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A landmark jury verdict threatens to upend home buying and selling. In Illinois, changes are already underway.
By Lizzie Kane
Chicago Tribune
Nov 20, 2023 at 5:00 am
In the 40 years Kate Schumacher has worked as a real estate agent, homebuyers have rarely compensated her directly. Instead, the seller has picked up the tab.
Yet, this year, the Baird & Warner agent based in Algonquin said she has already had two deals close where the seller did not cover all of her compensation: 2.5% of the selling price of the house. Both of her clients had to make up a .5% difference. One got the $1,315 covered by the seller in the closing costs, and the other paid Schumacher $3,575 in cash.
“We have more and more sellers that are not contributing as much toward the buyer’s agent compensation,” Schumacher said.
Schumacher has long had buyers enter into buyer agency agreements, the contract between the buyer and their agent that states how the buyer’s agent will be paid, guaranteeing a certain amount if the seller only partially compensates the buyer’s agent or doesn’t pay them at all.
Now, Baird & Warner and other local and nationalreal estate firms are encouraging agents to use these contracts more frequently, saying it’s no longer assumed sellers will foot the bill for both the listing agent and the buyer’s agent as litigation surrounding the issue winds its way through court.
Last month, a Missouri federal jury issued a landmark $1.8 billion verdict finding the Chicago-based National Association of Realtors and several large real estate brokerages conspired to artificially inflate commissions on home sales. The association has said itis appealing the verdict, while similar cases are ongoing in Illinois and Missouri.
The litigation has the potential to significantly shake up the real estate industry.In Illinois, changes to home buying and selling were already underway before the jury’s verdict.
Jennifer Ames, an owner of real estate company Engel & Völkers Chicago, which is not involved in the litigation, said her company is in the process of revising its contracts to include how much a buyer will pay their agent.
In the past, the commission was baked into the price of the home, Ames said. Now, it could be included as a credit in a buyer’s closing costs or the buyer might have to come up with additional cash on top of their down payment, she said.
“Going forward, it is going to be a little bit of a wild west,” Ames said.
[ National Association of Realtors CEO resigns amid new legal pressures ]
Local real estate experts like Ames said they also foresee the potential for longer-term changes if more sellers stop paying buyers’ agents. Some prospective homebuyers could forgo hiring an agent altogether and risk getting a bad deal, they said. But, experts caution it is too soon to tell what the long-term effects will be.
The Missouri jury’s Oct. 31 verdict comes as a federal court in Illinois gears up for a similar, yet potentially more costly, trial next year and as more lawsuits have been filed following the Missouri verdict. Real estate firms RE/MAX and Anywhere Real Estate (formerly known as Realogy Holdings Corp.) already agreed to settle both the recent Missouri and ongoingIllinois cases. Anywhere agreed to pay $83.5 million, and RE/MAX agreed to pay $55 million, though a court must still approve the settlement..
As in the Missouri case, the Illinois suit alleges NAR artificially inflates broker fees by requiring seller agents to make a blanket offer of compensation for buyer agents when listing properties on local multiple listing services and by only giving access to the MLS to agents who agree to adhere to its rules.
The compensation, set in advance, must be offered to every buyer agent regardless of their experience or the service they provide the buyer, the complaint alleges. The plaintiffs, a group of sellers, allege the system creates pressure on sellers to offer high commissions so buyers’ agents don’t steer buyers away from their properties, according to the suit.
While NAR argued in court filings that its rules allow the rates to be negotiated, Judge Andrea Wood said in her 2020 ruling rejecting the association’s bid to dismiss the case that the rules make negotiation “a practical impossibility.”
The suit, filed in 2019, was certified as a class action in March, representing sellers from 20 regions across the U.S. Plaintiffs’ attorneys estimate the amount of damages could reach $40 billion.
The U.S. Department of Justice expressed interest in the case, which could go to trial as early as next year.
Meanwhile, Midwest Real Estate Data, which runs the multiple listing service, or MLS, for northern Illinois, has amended its commission policy. The organization now allows users of the database to enter $0 or 0% into the commission field for agents for all listings, according to a September 2023 fact sheet. Previously, Midwest Real Estate Data required at least $1 to be entered into the commission field.
Though the change was made in response to the litigation against NAR and large brokerage firms, it had already been in the works by the time the Missouri jury rendered its verdict, which came down the same day the MLS change went into effect.
Mantill Williams, the National Association of Realtors’ vice president of communications, told the Tribune in a statement that its rules “prioritize consumers, support market-driven pricing and promote business competition,” with the outcome of the Missouri trial “not close to being final.” NAR’s appeal will likely tie up the case for a couple more years.
