May 15, 2019

After moving eight times as her husband's job transferred them around the world, Lindy Chapman felt she knew a thing or two about selling real estate.

Unlike her first home purchases, by 2015 she could do most of the initial research online, narrowing her home search to a few contenders before even bothering with a Realtor. Plenty of agents, it seemed to her, no longer did enough work to justify the traditional 6% commission: 3% on the seller's side, and another 3% for the buyer's agent.

So by the time Chapman moved to Dallas — a particularly frustrating relocation in which she ditched her agent and bought a home that was for sale by owner — she got her own Realtor’s license, thinking she could do a better job and charge less for it.

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But in trying to offer cheaper services to others, Chapman realized just how entrenched the commission structure is. When she listed homes for sale, the system boxed her in: If she didn’t offer the standard 3% to buyers’ agents, she worried they wouldn't show the home to their clients.

“The client wants Netflix and the technology for Netflix is here,” Chapman said. “And it's like Blockbuster saying, ‘no, this is the only way to watch videos.’”

A wave of disintermediation has squeezed margins in many sales and advisory professions. Travel agencies have shrunk from 100,000 employees in 2000 to 53,000 in America today, as websites like Expedia, Priceline and Kayak have allowed travelers to book their own itineraries. Financial advisors, who used to charge between one and two percent of the assets they managed for clients, have been shifting to fee-for-service models in order to compete with automated advisers and low-cost index funds.

Real estate agents have been a puzzling exception to that trend. Half of buyers now find their homes independently online, according to a survey by the National Association of Realtors. Yet 87% of them still end up retaining an agent, and the commissions rates have barely budged. According to data collected by the brokerage consulting firm T3 Sixty, the average commission has declined from 6.1% in 1991 to 5.1% in 2016, but most of the drop came in luxury homes. On a $310,000 house — the median home price in America — a 6% commission comes to $18,600, and it's usually baked into the price of the home.

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In a complaint filed in early March in the Northern District of Illinois, five law firms teamed up to allege that high commissions were a result of collusion by the National Association of Realtors and the nation's largest brokerage franchises in violation of federal antitrust laws. The firms include heavy hitters like Hagens Berman, which boasts work on cases including the state tobacco lawsuits that led to a $206 billion settlement, as well as Cohen Milstein, which co-led a case against Apple for monopolizing the market for e-books.

The class so far consists of just one person — a home buyer in Minneapolis. But the lawyers are currently recruiting more plaintiffs, and stand to gain millions in attorneys’ fees if a jury awards damages. In April, two nearly identical lawsuits were filed, one by two home sellers in Missouri and one by a Minnesota corporation.

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“If buyer brokers were able to do this job for the same percentage as they did 20 years ago, and the internet has made their jobs a lot easier, and real estate values have appreciated, here is an artificial impediment to competition,” said Benjamin Brown, an attorney with Cohen Milstein, one of the five law firms on the case.

If there were no such rule, the complaint argues, agents would be paid in the same way as any service provider: Through a price disclosed at the outset, which would allow the consumer to shop around. The suit seeks damages to be determined at trial, but Brown says they could range into the billions of dollars.

The full article can be accessed here.