Federal Judge Stephen Bough granted final approval Tuesday for the Chicago-based National Association of Realtors $418 million settlement agreement to resolve litigation against the organization and its members brought on behalf of home sellers related to broker commissions.
He granted preliminary approval of the agreement in April.
The payout comes after a Missouri federal jury issued a landmark $1.8 billion verdict in October of last year, finding the National Association of Realtors and several large real estate brokerages conspired to artificially inflate commissions on home sales. A similar case was expected to go to trial this year in Illinois federal court.
The settlement resolves NAR’s role in both of those suits plus two other class actions, according to attorneys representing the plaintiffs. NAR continues to deny any wrongdoing, according to the association. Some real estate brokerages opted to settle their own suits before and after NAR’s agreement.
“This is an important moment for NAR members, home buyers and sellers, and the real estate industry,” said NAR President Kevin Sears in a news release Tuesday. “The principles of transparency, competition and choice are core to the settlement agreement and empower real estate professionals and consumers to negotiate the services and compensation that work for them.”
The settlement will be paid out over approximately four years. The agreement is expected to fundamentally change how homes are bought and sold by removing the assumption that buyers’ and sellers’ agents will split a 5%-6% commission on home sales, which had been standard practice in the industry.
Realtors group to pay $418 million to settle litigation over broker commission fees
Some of the changes to come out of the lawsuit are already in effect as of Aug. 17. NAR is now requiring potential homebuyers to enter into written agreements — often referred to as buyer agency agreements — with their agent that state how the buyer’s agent will be paid. NAR also removed offers of compensation to agents in the Multiple Listing Service. The MLS is the main tool used by real estate agents across the country to market home listings.
If a broker is not a member of NAR or does not use an MLS platform that adheres to NAR’s rules, they will not be subject to these rules changes.
The lawsuits claimed the compensation practice for brokers was anti-competitive because it incentivized buyers’ agents to steer their clients toward sellers who were offering higher commission rates in their listings on the MLS. Real estate professionals can still discuss broker compensation with their clients off the MLS.
Historically, the seller set the commission rate when listing the home for sale and then paid the fee to their agent, who typically split it 50-50 with the buyer’s agent.
Attorneys say they expect the changes will lead to lower commission fees because agents will be forced to compete on service. NAR says its members’ clients have always been able to negotiate.
The home buying and selling process is changing. Here’s what you need to know in Illinois.
About 50 million people will be eligible to receive money from the settlement, with some individuals also eligible for money from settlements that have been reached against other defendants in the litigation, said Benjamin Brown, co-chair of the Cohen Milstein Sellers & Toll antitrust practice group, one of the law firms representing home sellers in the settlement agreement.
Brown told the Tribune in an interview Tuesday that while there are some industry surveys that have been published suggesting that commissions are already coming down as a result of the rules changes, it will take a year or two for the market to sort out new competitive pricing models.
“We believe the settlement provides justice for our clients and that the changes required by the settlement agreement are important and will help home sellers in the future to enjoy more competitive commission structures,” Brown said.
For Jeff Baker, CEO of Illinois Realtors, the state trade association representing about 50,000 real estate agents, the announcement Tuesday was also welcomed and allows buyers and sellers to move forward with certainty on the new changes that took effect in August.
“We can get back to continuing our work on educating consumers about the homebuying process and educating Realtors on how to continue being the most helpful professional in a real estate transaction,” Baker told the Tribune in an interview Tuesday.
Baker said his organization’s budget will not be affected by the national payout.
The litigation came to a head amid internal turmoil at NAR, which has undergone a series of leadership changes. Over the past year, NAR has seen two presidents and a CEO resign following allegations of sexual harassment against its former President Kenny Parcell.
NAR recently announced on its website 11 recommendations that came out of its Culture Transformation Commission task force that are the “latest action the organization has taken to set expectations around conduct, foster professionalism and promote accountability among members, volunteers, executives and staff.”
Following the announcement, The New York Times reported last week on the trade association’s expensive benefits for its executive staff and its leaders.
Two days prior to Tuesday’s hearing, the Department of Justice released a statement of interest in the case saying that the settlement does not shield the association from further government investigations and confirming its ongoing inquiry into the real estate industry’s practices.
