RIP Real Estate Agents - NAR Litigation
RIP - Real Estate Agents
You’ve seen it, right? A jury ruled that real estate companies were colluding and that a seller is no longer forced to offer a buyer agency fee. And with that ruling, they awarded them a boat load of money! And by them… I really mean the attorneys, because they are the ones that really made out!
There is a lot of bad information out there. As an example, I have had a couple of people say it was a supreme court ruling... It was not. Let’s get some clarification on what happened as well as talk about what this could mean going forward. Because there is no doubt about it. The real estate world is about to change. Some for the better and well some of it won’t be pretty.
But first, real quick, my name is Jeff Chubb and I am a recovering Investment banker, turned real estate agent that has sold more than a 1,000 properties. Let’s just say that I have been around the block at this point.
So a quick recap in case you were living under a rock. A group of 500,000 sellers in Missouri sued the National Association of Realtors, some real estate companies like Keller Williams, RE/MAX and Anywhere which owns brands like Coldwell Banker and Century 21. The lawsuit said that the NAR and real estate agents colluded to force sellers to offer a buyer agent a commission.
RE/MAX and Anywhere settled leaving NAR, KW and Berkshire Hathaway to fight the suit. And it did not end well. The jury after a mere 2 hours of deliberation handed down a $1.7 Billion dollar ruling that ultimately could turn into $5.4 Billion in damages.
A lot of agents and organizations… Including the National Association of Realtors is saying that this verdict won’t stick and they will win on appeal and that appeal could take years… And therefore it should be business as usual. But that’s not necessarily the case. Changes are already being made in the industry. But really, the big development… Revolves around the Department of Justice. The DOJ will soon slap a fine and force changes long before this appeal shakes out. My bet… This happens within the next year.
So let’s fast forward and talk about what this means for you as a buyer and a seller today and then talk about how I see this playing out in the distant future.
Let’s first focus on what it means as a seller. The first is if you are interviewing an agent and they say their fee is 5% or 6% or whatever and are lumping the buyer agent fee and the seller fee together… Then they are doing it wrong and could quite frankly be in trouble.
They need to be presenting the information like I have been doing it for at least a decade now… You as a seller need to pick the marketing package that you would like to choose for selling your house and then choose how much you would like to offer to the buyer agent. It could be zero. It could be 2%. It could be 4%. Whatever YOU as a seller want.
The immediate place this makes a big change to is on the buyer side. The argument that agents made in regards to buyer representation being free was always B.S. But agents have been saying this for years! In truth it’s always been my belief that the buyer is paying not only their agent, but the seller agent as well… “How could that be”, you ask? Well in the past, the seller has been paying both those agents with whose money?!? Ya, the buyer’s money!
But the way that it is charged may change. Like those attorneys that just took 30 to 40% of the $5.3 Billion dollars… Real Estate agents work on contingency as well. In other words, they only get paid when the end result is delivered. And because of that contingency, the agent compensation needs to be higher in order to compensate for the risk of investing time and resources with a person that may ultimately not end up buying or selling a house. And that means that agent does not get compensated for that time and the resources used.
If a buyer uses an agent, then that agent will still demand to be compensated… It makes sense right? Afterall, this is a business. Not a community service. They have a family to feed and a need to put a roof over their head. But now a buyer will have to pay that agent directly. And here is where it gets tricky. The buyer most likely doesn’t have an extra $10 grand sitting around to pay for that agent. They could finance it, but that would have to be worked into the deal and that can cause financing issues.
In the very short term, all agents will require a buyer agency contract for all buyers that they are working with. This alone will drastically improve the transparency on how the fee works and therefore will greatly improve the industry. The fee structure will be laid out and presented at the initial buyer meeting. It will be explained that whatever the agent and the buyer has agreed to as fair representation will be negotiated with the seller at the time of the offer. And anything that the seller is not willing to cover will need to be covered by the buyer.
Undoubtedly, this will cause some buyers to go directly to a seller agent. And therefore they will be unrepresented in the deal. And this will end up being a boon for the seller. A high percentage of these buyers are gonna lose… Lose big.
