New jury ruling against National Association of Realtors

Investment Analysis Clubs Macro Economic Trends and Risks
1

How the Real Estate Broker Business Could Change

Industry experts say a federal jury ruling this week against the National Association of Realtors and large brokerages makes the current commission model likely to change.

By Michael J. de la Merced and Jordyn Holman, The New York Times, Nov. 4, 2023

A federal jury dealt the biggest blow to the American home-buying industry in perhaps a century this week when it found that the powerful National Association of Realtors and several large brokerages had conspired to keep agent commissions artificially high.

More antitrust lawsuits against the association and brokerages are awaiting trial, while federal regulators are looking to intervene as well…

Right now, home sellers essentially pay fees for both their own agent and the buyers’ agent, with a typical commission around 5 to 6 percent, split between the two brokers… If a seller doesn’t agree to those terms, the listing isn’t shown on the multiple listing services that underpin most home sales.

This week’s decision may have changed that. …[end quote]

The article lists several potential changes, all of which could reduce the amount of money paid to real estate brokers. In addition to impacting the entire brokerage sector, this could impact real estate sales overall since more people could afford homes if transaction costs drop.

Wendy

5 Likes
2

I wondered when this would happen. Saw it coming decades ago. Transaction costs became essentially “fixed” as a percent of the selling price and no way around it. Some are trying to get around it. They advertise on TV regularly. This may be what it takes to force real change.

3

The anti trust aspect of this is astounding. During our last house hunt in 2017, the realtor flat out would not allow us to go visit an FSBO property. Period.

ETA: This had dramatic implications for the commission payable to the agent (none). Therefore, no interest in showing us a property, even if it’s one that fits our needs.

3 Likes
4

In that case, visit the FSBO property on your own. No problem. We viewed 4 or 5 homes with our realtor and viewed another 2 or 3 without. Ended up buying one of them with a simple handshake deal followed by a quick closing. It was a corporate relocation for us, so the company paid many of the expenses.

1 Like
5

An oldie but a goodie. My son is reading this book and we were discussing this just last night:

6

@Hawkwin, from your link: “using a broker typically results in a FASTER sale, but not a BETTER sale”. Yep, that about sums it up, because these middlemen control the process and reduce the use of alternate channels.

HOWEVER, if the property is desirable in every way, there is no need for a broker. Location, Location, Location.

That’s the rub with agents. You won’t see them add any value with rural farmland (except in cases where you can get a city slicker to buy property at inflated prices through creative marketing and presentations) and you won’t see an agent add value to the best house on block over places like zillow who provide all relevant details, pictures and trends.

Since the digital marketplace is now quite fluid and ‘efficient’, what purpose does a realtor actually add?

2 Likes
7

I take everything Freakonomics with a giant boulder of salt. What that chapter actually said is that real estate agents’ own homes take longer to sell, but sell for a bit more than their customers’ homes.

In other words, real estate agents work a bit harder for themselves than they do for their clients. Thanks for the insight, Captain Obvious! This is not a result you need an academic study to clarify. In fact, it seems a bit odd that a University of Chicago professor is even spending time on pedestrian stuff like this. I guess he needed more filler for a book.

The real question is how much, if any, value to real estate agents add over FSBO seller? That’s what whole debate is about.

1 Like
8

Can you elaborate on what fault you find that creates the skepticism?

The original link is now behind a paywall so I can’t quote specifics but in their book, they discuss how the compensation method (% of total home price sold) does not create an incentive for the broker to sell the home for more money. It instead, creates an incentive for the broker to sell the home faster and for the most efficient (often cheaper) price. Selling a home for $500,000 with a 6% commission would net the agent $30k. If the broker worked really hard and got the home sold for $550,000, they could make an extra $3000 but they might risk $30,000 in the process. The homeowner is likely more willing to risk the home not selling for $500,000 if they can get an extra $50,000 than the broker is willing to risk the $30,000 to get an extra $3000. This asymmetry in risk/reward creates an incentive for the broker to not work in the best interest of their client.

3 Likes
9

Unemotional perspective, assuming you pick a good agent. Not all are good.

Local knowledge. This can be critical if you are moving to a new area. Their opinion will also not always jive with yours, so be aware, but they should raise things for you to consider and research. Our current agent, with whom we have bought two homes, sold one and will be placing another in her hand this Spring, has actually talked us out of putting a contract in on a place. She takes her fiduciary responsibility seriously, and is a good enough agent to know that her honesty is a better investment through referrals than anything she could do with that commission.

I have sold properties by owner, been a Realtor myself…a good one, IMO. I have straightened out buyer’s credit so that they can afford a house, guided sellers in what to do to their property to make it more easily seen by buyers as a place that could be theirs, saved buyers significant tax savings by understanding the weird property tax structure of the area in which they were buying and finding the loopholes. (A 5 year old property saved them about $5K/YEAR in taxes compared to the new home they wanted.) I took my fiduciary responsibility seriously as well and always put my client’s needs first. I know how to sell/buy properties and have done so without an agent as well as with, but a good agent by your side will help you not to make expensive mistakes. I think outside the box and used my creativity to get my clients better deals. Bad agents are less than useless. Good ones are worth every penny.

