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$1.8 billion lawsuit could upend the real estate industry

ADRIAN MA, HOST:

Now, it goes without saying that buying a home, for most people, can be super-duper expensive. But selling a home can be expensive, too. And that's in part because of real estate agent fees, these commissions agents collect when a home gets sold. Now, depending on the price of a home, these fees can run tens of thousands of dollars. And that is why a group of Missouri home sellers brought a class-action lawsuit against the National Association of Realtors recently. They argued that these fees hurt consumers by artificially inflating home prices. And this past week, a federal jury agreed. They awarded the home sellers $1.8 billion, and this decision could upend the real estate industry. My colleague Wailin Wong from NPR's The Indicator podcast helps me explain.

(SOUNDBITE OF ARCHIVED NPR BROADCAST)

WAILIN WONG, BYLINE: A couple of years ago, Nick Kraus (ph) and his wife were looking to buy their first home.

MA: How much did you know about the home-buying process before going into it?

NICK KRAUS: Basically nothing. Yeah, I knew vaguely what a mortgage was. We watched some, like, you know, Instagram Reels and some YouTube videos about, like, what to look for in visiting homes and stuff like that.

MA: That doesn't sound like nothing to me.

WONG: No. I mean, it sounds like he really did his research. Where else are you supposed to turn for information? So like almost 90% of people who buy homes nowadays, Nick and his wife decided to enlist the help of a real estate agent, someone to help them scope out properties, set up walkthroughs, negotiate the sale and handle the contracts.

MA: And despite doing all this work, Nick and his wife were a little surprised that their agent didn't charge them a dime.

KRAUS: I think she just kind of mentioned that they would get paid by the seller. We didn't have to worry about it.

MA: Do you think it's weird that the seller pays your agent? Because the buyer's agent is supposed to represent the buyer's interest, but the seller is the one who pays your agent.

KRAUS: (Laughter) I did, yeah - not going to complain.

WONG: Nick is not complaining, but this detail is at the heart of the lawsuit.

MA: Real estate agents typically work on commission. That means when they help buy or sell a home, they get a percentage of the final sale price, traditionally 5 or 6%.

WONG: And, as Nick learned, the home buyer is not on the hook for this. Typically, it's the person selling the home who agrees to pay both agents. This is called an offer of compensation.

MA: This offer of compensation is a practice that goes back more than a hundred years. So back then, before the internet made it possible for all of us to browse real estate listings from the comfort of our couch or toilet...

WONG: TMI, Adrian.

MA: Oh, go ahead, pretend like you don't know what I'm talking about.

WONG: (Laughter).

MA: But back then, they didn't really have this option, right? There wasn't a central place to view all the properties for sale in a given area. Then, in the late 1800s, a bunch of real estate agents got together and were like, wouldn't it be easier if we, like, pooled our listings? And this led to the creation of something called the Multiple Listing Service, or MLS.

WONG: And to encourage deal-making, they came up with a rule. Anyone using the MLS to list a property for sale had to offer a commission to the agent who brings them a buyer. This is a financial incentive that says, if you help me sell my listings, I'll help you sell yours.

MA: You scratch my back. I scratch yours.

WONG: This practice is that offer of compensation, and it continues to this day.

MA: Now, offer of compensation - it sounds relatively neutral, right? But critics of this practice have a different way of describing it.

STEVE BROBECK: It's a conflict of interest.

MA: Steve Brobeck is a senior fellow at a watchdog group called the Consumer Federation of America.

BROBECK: Ask anyone - do you think it's fair or make sense for the seller to pay the buyer agent commission?

MA: Steve says he agrees with the plaintiffs who sued the National Association of Realtors. He says having sellers pay agents on both sides of the deal is not great for sellers or buyers.

BROBECK: The compensation is all out of whack with the value that the consumers receive.

WONG: Steve says this practice hurts sellers, who probably don't want to be paying thousands of dollars in fees to the buyer's agent. He also argues it's bad for home buyers, even if the buyer isn't directly footing the bill.

BROBECK: The fact is that today, that buyer commission is added to the sale price in most cases. The industry generally agrees that that's what happens and academic research has shown. So effectively, the buyers end up paying the commission. They just can't negotiate it. They have no control over it. In a free market, buyers would be able to negotiate their commissions. They can't right now.

MA: Now, technically, it is possible for a prospective homebuyer to try and negotiate with their agent, but in the vast majority of cases, it's sort of irrelevant because the seller has listed a property on one of those multiple listing services, which means the seller has likely already offered to pay the buyer's agent, that compensation offer we talked about. And Steve says from his research in dozens of cities, the size of this fee doesn't seem to vary much.

BROBECK: When the seller asks the listing agent, well, why do I have to pay the buyer agent? Shouldn't the buyer pay the buyer agent's commission? And the response is, this is the way the system works. And in order for your house to be shown, you need to offer the going rate, which is, depending on the area, 2.5 to 3%.

MA: One more concern Steve has with the current system is that it might encourage certain buyers' agents to nudge their clients to certain listings with juicier commissions. So what does Steve think should be done to make the system more fair for buyers and sellers? One way to do this, he says, is through something called decoupling. That's where sellers and buyers are responsible for paying their own agents directly. And decoupling is one possible outcome of the litigation that's facing the industry.

WONG: Now, if that happens, the theory goes buyers will be more likely to shop around, and competition among agents will drive down commissions from 5 to 6% to something like 3 to 4%. That could be a difference of thousands of dollars per sale. It could also bring commissions closer to what they are in countries like the U.K. or Australia, which hover around 2%.

MA: As you can imagine, a lot of folks who work in the real estate business disagree. They say decoupling would have a negative impact for consumers. And one of those people is Ron Phipps.

RON PHIPPS: The impact of decoupling the fee means some buyers will be eliminated from the market. A lot of buyers don't have additional cash. They don't have the extra money to go ahead and proceed.

MA: Ron is a real estate agent in Rhode Island and also a former president of the National Association of Realtors. He's especially talking about first-time home buyers, who are often having to scrape together the cash just for a down payment. Ron says forcing them to pay for an agent just puts another financial obstacle in their way.

PHIPPS: On the macro level, the disparity of wealth between homeowners and nonhomeowners is going to grow even more.

WONG: And, sure, he says people always have the option of not using a real estate agent to buy a home. But there's a reason close to 90% of people use an agent. The homebuying process is complicated. Ron says a good agent can help buyers spot potential problems with the property and avoid costly mistakes.

PHIPPS: The fact of the matter is, if a buyer doesn't have representation in the transaction, their risk is significant.

MA: And as to the claim that some agents might be pushing their clients to listings with better commissions without them knowing, Ron says the Realtors' Association actually has rules against this sort of conduct. And he also says agents who are just out there chasing commissions don't tend to last in the business.

PHIPPS: The best agents, the majority of agents in the United States, those great realtors are not transactional. If the consumers don't value what I'm providing, they're not going to hire me. If I can't get listings, if I can't get buyers, they're not going to pay me anything.

WONG: Nick, our first-time homebuyer, says their realtor really helped them out. But if he'd been forced to pay them directly, he may have had second thoughts.

KRAUS: Houses are expensive (laughter). And, yeah, if you're just adding to the pile of cash that you need up front or even upon closing, I mean, you'll, like, empty out your resources. So I think that is the value of the current system is it was one less thing for us to worry about.

MA: Of course, the plaintiffs who won that class-action lawsuit, they would probably say that Nick and his wife did pay for their agent. It was just baked into the sale price. The industry, by the way, is appealing that verdict, but there may be more legal headaches coming. The U.S. Justice Department is reportedly considering its own case targeting real estate agent fees. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.