Now where I see the buyer agency market going is the market providing buyers with two options… These options are similar to when someone uses an attorney. They can pay upfront and thereby the total fees will be less OR they can work off contingency where the fee will be higher.
So let’s make up some numbers. Maybe it’s $250 an hour with an up front $2,000 retainer for buyer agent representation. How involved do you want that agent to be in the process? Do you want them at every showing? If so, then that will cost you. Maybe you only want them at second showings because you did a bunch more legwork and saw a bunch of houses during open houses… Oh, but in the future, open houses may not exist like they do now… But we will get to that. Or maybe you only want the agent to consult on pricing, write up the offer and do the negotiations.
You get the point. The consumer gets to choose how much they want to pay based on how much direction they want from their agent. And agents will have different fees. An experienced agent that has sold thousands of houses will probably charge more than the agent who is newly licensed. And if they decide to not end up buying a house… Then that’s okay. No harm. No foul. That’s their decision and the agent has been compensated for their time and their efforts.
OR maybe the buyer decides they want the agent to work on contingency. And it is agreed that when the buyer buys a house that the agent will be compensated 2.5% of the purchase price which could be built into the deal as closing cost assistance which would be paid by the seller. No upfront funds are paid and if the buyer doesn’t end up buying a house then they don’t owe anything. Very similar to today's structure, except that it would be negotiated at the time of the offer.
It’s a simple risk and reward equation. The current system is high risk for the agent and therefore high reward. I think the new system will be a sliding scale where the buyer ends up getting to choose.
I think if that is where it ends, then it is a win for all parties. But I don’t think that is where it will end. I think it will continue to evolve from there. Now we are getting into a bunch of 'what ifs and hypotheses’ and this is easily the most unfactual thing I have ever said in all of my videos. And I hate not talking about specific data points and the what if worlds… But here we go… Because things changed… A lot.
The good news in me being able to point to some facts and data points is that I am pinpointing my belief as to what the future holds based on what happened in our history. I am going back to the 80s and looking at what the real estate market used to look like back then… This was before a lawsuit was filed and won which ended up creating buyer agency in the first place. Isn’t it ironic? It was a lawsuit that created buyer agency and ultimately a lawsuit that will end it!
So one of the first things is that The National Association of Realtors in donezo. It’s gone. And while everyone thinks that organization was for us agents… That’s B.S. That organization didn’t care about us agents. They had us “locked” in based on collusion between them and the real estate brokers. The needs of us agents were their last thought.
But for everything that organization wasn’t… They were extremely pro-consumer. Pro consumer almost at the extent of their true customer… Us agents. As a homeowner, I know you LOVE the interest deduction on your mortgage every year. And the capital gains tax exemption on your house… You know the one that says the first 250 grand is tax deductible for an individual and the first 500 for a married couple. I personally loved the $8,000 tax credit I got when I bought my first house back in 2008… This credit is one of the things that has been contributed to turning around our real estate market as well as our economy back then. Well all of those things that I just mentioned are thanks to the National Association of Realtors.
And they won’t be there anymore. There will be no organization fighting for the special interests of us homeowners. So the first thing to go will be the interest deduction on our taxes. Then the capital gain deduction… Because in each and every single budget battle… Politicians are always first to go to the elimination of the interest deduction as a way to increase revenue… But it was the power of what used to be the largest trade union in the country and the most powerful lobbying arm in the country and all the money they spent on buying those politicians that protected those deductions and our special interests as homeowners.
Again, the NAR won’t be there to fight and protect those deductions. So those are gone.. And they are gone very quickly. We can call that an opinion, but I would pretty much chalk that one up to fact.
Buyer Agency in general will disappear. It will go back to the days in the 80s where buyers didn’t have any representation. Everyone worked for the seller. And that agent the buyer thinks they have working for them will be working as a facilitator and not in the capacity of the buyer. And the seller will pay a minimal fee for that facilitation service.
Because of the disappearance of the competitive compensation on the buyer side, then ultimately that means the value of the buyer lead is drastically reduced. Fun fact. Did you know that a Zillow lead in the Back Bay would cost me as an agent more than $1,500 PER LEAD. That’s not per closing. That’s per lead.
