The National Association of Realtors (also known as NAR) troubles continue after a devastating court decision found them liable to pay nearly $1.8 billion in damages for their role in inflating broker commissions between 2015 and 2022.
The class action lawsuit included home sellers from Illinois, Missouri, and Kansas who claim they were wrongfully forced to pay commissions to buyer’s agents at artificially high amounts. The decision came after a two-week trial and jurors came to a verdict after only three hours of deliberation.
While the battle in court is likely far from over, this case may mark the beginning of a change in tides when it comes to broker commissions. Keep reading to find out how this court decision may affect consumers and some helpful tips when it comes to selling this year.
Who is NAR?
The National Association of Realtors is the largest professional organization in the United States that represents and advocates for real estate agents and other industry professionals. NAR was founded in 1908 and continues to have a significant lobbying presence in the real estate industry.
The association has over $1 billion in assets and owns the trademark for the term “Realtor,” which means real estate agents who want the title must pay NAR yearly dues for membership to the organization.
Ethics and responsibility are an important part of trust among real estate agents and their clients, and NAR is known for their Code of Ethics that members must follow. Although somewhat ironic after the court decision, NAR has policies that penalize real estate professionals for violations of their codes in an effort to set high standards for professionalism and ethical conduct.
The National Association of Realtors has other duties as well. They provide networking opportunities for real estate professionals to advance business interests and encourage collaboration. Additionally, NAR provides legal resources and market research to help agents and brokers to better understand the housing market.
NAR is well-regarded among industry professionals, but this setback could threaten their hold on real estate agents and industry leaders who share memberships with the organization. In fact, some agents are already threatening to leave the association over the verdict.
A Storm that was Brewing
The legal troubles for the National Association of Realtors was a storm brewing before the recent court decision. NAR president Kenny Parcell resigned from his post in late August amid sexual harassment allegations involving lewd photos and texts sent to coworkers.
Parcell denied the allegations reported by the New York Times but succumbed to the pressure of shareholders and members of NAR to resign.
Details of the Case
While the verdict was a devastating one for NAR, they weren’t the only ones involved. Brokerages that include units of Berkshire Hathaway, Keller Williams, and Anywhere Real Estate were all found to conspire with NAR to inflate broker commissions.
The main complaint from plaintiffs was that NAR and its associates unfairly forced sellers to cover the buyer’s agent commissions, which they claim is a breach of the Sherman Antitrust Act of 1890.
The verdict handed down in Kansas City by a federal jury may threaten the traditional real estate commission model. This decades-old practice significantly benefits realtors when home prices and mortgage rates rise while hurting both buyers and sellers.
Additional Legal Battles
Current damages total $1.8 billion collectively among the defendants, but that total is expected to rise up to $5.3 billion as more defendants jump on the class action lawsuit and additional cases are opened up.
Additionally, experts say the U.S. Department of Justice is likely opening an investigation to get a thorough understanding of NAR’s conduct and the procedures of real estate transactions in the United States.
One such expert is Makenzy Mohrman, a financial analyst at Capstone, who asserted that the Kansas City court ruling could be a “crossing of the Rubicon” for the industry, implying that the reputation of NAR is in jeopardy and realtors may be leaving the organization for good. She also suggested that this may be the first domino of many to fall regarding how real estate commissions are handled in the industry.
Another industry leader, who lost an antitrust lawsuit against NAR in August, decided to weigh in as well. Jack Ryan is the CEO of REX Real Estate and said that the verdict is “extremely good news for Americans.”
He emphasized the effect it will have on home prices throughout the country and how this is a big win for consumers. “The price of every home will come down, jobs and wages will go up, tax revenues will increase, people can easily move to better and more fulfilling jobs,” he said in a statement to the New York Times.
Will the Decision Impact Broker Commissions?
Fortunately for agents, the October court ruling will not have an immediate impact on real estate commissions. This court battle will likely continue for several years, as NAR and other defendants fight to reduce damages on appeal and minimize their losses.
However, once the lawsuit is settled and the Department of Justice completes their investigation, the industry could be looking at a major overhaul of the decades-old real estate commission structure.
The current commission model disproportionately benefits agents during periods of high home prices and limits the buying power of consumers. Those who can afford to buy homes during high inflation cycles end up paying more in broker fees than necessary.
While the National Association of Realtors industry stronghold may be in jeopardy, the recent October court decision is undoubtedly a win for consumers. The result of the verdict could induce a reduction in home prices and lower inflation throughout the country.
But the effects might take years to materialize. In the meantime, it’s important for the government to reduce spending and minimize the impact of regulatory changes in the private sector. With a significant change in strategy, the economic future of the United States could be on its way to recovering back to pre-pandemic levels.
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