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6% Commissions for Real Estate Agents on Trial

The actual established rate for commission payments to real estate agents is a 6%. Class action lawsuits and Justice Department scrutiny are under way trying to protect consumers from high rates and monopoly-like business strategies. In late October of this year, a Missouri jury sided with the plaintiffs in a verdict that could affect the way real estate agents are compensated for their services. The US Department of Justice is scrutinizing the powerful National Association of Realtor industry for colluding to keep its commissions high.

Real Estate Agents Commissions explained

In the US, the seller typically agrees to pay a 5% to 6% commission on a sale of their property. Once a sale is completed, the seller’s real estate agent splits the commission with the buyer’s agent. This system is tied to the Realtors’ association’s control of many of the country’s multiple listing services.

The Issue at Hand

The cost comes out of the purchase price, so the payment is often effectively financed by the buyer’s mortgage. Note: In most other countries, total commissions are around 2% like in in Australia and the UK.

The Missouri Case

A jury sided with the plaintiffs, finding that the Realtors’ association and others colluded to keep commissions high. The damages: $1.8 billion to compensate a class of 500,000 plaintiffs who sold homes in Missouri in recent years. That amount could be tripled because the jury found that the defendants acted with intent rather than negligence.

Other Cases on Trial

After the Missouri decision, the law firm representing the plaintiffs filed another lawsuit against the Realtors’ association and seven brokerages, seeking more than $100 billion in damages. And a separate Illinois class action also contends that the commission system amounts to illegal collusion that harms consumers. After the Missouri verdict, the chief executive officer of the Realtors’ association announced his resignation earlier than planned.

Are Real Estate Agents 6% Commissions Fixed by Law?

The answer is no. But in the US, an industry standard known as the buyer-broker commission rule requires sellers’ real estate agents to offer compensation to buyers’ representatives as a condition of submitting a property to a multiple listing service, a vital tool for marketing homes.

Justice Department Examination

The Justice Department is examining whether the commissions system violates antitrust law. In the very worst scenario, the law could prohibit seller’s agent from compensating buyer’s agents.

What ifs…

The Consumer Federation of America, estimates that the commissions paid by consumers would fall 20% to 30% if there was “effective competition.” On the other hand, the Realtor’s association said that compensating buyers’ agents, and coordinating that through a local multiple listing service, helps foster competition that makes for a more efficient market.

Source: CNBC

By Patrick Clark and Leah Nylen


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