Us agents won’t be willing to pay the Zillows of the world a premium for near worthless leads. Which means the property syndication that we have now… Will ultimately disappear. It’s a simple rule… If you aren’t paying anything… Then you are the product. Just like Facebook. We don’t pay anything and therefore they sell our info to marketers. Us Facebook users are the product. Well when you use Zillow, they are selling your info to us agents. You are the product. And in the new world, that info will become worthless.
But that isn’t actually Zillow or Realtor.com’s or any of those other big sites biggest problem. Their biggest problem lies with the Multiple Listing Service and it not really existing. Because the MLSs in the country have a couple huge headwinds coming at them.
The first is a drastic cut in the agent count. It’s us agents that pay monthly fees to keep these services going. These fees then store all this data which is then fed to all those beautiful house websites that consumers visit each and everyday. With a quartering or halving of real estate agents… These MLSs will not be able to exist. There will have to be a mass consolidation of Multiple Listing Services and a mass cutting of resources to be able to survive.
Their second and biggest risk is the rise of the pocket listing. These were very prevalent and how the real estate market operated in the 80s. WIth the removal of the MLS, you have removed the motivation of agent to agent cooperation. Slowly, but surely, agents will put fewer and fewer houses on these MLSs and have them as inner office listings.
It will be like back in the 80s when you had to go down main street and stop in at each office to see what they had for listings… Except tomorrow you will have to stop by each office’s website rather than their main street office address to see their pocket inventory.
And this is where the consumer really loses. Because in the end, it’s the consumer that gets really hurt by a change to the current model.
The lower income buyer is really screwed. They won’t be able to afford an up front buyer agent fee. So they will have to go directly to the seller’s agent and have no one protecting their interests.
All buyers will be affected by the reduction and then elimination in the free flow of information. All those consumer sites will slowly but surely start disappearing… Or maybe not disappearing all together. I could see where Zillow starts charging me as a listing agent to list their house on their website. And then charge more for premier status and then more for a listing video and so on. And by the way…Those are all charges which I would pass along to the consumer. The point is the consumer loses because the information won’t be as readily available.
Without the big reward, you will see less and less business happening on the weekends and evenings. The model will turn closer to the European real estate model where business is done on the weekdays and between 9 and 5. Again, if you aren’t paying an agent 10s of thousands of dollars to represent them on a property, then that agent will not be at the beckoning call during down time. In Europe, if you want to look at a house then it is considered a serious process. And thereby you take time off work and look at houses during the day and during the week. And with that, there will be no more weekend open houses!
And in the end, the seller loses because they won’t be able to jump onto Zillow to see what their neighbors house sold for… Or at least jump on Zillow for free. They won’t be able to see what the fit and finish to that neighbor's house was and will have less information to help determine the true market value of their house. They won’t be able to do the research that they can today.
You know who will have that data? The neighborhood real estate agent. And in the end, the real estate agents who are left standing will be more valuable. The value of the real estate agent drastically increases. It’s going to take some time to get there. It’s going to drastically narrow down the field and eliminate a good three quarters of the amount of real estate agents in the country. This will eliminate competition of not only agents, but also a lot of real estate companies will go out of business with there being a LOT of consolidation. The elimination of competition plus being the ones that control information will only end up increasing a real estate agent's and the real estate company's value… At least the agent and companies that make it to the end.
And agents… Again, history repeating itself here… In all of that transition that I just talked about… Through all of that. It is the real estate company that begins to start gaining massive leverage over us agents.
I feel like we all long for the past… The good news is that we are all going to get to live it in real time soon enough. It will take some time for it all to play out, but there is no doubt that there are a LOT of changes coming.
And on that note. I am personally excited for the future. And I fully embrace it. That’s why for any and all of my clients, sellers or buyers. From this point forward, they can choose to work with me on contingency or on an hourly basis.
And heck, if you are a buyer and you are paying me on an hourly basis, then that means if the seller on the house that you are buying is offering a commission… Then that entire commission would revert to you.
All of my contact information is in the description below. Otherwise you can visit YouTubeRealEstateAgent.com and fill in your information and then my team and I will reach out to you.
Until next time.