The jury verdict follows reported allegations of sexual harassment at NAR, which led to the resignation of former NAR President Kenny Parcell. NAR CEO Bob Goldberg announced his earlier than expected retirement shortly after the jury verdict.
NAR declined to make its president, Tracy Kasper, available for an interview, citing the ongoing nature of the lawsuits.
In a video following the verdict, Kasper encouraged NAR members to continue using agreements between sellers, buyers and their agents to explain what services they are providing and to dictate compensation.
[ National Association of Realtors takes additional steps to address alleged workplace issues ]
Real estate agents are typically compensated 5% to 6% of the purchase price of a house by the seller, an amount that usually gets split in half between the buyer’s agent and the seller’s agent. Local real estate agents maintain the commission percentage has always been negotiable. And, as Ames noted, while the seller is paying the upfront costs, the payment is coming from the money the buyer is paying the seller for the house.
For the month of October, in the Chicago metro area, the typical home was worth$306,750, according to Zillow. For a $306,750 home, a 6% commission would be $18,405, or about $9,202 if split between the buyer’s and seller’s agent.
Alley Ballard, a real estate broker with @properties Christie’s International Real Estate — one of the nation’s largest residential real estate firms and not one that was involved in the lawsuit — said she has not seen commission rates drop from sellers yet on single-family homes or condos.
Ballard said wealthier buyers will be able to afford to pay an agent, while poorer ones may go without one if the seller doesn’t shoulder the cost.
“Therefore, they are left to tweeze apart value; they are left to negotiate on their end; they are basically left to their own defenses purchasing what is usually the most expensive thing that you can purchase in your life, the most important thing,” Ballard said.
Ballard, who has worked in Chicago’s real estate industry for about 24 years, also thinks the properties of sellers who opt not to pay the buyer’s agent — some who may be doing so because they are less financially stable — will be overlooked.
“This is a lose-lose proposition,” Ballard said. “It cannot effectively help buyers or sellers.”
In a policy update fact sheet sent out to agents, @properties said it would make policy changes in light of the verdict and would have new training available to help agents discuss commissions and representation. That includes buyer agency agreements.
“The recent verdict and ongoing litigation involving broker commissions will not alter the central mission of our brokerage, which is to serve our clients with the utmost fairness, integrity, fidelity and transparency,” Thad Wong, co-CEO of @properties, said in a statement.
@properties declined the Tribune’s request to interview its CEOs.
Real estate professionals such as Ballard say prospective homebuyers — especially first-time buyers and low- to moderate-income buyers — could be further hampered in an already challenging and unaffordable housing market by having to come up with more cash, in addition to a down payment.
[ Chicago home sales down 11% in September, ending tepid summer housing market ]
“Here’s my real worry: people that don’t have a lot of money,” said Laura Ellis, chief strategy officer and president of residential sales at Baird & Warner, which is not involved in the litigation. “The economically disadvantaged will be further disadvantaged … because they will have no one to help them, and they won’t have the cash out of their pocket to pay an agent.”
One group of buyers that could face acute disadvantages if more sellers stop paying buyer brokers are veterans. Per the policy for VA-backed mortgages, veterans buying homes are not allowed to pay for an agent’s compensation.
In a statement to the Tribune, the U.S. Department of Veterans Affairs said, “VA has been closely monitoring litigation related to these sorts of charges and is working with internal and external stakeholders to evaluate the potential effects the litigation may have on Veterans and on VA’s policies and procedures.”
Ames of Engel & Völkers said moving into the new year, sellers need to understand what their options are, and it is the job of real estate professionals to explain that.
“None of us can predict what will be the new norm, but the bottom line is in a couple of years, we’ll settle into the new norm and continue with business as usual,” Ames said.
Jim Speta, a professor at the Northwestern Pritzker School of Law who specializes in antitrust law, said there is still a long way to go to see how this all plays out, given appeals in antitrust cases take awhile since antitrust cases are notoriously complex.
As for the trial that could take place in Illinois next year, Speta said while the recent verdict cannot set legal precedent for the future case, he thinks it will still affect the outcome.
“There is now this data point out there — which is the jury was willing to find in favor of plaintiffs after the parties had litigated the case — and that data point will encourage plaintiffs to push hard and should affect, at least preliminarily, the defendants’ assessment of their odds of defeating the Chicago case,” Speta said.
ekane@chicagotribune.com
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