inflate the commissions paid to real estate agents, a decision that could radically alter the home-buying process in the United States,” according to The New York Times.

As a result, the NAR and brokerages were ordered to pay damages of nearly $1.8 billion. Because the verdict allows the court to issue ‘treble’ damages (up to three times the original damages), this payout could expand to more than $5 billion.

So, what does this mean? Traditionally, the industry standard practice is that the seller pays the commission for both the representing agent and the procuring agent. However, sellers in this anti-trust act claimed that this rule forced them to pay excessive fees to the agents.

Because of this monumental verdict, sellers in the aforementioned area are no longer required to pay the buyers’ broker commission, thus leaving agents free to set their own commission rates. This would mean these rates would be cut drastically.

You might be wondering what a verdict in the Midwest has to do with NYC real estate. Well, this court decision has emboldened sellers in other states to join in a class-action suit like the one in Missouri. According to Bloomberg Law, “The flood of litigation aimed at NAR and various brokers could further cripple the real estate industry, while interest rates hovering around 8% have impacted and diminished property supply.”

Similar copycat litigation is now emerging nationwide, including in New York City.

Within weeks of the verdict, NYC saw its own commission fees-related class-action complaint hit New York Southern District Court on behalf of a NYC home seller.

Just before the holidays, The Real Deal reported on this first NYC case – this one against REBNY and 26 NYC residential brokerages. While NYC doesn’t have a dedicated MLS, and NAR membership in Gotham is rare, the lawsuit is based on REBNY’s similar commission structure policy.

Though there is no definitive idea of what the verdict on this NYC suit will be, those buying or selling real estate need to understand what this could mean for them.

While it may initially seem like lower commission fees would be a win for buyers and sellers alike, it is far from the case and much more nuanced.

Here is where it gets tricky. Typically, the seller pays both the buyer and the listing agent’s commission. This has been the norm for many decades. With the proposed changes, the buyer would be forced to pay for their own representation—or forgo it completely. As a result, the industry-standard practice of 5% or 6% commission could be reduced to as little as 1%.

As such, not only will pricing be driven down, brokers will also be de-incentivized to garner the highest price for the seller or the lowest price for the buyer. More precisely, it removes the incentive for parties to claim the highest value on either side of the table.

It also impacts long-term valuation. With our current commission fee structure, the industry standard practice pushes the seller to pay it to offset the buyer feeling pinched by their friction costs, such as the Mansion Tax, Mortgage Filing Recording Tax, attorney’s fees, title insurance, potential renovation costs, architectural plans, etc. However, now there would be much more pressure on buyers. They would now have to factor in not only paying a purchase price that meets their seller’s expectations, along with typical closing costs, but also paying a commission to ensure that their broker is incentivized to represent their interests diligently. That is not to say brokers are not hardworking regardless, but if there is a less-than-industry standard commission issued, the drive to perform could be lessened. Overall, the new commission fee structure would impact how much a buyer could afford to pay for a property.

The reason a buyer would ordinarily want to work with their own representative is because a property purchase is typically the most expensive purchase of one’s life, and one that is somewhat illiquid. As such, a prudent buyer would desire to have an expert evaluate and investigate this asset to ensure long-term value.

If a buyer were to opt to forgo having personal representation, they will not be fully educated and this would impede their ability to affectively negotiate. Without a representing agent on the buy side, one is essentially in a dual agency that prevents them from having their best interests served.

It may even be illegal for the seller to offset the difference of that commission paid by the buyer by covering the difference. This would further impact the buyer and the buyer’s broker. Not being able to be made whole by either side provides very little motivation for the sale to be strong in terms of its price and impacts overall value going forward for the purchase.

This negatively impacts everyone – buyers, sellers, and agents. If the commission fee structure is changed this drastically, it could de-incentivize higher pricing for real estate overall.

The bottom line is what may have happened in other areas of the country should not apply to a dominant city like New York that functions highly for investment and seeks to exceed and grow values at an efficient clip.

The importance of growing one’s asset in a metropolitan area helps make the cities thrive and business boom, which in turn, sets a precedence for the rest of the country.

As this lawsuit plays out, I will keep my eyes on all developments. Hopefully, better minds will prevail and come to understand the devastating impact and upheaval on our industry – particularly in a major city like NYC – this massive change would have, and ultimately keep what has worked for decades in place.

Regardless of any changes that may ultimately take place, I stand by my earlier assertions that 2024 is going to be a year of massive opportunity and a chance to take market share. I remain enthusiastic about the possibilities. As always, I am deeply protective of everyone who has entrusted their real estate investments with me, and am committed to keeping my clients apprised of anything that could impact their long-term value.