(Bloomberg) -- Agents hustling to strike deals for homes in a tough Manhattan market are confronting another major hurdle as lawsuits crop up challenging commission structures.
A case filed in New York this month is the latest blow after a bombshell jury finding in a civil court case in Missouri in late October held a major Realtor group and others liable for colluding to keep commissions high. The battle over sales commissions and who should pay is throwing agents into an uncertain future. And it comes as the market is already struggling with few homes for sale and high mortgage rates that are sidelining potential buyers.
“They feel like there’s this tidal wave of change coming and they’re sort of frozen, they don’t know quite how to react,” John Walkup, co-founder of real estate analytics company UrbanDigs, said. “It’s just a bundle of uncertainty for them.”
Typically in Manhattan, the broker on a listing could make an offer for compensation to the buyer’s broker, with money often coming from the proceeds of the home sale. Brooklyn’s system is slightly different. As lawsuits started to pile up this year, the Real Estate Board of New York tweaked its policy. Starting next year, the group requires that buyer’s agents will be compensated directly by sellers or will need to negotiate their potential pay with their buyers.
Read more: Why 6% Commissions on US Home Sales Are on Trial: QuickTake
The change has left New York agent Vickey Barron, who works with Compass Inc., having to figure out how to adjust.
Compass is hosting workshops to explain the new policy, and Barron says almost every agent she knows has signed up.
“You’ve got a challenging market with high interest rates and low inventory, and now you have this new component everyone has to wrap their head around,” Barron said.
In the Missouri case, a jury found the National Association of Realtors and others liable of colluding to keep real estate agent commissions high. The NAR has promised to appeal. Other cases, including one seeking more than $100 billion in damages, have cropped up since then.
The New York lawsuit also targets commission structures. The plaintiff Monty March filed a civil case in the US District Court for the Southern District of New York, alleging that the system of having the seller pay the fee for the buyer’s broker “increases a seller’s transaction cost, and artificially inflates Manhattan residential real estate broker commissions paid by residential real estate sellers,” according to the complaint.
REBNY is pushing back against the lawsuit, which is taking aim at the residential listing service.
“The complaint is laden with numerous inaccuracies regarding the RLS’s rules, which abide by all applicable laws,” REBNY’s General Counsel Carl Hum said in an emailed statement. “We look forward to our day in court.”
Many agents across the country are facing a slower year as mortgage rates hovering above 7% push some would-be buyers to the sidelines. Manhattan home sales were down about 23% in the third quarter from the same period a year earlier, according to data from appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. That’s the fewest third-quarter sales since 2020, according to Jonathan Miller, president of Miller Samuel.
A Consumer Federation of America report in 2022 showed that the median rates paid to buyer agents ranged from 1% in Brooklyn — which doesn’t require listing brokers to offer any compensation to buyer’s agent according to the report — to 3% in Manhattan.
UrbanDigs’ Walkup said Manhattan real estate deals could soon look more like those in Brooklyn, where buyer and seller agent commissions are decoupled.
Worsening affordability has likely played a role in sellers’ growing suspicion toward the model, according to Vasiliki Yiannoulis-Riva, a partner in Withers’ New York real estate team.
“Life in general is becoming more expensive, and there’s a growing awareness of how high brokerage commissions are in this country relative to others, where it’s more like 3%,” Yiannoulis-Riva said. “I think people are thinking, ‘Why am I paying 6%?’”
‘A Little Rocky’
For Compass’ Barron, it’s tough to fight back against how reality shows focused on real estate agents portray the industry as an easy and glamorous place to work. She argues that the hours of work that goes into a closing deal is often under appreciated.
“My value is not so much in identifying what’s for sale, anyone can sit in their slippers and find that,” Barron said. “Having years and years of experience to understand what questions to ask to provide the buyer with knowledge to make an educated decision, to me, is priceless.”
Moving forward, agents will have to adjust their approach and learn to communicate the change to buyers. Walkup thinks the transition will be rough at first but agents will adapt. In the meantime, he says there could be turnover.
“It’s just going to be a little rocky before we redefine how those payments are structured,” Walkup said.
(Updates with more details on changes in fourth paragraph.)
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