Real estate franchise giant Keller Williams (KW) has agreed to pay $70 million to settle a class action lawsuit alleging anti-competitive practices related to agent commissions, according to court documents filed this week.
Background of the Lawsuit
The lawsuit, originally filed in 2019, accused KW and several other large real estate brokerages of conspiring to require sellers to pay broker commissions to the agent representing the buyer. This practice allegedly inflated commissions and made it difficult for smaller discount brokerages to compete.
The lawsuit gained class action status in 2021, allowing it to seek damages on behalf of a wider range of plaintiffs. The plaintiffs include home sellers who paid broker commissions over several years.
Key allegations in the lawsuit:
- KW and other brokerages conspired to maintain high commission rates through anticompetitive practices
- Commissions stayed at around 2.5-3% for decades despite technological changes that should have improved efficiency
- Buyer broker commissions are inflated through NAR MLS rules and pressure on sellers
- Discounts are discouraged through unfair competition
Keller Williams Agrees to Settle for $70 Million
In a major development this week, court filings revealed that KW has agreed to settle the lawsuit for $70 million. This makes KW the first major defendant to settle, though the lawsuit is still ongoing against other brokerages like Re/Max and Coldwell Banker.
The KW settlement includes:
- A payment of $70 million to compensate sellers who paid allegedly inflated commissions
- Agreement to certain changes in KW’s practices around commissions and competition. Details of these changes are not public yet.
- Keller Williams does not admit wrongdoing through the settlement
Attorneys for the plaintiffs hailed the agreement as a “monumental settlement” and believe it will add pressure on remaining defendants to settle as well.
Potential Impact of the Settlement
While specific impacts remain to be seen, industry experts say the settlement could encourage positive changes in real estate practices:
More commission flexibility and competition
- KW’s agreed changes may open the door for more discount brokerages
- Other brokerages feeling pressure may lower and flex commissions
Further MLS reforms
- MLS rules and norms have enabled high commissions
- More scrutiny coming to ensure competitive markets
Increased consumer power
- Buyers and sellers get more options to negotiate commissions
- Can better shop for discount brokerages
However, the settlement also leaves unanswered questions:
Will other brokerages settle or fight?
- Legal battle continues against Re/Max, Coldwell Banker
- Unclear if they will settle or take chances in court
What exactly did KW agree to change?
- Specific practice changes are confidential
- Uncertainty around how much policies will evolve
Will commissions actually decrease?
- Market dynamics still support ~2.5-3% rates
- True disruption may require more innovations
Background on the Real Estate Commission Debate
The class action lawsuit rests on long-running debates about the way real estate commissions and competition function:
How commissions evolved
For decades, residential real estate commissions have stuck narrowly around 2.5-3% total paid by sellers. This breaks down into about:
- 2-2.5% to seller’s agent
- 0.5-1% to buyer’s agent
This uniform rate structure emerged in the 1950s following the creation of the Multiple Listing Service (MLS) system. At the time, Realtor associations aimed to establish fair compensation for buyer brokers who helped bring clients to purchase properties.
However, while real estate markets have changed enormously since the 1950s, commission rates have barely budged from that historical MLS-driven precedent. Plaintiffs argue this suggests anti-competitive forces blocking more dynamic commission pricing.
Forces keeping commissions steady
What allows commissions to stick so uniformly around 2.5-3% against changing market dynamics? Brokerages argue it simply reflects customer preferences and reasonable compensation for skilled, complex work. But critics point to structural factors enabling the status quo:
MLS policies and norms that influence commission offers through listing data fields, with peer pressure keeping rates clustered around the norm. Sellers often believe going below the MLS standard could make their home harder to sell.
Buyer broker compensation as a hidden cost rolled into seller commissions, preventing buyers from negotiating that major cost factor.
Realtor association affiliation rules that are alleged to discourage aggressive competition and commission discounting.
State licensing laws that tightly control who can facilitate sales and charge specific facilitation fees. New models leveraging alternative agents or automated tools often bump against statutes never meant to regulate modern markets.
Industry resistance to true fee-for-service disruption by tech innovators. Companies like Redfin were the first to gain traction with alternative models during the Internet era. But while gaining share, online brokers have struggled to fundamentally shift rate structures. Their market share pales against giants like KW.
With the combination of all these dynamics, most experts argue there are built-in advantages allowing major brokerages to maintain steady commission rates and impede challengers who aim to disrupt with lower or non-traditional fees.
Whether this qualifies as illegal conspiracy or price-fixing has been the core question around lawsuits and debates targeting Realtor associations and MLSs. Breaking through historical industry norms requires changing policies, statutes, and established incentives.
Will the Class Action Drive Meaningful Change?
Many parties believe existing commission dynamics are due for more fundamental disruption, through legal, policy, and tech-driven forces:
Tech innovators aim to empower consumers with data transparency, automation tools, and alternative business models around facilitation. Some support lawsuit efforts as breaking down resistance holding back innovation.
Discount brokers argue they cannot truly flourish and drive commission competition under current industry policies and norms. The suit seeks to open space for their differentiation.
Government regulators have been eyeing commission debates in light of broader antitrust enforcement efforts targeting restrictions across industries enabling inflated consumer prices. Legal actions help draw attention to practices potentially stifling competition.
Consumers benefit the most from competitive, transparent markets optimizing the balance between professional compensation and overall pricing. More options and leverage for consumers put pressure on longstanding industry inefficiencies.
Ultimately the forces compelling this week’s landmark $70 million settlement will help set the stage for the next era of residential brokerage. The combination of legal, regulatory, and tech-driven transformation of existing commission models has the potential to fundamentally shift industry dynamics toward more pro-consumer competition. While dominant giants like KW remain major players, their growing openness to change through settlements like this may gradually disrupt the commission status quo.
What Happens Next?
In the immediate next steps following Keller Williams’ settlement, all eyes now focus on the response from remaining brokerage defendants like Re/Max and Coldwell Banker. Plaintiffs will push hard for additional settlements now that one giant brokerage has laid down its marker.
If additional settlements are reached, we may see a domino effect driving an industry reckoning around commission practices. However, some defendants may still pursue a legal defense believing arguments around anticompetitive practices fail to fully account for countervailing factors that legitimize longstanding commission norms.
Regardless, the litigation will now play out under the long shadow cast this week by KW’s concession. Industry experts widely expect KW’s $70 million settlement to escalate legal pressure and brokerage soul-searching over commission competition issues. How exactly this transforms existing rate structures remains hard to predict. But no one can ignore the tremors through the real estate industry unleashed by this major settlement concession.
The next 6-12 months promise to bring pivotal responses that will influence rate structures and tech disruption for years to come. For innovators, this legal saga represents a rare opening to drive change in an industry where old norms and incentives traditionally resist transformation. For dominant giants like KW and its peers, adapting to forces compelling this settlement may require changes few envisioned even several years ago.
One way or another, the gauntlet has been thrown down to spark overdue reform. Whether market forces or legal pressures drive that change from here, the ground under the real estate industry’s commission model has begun an earthquake that cannot easily be reversed. The aftershocks from this week’s settlement will reverberate for the foreseeable future.
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