Co-owners of real estate are always hoping to reduce the cost of a partition, which is a lawsuit that attempts to divide co-owned property, generally by forcing a sale and division of the proceeds. On October 31, 2023, the National Association of Realtors and large residential brokerages were found liable for about $1.8 billion in damages after the jury found that they conspired to keep commissions for home sales artificially high.
These pending lawsuits will likely reduce the usual cost of Realtor commissions from about 5% in California to about 2.5%. This forthcoming change will benefit co-owners by reducing the costs of a partition. Perhaps more importantly, the reduced cost of a partition will allow selling co-owners, who are usually the co-owners filing a partition action, to obtain more of their equity in a buyout of their interest by the defendant, which is a common outcome in a partition action.
How do Realtor commissions impact the cost of a partition?
Many co-owners ask about the cost of a partition. They may quickly realize that the cost of a Realtor, not the lawyer, constitutes the single largest cost of a partition.
Let’s review an example to calculate what a co-owner should expect to receive in a partition. Perhaps a plaintiff files a partition action in Los Angeles relating to a $1,000,000 property owned 50/50 with their former significant other or sibling after inheritance. This example assumes the most common fact pattern of moderate litigation for a few months followed by a settlement agreement to sell on the market without a referee or to the defendant. The following might be an example of the costs of a partition action:
- $15,000 – Attorney’s fees and legal costs for the partition action
- $50,000 – Realtor commission of 5% paid to the listing agent, which results in 2.5% to the listing agent and 2.5% paid to the buyer’s agent under the existing commission scheme
- $5,000 – Escrow, title, and other costs of sale
In this example, the net proceeds of sale would be $945,000, from which the Plaintiff would receive $472,500. However, after attorney’s fees of $15,000, the Plaintiff would net $457,500. Under such an example, a rational plaintiff might accept $472,500 if the defendant wanted to buy them out.
Lawsuits are challenging buyers’ agent commissions
Realtor commission class action lawsuits are threatening to upend Realtor commissions as we know them. These most followed of these cases are known as the Sitzer / Burnett lawsuits. Incredible coverage can be found online and on numerous real estate blogs.
As the Wall Street Journal explains the lawsuits:
The National Association of Realtors requires its 1.5 million or so members to comply with numerous rules that inflate their pay. Missouri home sellers are arguing in the lawsuit that a rule requiring them to make a blanket offer of compensation to any potential buyer’s broker violates the Sherman Antitrust Act.
The Scottsdale Realtors blog explains the parallel Moehrl v. NAR case as follows:
The lawsuit challenges the Buyer Broker Commission Rule—also known as the Participation Rule, alleging it’s anti-competitive. The rule requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation when listing a property on a Multiple Listing Service (MLS).
Extensive economic analysis of the elimination of buyer’s broker commissions can be found in the hour-long vlog from Brandon Mulrenin, shown below.
The bottom line is that major national real estate brokerages are paying eight figure settlements to get rid of these lawsuits. This is because these lawsuits could give rise to billions in damages. The writing is on the wall that the way of doing business whereby a seller is required to pay a flat rate commission of about 2.5% to any buyer’s agent appears to be coming to an end.
Reducing buyers’ agent commissions will benefit California co-owners in partitions
The most fundamental impact of reducing the total commission paid to sell a house is simple: it will reduce the cost of selling a home, putting more of the equity in the pockets of sellers in California and elsewhere.
However, how this will impact partitions is a bit more complex. One common outcome of a partition is that the property will be sold. By lowering the cost of selling the home, there may be less resistance to partitions because the loss of equity will be smaller. This means the transaction cost of buying and selling a home should be lower, perhaps creating less fear of a co-owner moving on from their co-ownership.
Seemingly, reducing the cost of the partition would make it more likely that a plaintiff will file a partition. Indeed, as the cost of a service goes down, demand normally goes up. This means that a disgruntled co-owner might not be as tempted to kick the can down the road about selling the property when the co-ownership relationship deteriorates.
It remains to be seen whether an increase in demand for partitions because the cost is lower will be offset by a decrease in resistance to a sale by would-be defendants to out of court negotiations to end the co-ownership relationship.
Further, co-owners are more likely to want to force the sale of a property in a partition if there is equity to be paid. Reducing the Realtor commission will create more equity. This is especially impactful for properties with limited equity, such as those that were recently purchased or those with significant debt resulting from a minimal down payment, like FHA financing with just 3.5% down.
Reducing buyers’ agent commission will also benefit co-owners selling their interest in a settlement
Perhaps the more subtle but important impact of reducing Realtor commissions will be that plaintiff will receive more of their equity in a buyout by the other co-owner, who is often the co-owner in possession.
Indeed, when defendants make an offer to buy out the plaintiff’s interest, they often raise the argument that the equity of the plaintiff should be reduced by the cost of sale that would be incurred if the property is sold to a third party. While the party being bought out my argue that the cost of sale is not being incurred in this transaction of a co-owner buyout, the truth is that the Realtor commission is likely to be incurred at some point in the future by every owner of real estate.
The net effect is that the 2.5% buyer’s broker commission is paid 1/2 by 50% owner, which amounts to 1.25 of the gross value of the property. In the example of a one million home, this means $12,500 more in the pocket of the co-owner who sells their house to a co-owner. Interestingly, this amount is incredibly similar to the average cost of a partition lawyer in California when handled by Talkov Law, which should emphasize the importance of this reduced cost of sale.