These Lawsuits Could Change the Way You Pay Your Realtor

If you've ever hired a real estate agent to sell property, you know the drill: As the seller, you're responsible for paying commission to both the seller's agent (the one working for you) and the buyer's agent (the agent who helps the buyers make their offer). Typically, sellers are expected to pay 6% of the sales price -- 3% to each agent. For example, $18,000 would be deducted from the proceeds of a home selling for $300,000, and $9,000 would be paid to each agent.

Now, two huge class-action lawsuits are challenging how real estate agents are paid. Here's what we know about the cases.

The complaint

According to the multibillion-dollar lawsuits -- Sitzer et al. v. NAR et al. and Moehrl et al. v. NAR et al. -- this method of paying real estate agents is part of a scheme bilking home sellers out of billions of dollars yearly.

The problem, according to the suits, is the multiple listing service (MLS). The MLS is vital to the real estate market and one of the most important tools a real estate agent has available. While it's easy to think of the MLS as a single service, it's actually a web of around 600 independent, local databases, with nearly 97% owned or operated by local real estate associations.

Typically, when a potential home buyer goes online to look at homes for sale, they check an MLS website. There, they can view photos of the property, descriptions of rooms, tax information, sales price, and contact information for the seller's agent.

The tricky bit is that the MLS requires any agent who wants to list through its service to follow the old-school way of paying. The seller agrees to pay both their agent and the buyer's agent. At closing, the funds to pay the agents are deducted from the seller's proceeds check. If a real estate agent refuses to agree to those terms, they cannot utilize MLS, one of the most powerful tools at their disposal.

Between a rock and a hard place

Home sellers have the right to negotiate how much they are willing to pay each agent. However, there's a catch. There's a practice known as "steering." Agents representing buyers have access to how much commission is promised for each property in the MLS. Let's say one seller is willing to pay the buyer's agent 2%, but a nearby seller will pay the full 3%. An agent has the sway to discourage a buyer from viewing a property that pays out less.

Given the current system, lower commissions can be costly. Research shows that a house with a lower commission is less likely to be shown by buyer agents. Specifically, home sellers offering 2.5% or less are 5% less likely to sell their homes. And when they do sell, it takes an average of 12% longer.

As anyone who's ever sold a home likely knows, the longer a home lingers on the market, the more buyers assume there's something wrong with it, and the less they're willing to pay. After factoring in today's higher home prices and ever-changing interest rates, a buyer may look for a price break wherever they can find it.

A uniquely American system

There are twice as many real estate agents in the U.S. as homes for sale. This imbalance leads to intense competition. Still, commissions have remained high relative to other countries with similar housing markets. According to Business Insider, only 5% to 20% of home buyers work with a buyer's agent in the United Kingdom, Australia, and the Netherlands. Those who do, pay 1% to 2% in commission. Sellers pay from 1% to 3% in commission, but only to their agent.

However, the National Association of Realtors (NAR) stands by its stance that the current system is the most efficient because buyers don't have to pay out of pocket. In addition, sellers can avoid closing delays associated with which agent gets paid what.

Plaintiffs counter that the current system forces sellers to pay inflated commissions in order to prompt agents to generate interest in their homes.

Both lawsuits are seeking billions of dollars in damages. The first trial will be Sitzer et al. v. NAR et al., scheduled to begin in October 2023. The next case -- Moehrl et al. v. NAR et al. -- should reach trial in the first half of 2024.

If successful, these cases have the potential to forever change an established practice in American real estate. It may be that when a buyer shops around for the best mortgage, they'll also have to determine how they will pay their buyer's agent. And it may mean that sellers will eventually give up less of their sales proceeds to cover the cost of two agents.