Inflated Real Estate Commissions

The law firms of Kozyak Tropin & Throckmorton LLP, Jeffrey L. Berhold PC, and Hall & Lampros LLP have filed a class action lawsuit against the Florida Association of Realtors and some of the largest real estate brokerage firms in Florida.  The lawsuit alleges that Florida citizens have paid inflated commissions to their agents when selling their homes.

Inflated real estate commissions

This is an antitrust case about real estate commissions.  When selling a home, home sellers typically pay their agents a commission of about 5% to 6% of their home’s sales price.  That commission is then often split between the seller’s agent and the buyer’s agent.  In other words, it is usually the seller that pays the buyer’s agent.

This unusual framework—where the seller pays the buyer’s agent during a sale—is the result of rules that stem from the National Association of Realtors, a nationwide organization for real estate agents across the United States.  The rules are adopted and enforced by Florida Realtors (a statewide association of real estate agents) and sixteen large brokerage firms (who account for many of the home purchases and sales in Florida).  These rules:

• require sellers to offer compensation to buyer’s agents;
• require sellers to offer the same commission to all agents, regardless of the agent’s experience or skill;
• require sellers to disclose that offer of compensation to all agents, allowing agents to steer buyers towards higher commission homes; and
• largely prohibit buyers and sellers from negotiating lower commissions.

Here is an example of how these rules work in practice.  First, a homeowner enters into a contract with a seller-broker.  The listing agreement requires the seller to pay a commission to the buyer’s agent (usually 2.5% to 3%) on top of the commission to his or her own agent (usually another 2.5% to 3%).  Second, the seller-agent lists the house on a local multiple listing service and, in accordance with the anticompetitive rules, makes a blanket offer of compensation—3% in this example— to every buyer-agent out of the seller’s proceeds on the sale of the house.  Third, a buyer-agent shows the property to a buyer client, who buys the home for $300,000.  Fourth, the buyer pays the $300,000 purchase price, with 3% of the sales price ($9,000) going to the seller-broker as commission in this example, another 3% of the sale price ($9,000) going to the buyer-agent, and the remainder going to the seller.

These rules have a negative effect on home sellers across Florida.  In other countries like Australia, Canada, Ireland, the Netherlands, and the United Kingdom, home sellers pay much less in real estate commissions.  Home sellers in those countries pay closer to 3% in total commissions rather than 6% in total commissions.  That means sellers in other countries typically pay half the amount that home sellers pay here in the United States.  Going back to our example of a home sale, our seller should have paid $9,000 total in commissions rather than $18,000 total in commissions.  The result of the anticompetitive rules is a massive transfer of wealth from ordinary Americans to large real estate companies.  In 2019, for example, realtors collected roughly $100 billion in commissions, indicating that U.S. consumers annually would pay about $50 billion less in fees if U.S. realtors charged commission rates in line with international norms.