The real estate industry is facing a large and slow reckoning on how to handle fees.
In late October, a Missouri judge ruled that the National Association of Realtors and several brokerages engaged in illegal price manipulation when setting commission rates.
The industry now requires sellers to provide compensation to buyers’ agents in order to be listed on local multiple listing services (MLS). These commission rates are often set around 5% or 6% and typically work as follows. That is, the home seller pays the agent, and the agent splits the commission 50-50 with the buyer’s agent.
The decision puts those rates at risk, but the changes won’t happen immediately. The National Association of Realtors plans to appeal.
Mike Delpreto, part-time scholar at Leeds School of Business, gives his views on what this means for the industry going forward.
how did we get here? This didn’t happen overnight, right?
In recent years, there have been a number of industry lawsuits challenging the current state of how fees are set and paid in the real estate industry. The first judgment ultimately awarded billions of dollars in damages to homeowners and home sellers in certain states.
This is because for years we’ve looked at the industry and how fees are paid and said, “This isn’t fair. All of these companies are collaborating and colluding to keep fees high.” It’s a culmination of people. Now, the legal system has finally said “enough is enough.”
So, does this mean that home sellers currently cover the entire amount through commissions?
When it comes to buying and selling real estate, it’s tricky because not only does the seller pay the buyer’s agent, but the buyer also doesn’t have to pay the buyer’s agent. There is no free market economy at work here for buyer agents to actually prove their worth and deliver to the people they represent.
If you want to buy a house, talk to an agent, who will guide you, negotiate, and close the deal. And it costs nothing to the buyer. That means we don’t compete on price or value. they’re just there. Receiving compensation from a seller’s agent means that the seller is simply present in the market. A buyer or agent who has been in the industry for 30 years will receive the same amount as someone who has been in the industry for 30 minutes.
Does that mean the buyer’s agent is working against them? Lowering prices means less money in your pocket, right?
That is correct. Agents working for buyers want their customers to buy at the lowest possible price. But the lower the price, the less money the agent receives. It makes no sense. However, the percentage is small. And buyer agents are basically incentivized just to close the deal. They want to close deals, whether it’s in today’s market or two years ago or four years ago.
Could real estate agents lose their jobs if commissions were drastically reduced?
The implications here are potentially problematic for many people and industries. Agents are contractors. They are not paid. Whether he trades 0 or 100 a year, they get to eat what they kill. It’s about how much work they do.
Part-time amateur agents may have more incentive to exit the industry. That’s because it becomes more difficult when you suddenly can’t show prospective buyers lots of homes, tell them it’s free, and then get the money if they sell. If you have to justify your value, it will become more difficult and competition will become more intense.
Will this make homes more affordable?
What they are trying to do now with the lawsuit is not going to help housing affordability. It doesn’t necessarily get worse. The idea that if the commission is 5% or 6% and you cut that in half, all of a sudden home prices will fall by 3% across the country, that’s outrageous. That’s not how home prices are determined. The market determines the price of your home and you will be charged a fee based on that.
What happens next?
Since this lawsuit was won, copycat lawsuits are now popping up all over the place. It just comes out left and right. And it’s not sustainable. If damages are awarded in this one case, all defendants will become bankrupt. We’re not trying to bankrupt all real estate agents here. We are changing the rules of the game. So over the next 12 to 24 months, all the stakeholders need to get in the room and decide what rules can actually be changed and enforced.
Many businesses make money from these fees. Companies like Zillow, Redfin, and Opendoor are all in the works right now. From a business perspective, this has the potential to significantly change the way many public companies generate revenue and deliver value in their space. If you are an investor, you can have it all. And while this is a time of great risk, it is also an opportunity for these existing and new businesses to come in and address these challenges in new and innovative ways.