New wave of commission lawsuits targets smaller real estate brokers

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Yet another potential class-action lawsuit is going after broker commissions — but there’s a notable difference from the prior wave of lawsuits.

The targets in the new suit are smaller than the real estate heavyweights that were defendants in prior lawsuits.

The new lawsuit, filed Feb. 14 in the United States District Court District of Nevada, names the National Association of Realtors and other real estate giants, including Compass, Inc., Exp World Holdings Inc., BHH Affiliates, Redfin Corporation Inc., and Douglas Elliman Inc.

But it also names a host of other, often smaller brokers, including Beverly Hills-based Umro Realty Corp., Chase International Inc., Dickson Realty, Inc. The Real Estate Guy Inc., Realty One Group Eminence, Urban Nest Realty and Huntington & Ellis.

Efforts to reach those smaller brokerages for comment were not successful by press time, but the NAR has vowed to fight and appeal the lawsuits, while many defendants have said the cases are without merit.

That includes Douglas Elliman Inc. Chairman Howard Lorber, who said in a recent earnings call that the cases will take years to litigate and will be challenged by the company, according to The Real Deal.

Meanwhile, in Texas, dozens of local real estate brokerages and agents were hit with their own lawsuit.

The lawsuit mirrors the more 19 and counting other lawsuits that allege a conspiracy between the NAR, multiple listing services and brokers to keep commissions high by largely requiring home sellers to pay buyer broker commissions. A similar, earlier lawsuit saw a $1.78 billion jury verdict in Missouri in November of 2023. Several real estate giants to date have paid to settle claims against them.

And, as these lawsuits continue, experts say it’s only a matter of time before more and more midsize brokers and high-profile agent teams across the country see themselves hit with similar lawsuits — and have to decide whether to settle or risk a trial.

“This is just the beginning, and this is just the tip of the iceberg,” said Abbas Kazerounian founding partner at Kazerouni Law Group, specializing in class-action law. “If these guys have sense they are going to settle.”

Why? The plaintiffs in previous cases did much of the legwork when it came to expert research and testimony, Kazerounian said. The earlier verdict shows juries are sympathetic to the issue, and cases that go to trial could get similar verdicts, Kazerounian said.

As more and more midsize and smaller brokers get targeted by these lawsuits, they will have to weigh whether to fight the cases or try and settle early.

“If I am a middle-of-the-road brokerage, I am watching [the] companies that have top-end lawyers defending them — and they got hit with a crazy verdict. If I am a middle-of-the-road brokerage, what are my chances in this?”

He added there is a lower limit on litigation. The very smallest of brokerages are a lot less likely to be targeted by lawsuits, as the potential payout has to be enough to justify the litigation.

That plus the statute of limitations on which purchases and sellers would be covered limits the potential payout pool, Kazerounian  said.

“That’s what’s going to affect the number of viable defendants that have a deep-enough pockets,” he said. “There is a lot of variables and a lot of considerations when you are looking at bringing a case.”

More heavyweights added to real estate commission lawsuit

It’s not just mid-sized brokers that are part of the expanding scope of the commission lawsuit wave. Earlier in March, Berkshire Hathaway Energy was added as a defendant to an ongoing lawsuit in Kansas City Missouri. Berkshire Hathaway Energy owns HomeServices of America, along with a variety of energy assets, and the plaintiff in the case says the parent company is liable for the conduct of its HomeServices subsidiary.

The lawsuits have already pushed the NAR and others to make changes. The New York Times reported in October the NAR earlier in 2023 circulated an internal memo that said while brokers are required to offer a buyer-broker commission, that commission could be set at $0.

Meanwhile, real estate company Redfin Corp. in October announced its departure from the NAR. It cited dues requirements, fees on every listing and alleged sexual harassment within the trade group, according to reporting by the Puget Sound Business Journal.

NAR commission lawsuits could trigger deep cuts in homebuying industry

In October of 2023, Keefe Bruyette & Woods estimated a broad “unbundling” of commissions could trigger a 30% drop in annual commissions for real estate agents as well as a significant decline in the number of real estate agents doing business. All told, the Keefe Bruyette & Woods analysis found fallout from the lawsuits — depending on how courts rule — could cut deeply into a commission pool estimated at about $100 billion annually.

A recent study by the Federal Reserve Bank of Richmond found the current model in which the home seller pays the buyer broker commissions pushes up the costs of buying a house while also incentivizing homebuyers to search too much.

“Together, the two distortions may lead to elevated home prices, overused agent services and prolonged home searches,” the study said.

The study suggested that switching to a “cost-based” model, in which agents earn fees for their work but not as a percentage of the purchase price, could increase homebuyer welfare by more than $30 billion a year.

Despite broker abilities to, at least in theory, offer lower buyer broker commissions, such commissions are remarkably uniform, according to the study. The study looked at buyer agent commissions in the Houston metro area from 1997 to 2019 and found that of the 2.58 million houses listed for sale, about 96.5% offered to pay a 3% commission to buyer agents — regardless of price ranges.

The typical commission paid by the seller is less than 2% in the United Kingdom, Ireland, the Netherlands, Singapore, Sweden and Norway, according to the study.

In Australia, Canada and Denmark buyers commonly purchase properties without agent representation.

Article By Andy Medici – Senior Reporter, The Playbook, The Business Journals

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