Beyond that, there is a perception by most buyers that FSBOs don’t know what they are doing. Often they are right, and these deals can fall through with much greater incidence than brokered sales. The agents are there to hold emotions in check, allowing the sale to close. Our agent did this for us with our last sale. Even though I was a Realtor and know the drill, it took someone for whom it was only about money, (commission,) to be the voice of reason.

There are some properties that all you need to do is throw a sign up and it will essentially sell itself. The first house I FSBOed was on a well traveled street and in the starter home market. I sold that very quickly. My second FSBO I never even put a sign up and let word of mouth sell it. The property we are placing on the market next Spring is more secluded and with a higher price point. I want lots of eyeballs on the property to get bidding wars going. That requires an MLS listing.

I have never paid 6% to sell a home. My properties tend to be pristine and have emotional push points that make buyers drool. Contracts are negotiable. Agents take one look at my property and realize how little work they need to do to sell it. If they don’t take my commission, someone will. Last property went with a 5% commission, being a rental which comes with more hand holding. We intend to sell next Spring with a 4 % commission. There are so few properties on the market, and ours has things not easily reproducible elsewhere, that I do not anticipate an issue getting an agreement with that.

So why would I list with a Realtor? A seller NEVER wants to be able to be questioned directly by a prospective buyer. I love buying FSBO. I can extract a ton of info that the seller doesn’t even realize they are giving me. And happily because we have a great agent. They exist. Learn how to find them.

IP

5 Likes
10

Happy to. But first, your summary is exactly correct. The interests of the seller and the agent are not necessarily aligned. This is not a novel discovery. Decades ago on the Buying a Home board, there was a debate the lasted for years about how much value, if any, the seller’s agent actually adds for this exact reason.

So I thought that part of the book was yawner because it is something that was already widely understood. All Levitt really concluded is that people work harder for their own interests than for others. Not a particularly surprising insight. Auto mechanics are working in their own best interests as we all know. Doctors who own their own diagnostic equipment order more tests. Not new information.

In general I found to be Freakonomics pretty meh. The conclusions were either obvious or not really supported and a lot of it seemed lazy. I’ll do a review in another thread so I don’t derail this one very much.

2 Likes
11

Agents are very used by unscrupulous buyers. Buyers who take 6 months and then buy from another agent. Buyers who look for a year and then say now is not the time to buy. People who can only look in the weekends. People who need little things done for free. Then there are the costs involved.

This is going to drive the business into a crap state. People won’t do it for 2%. Not someone you trust. The insurance costs for agents will rise.

12

Since the sellers agent won’t be paying the buyers agent anymore, the buyers agent can sign a contract with the buyer and they can agree on what a fair payment will be. Maybe some base rate plus a percentage of the purchase price? Maybe an hourly rate? Maybe some combination of the three? But that’ll be decided between the buyer and the buyers agent. As is customary between any purchaser of a service and provider of said service.

13

“Unscrupulous buyers” tends to be a synonym for uneducated buyers. An agent needs to do their job to explain how compensation works and how to operate to get everyone’s needs taken care of. I do not walk into an open without telling the agent “I am represented by …,” and signing in with our agent’s contact info.

That said, I did have to “fire” one client. His ethics were questionable and I wasn’t putting my name on his requests. I suggested he find someone else to represent him and let him out of his buyer’s agency.

This is not a 9-5 job, which is both a blessing and a curse. I put so much time in with one buyer, that I probably didn’t make minimum wage with her, as she was a low price starter home purchaser. I actually started out trying to convince her to keep renting, that there would be lower entry points in a year or two, but she insisted on buying. The smart agents only represent sellers. I frankly loved helping the buyers, but yes, it can be rather like a drudge job if you don’t love it.

IP

1 Like
14

I suspect that for as long as inventory is as tight as it is, there will be open houses where buyers can see the homes, and buyer’s agents who for a set fee do the administrative part of buying, minus the house tours that take up so much time. They will never leave the office. Seller’s agents will have to do the home tours of their listings for buyers.

IP

1 Like
15

That sounds reasonable. Considering that the sellers agents will be earning [far] more than the buyers agents in most cases, it makes sense that the sellers agents work harder than the buyers agents. Though, perhaps the higher end you get, the more the buyer will be willing to pay their buyers agent to ensure that they get a fair deal and a good property.

16

No doubt, particularly for transferees whose fees are likely to be paid by corporate. Time for a new industry to be cobbled together in response to the changes this lawsuit will bring.

IP

17

It won’t be all bad. Now the buyers agent will actually be working for, and being paid by, the buyer. In business, or any money transaction, alignment of interests is alway a good thing.

18

Why would the seller’s agent get paid their current percentage as a commission? Who says there will be any price stability in that?

19

The sellers agent commission is already negotiable. Some people pay 6%, some pay 5%, and some pay less than that. Since the sellers agent will not be paying buyers agents anymore, I would expect commission rates to come down. But, again, like every other service, the seller (customer) will come to agreement with the seller agent (service provider) regarding the price for their services, and they will sign a contract with the details noted.

2 Likes
20

It is not an industry that has pricing power. The pay outcome will be very bad.