Farewell to Quid Pro Quo
Real Estate Commissions
Long-time readers of this newsletter and my blog site (GolfCommunityReviews.com) understand that I am no fan of the National Association of Realtors (NAR). In 2007 and 2008 I wrote articles slamming the organization for pumping sunshine into a fragile real estate market. The resulting housing recession blindsided Realtors and consumers, with many of the former losing their jobs and many of the latter their real estate investments. The NAR leader and its chief economist at the time – the economist is still with the organization – bamboozled their members into thinking all was terrific in the market. They were wrong, maybe even deceitful, in a big and harmful way. Their latest misstep, which I describe below, will also cost their dues-paying members money and jobs.
If you are contemplating a sale of your house this year, it may pay to wait until after July. That is when a court will likely approve a landmark settlement between the National Association of Realtors (NAR) and a group of homeowners in Missouri who filed a class action suit against the trade organization. The result was a whopping $1.8 million judgment. In settling at $418 million, the NAR saved itself a lot of money but gave up even more in terms of its standing with its one million members and its fading influence over the real estate industry. (A few large firms like Keller Williams and Compass settled separately.)
The 6% Commission is Likely a Goner
The two major components of the NAR settlement are that the commission rate a brokerage charges a home seller client cannot be used to pay for the commission of the agent representing the eventual buyer; and that commission rates for buyers’ agents can no longer be published in the multiple listing service (MLS) listings. That non-negotiated rate paid to buyers’ agencies, the court found, not only unfairly compelled sellers to pay for the services rendered to a buyer, but also encouraged buyers’ agents to “steer” their clients to more expensive homes since higher purchase prices would pay out an overall higher dollar commission rate.
If you own, say, a $1 million house for sale, you could save $30,000 or more after July. (That is the 3% you might not be willing to pay to your listing agency that it would previously have used to compensate the buyer’s agency.) Owners of homes that will sell at other prices can do the simple math. In short, sellers will be more hard-nosed about negotiating the commission rate – likely at least half as much as the formerly typical 6% – and real estate agents on both sides of the sale will have to figure out how much the buy side agency will be compensated. Buyer agents will need to brush up on their selling skills as some of their compensation is likely to come from charging their clients to find them a property, and also to take care of paperwork and coordination with the seller’s agency.
Convincing Buyers to Pay will be Challenging
Some real estate industry observers expect the landmark agreement will reduce the costs of homes by a percentage point or two. Count me as a skeptic. Sellers will always want the most they can get for their home; and they will not care who pays the buyer-side commission, as long as it is not them. It will take great communication/selling skills on the part of the listing agency to convince their potential clients they need to kick in an extra percentage point or two to “market” their property to the widest possible audience. Sellers are likely to point to the giant online real estate listing sites like Zillow.com, Homes.com and Realtor.com as viable sources of potential buyers. The listing agency will have to decide if they use any extra commission dollars from the seller to pay a buyer’s agent to bring them a successful buyer. In all likelihood, the sellers’ agency will publish rates on its website and elsewhere that they are willing to pay to the buy side. (Communicating such information will still be permitted, as long as the multiple listing service is not involved.)
However, if that compensation does not come from the commission rate the seller pays, it is hard to see how buyer agents and their agencies will be compensated anywhere close to the 3% they have been used to. Buyers’ agents will have the toughest selling job in the new real estate environment. To supplement the previously certain 3% commission they earned by bringing a buyer to the table and engineering a sale, buyer agents will now have to turn their attention to convincing buyers to pay for their services. In my 18 years of working with buyers and their agents, I cannot recall a single time when a buyer was charged a fee by the agents who represented them. Everything was covered by the seller. That is gone after the court approves the settlement in July. (Note: An agency, rather than its agents, are paid the commission; the agency then compensates the agent a percentage they previously negotiated. Disavow yourself of the notion that a buyer agent herself receives anything close to half the 3% current commission rate; in many cases, the brokerage keeps 50% of the agent’s commission, or half of the 3%.)
To be blunt, many buyers in the “new” real estate industry will have baked-in expectations about not paying any fee. Those negotiations between agent and client will be tough, with many struggling agents and their agencies willing to low-ball their fees to buyers.
Dual Agency Carries Benefits and Risks
The most nimble and aggressive real estate brokerages will invest in beefing up their online Internet presence and setting up in-house processes to handle increased action from the Internet. As noted above, millions of potential buyers use Zillow.com, Realtor.com and other online listing services as an initial step toward finding a home. Thousands of buyers’ agents advertise listings on Zillow, for example, even though they work for an agency that is not the listing agency. That may be more difficult after July approval of the NAR settlement as many buyers will consider, “Why do I need to pay an agent if I can go directly to the agency that has listed the house?”
That sounds all well and good, but a buyer who agrees to be a client of a single agency that is representing the seller may feel compromised during the process. In fact, eight states currently, as a protection for the buyer, maintain that such “dual agency” is against the law. Dual agency defines a situation in which a client is represented by an agent or agency who also represents the seller. Where dual agency is legal, a dual agent owes a fiduciary responsibility to both the buyer and seller equally. But with the seller paying the agency, conflicts during the process in some agencies could result in less than equal representation. My advice to buyers who opt for dual agency is to insist that they work with one of the brokerage’s agents who is not the person with the listing, and interview that person thoroughly to ensure you are satisfied with their loyalty to you. In that way, at least you have a chance to avoid being second fiddle in the process. (Note: The listing agency will still expect you to pay something for the buyer services they provide.)
It is also reasonable to predict that companies like For Sale By Owner, Redfin and Homes.com will exert more pressure on traditional real estate agencies as sellers become increasingly aware of the changes in the industry and take more seriously the opportunities to reduce the out-of-pocket costs of selling their homes. Buyers will also look at such “private” home sales as a way to avoid buyer agency fees, although they will still need to pay a lawyer and a real estate professional for services related to the closing. Agencies with a strong buyer support infrastructure might see their way to dominate a local market with high-volume, low-price buyer-side fees.
A Leaner, Meaner Real Estate Industry
One other prediction that industry observers are making is that the new restrictions on marketing and compensation will drive thousands of real estate agents from the industry. That is not an unreasonable expectation. Real estate agents, especially on the buyer side, will be called upon to use some communication, negotiation and selling skills they have never used before. They will need to convince potential clients that their services will be worth the price. They will also need to convince listing brokerages that the size of their compensation from the sell side should be a function of how many viable buyers they bring to the table. Although some real estate agencies will publish those rates in media other than market listing services (MLS), I expect that many of them will be negotiated depending on how serious the buyer appears to be (and how effectively the buyer’s agent can communicate that seriousness). It is possible that some listing agencies will pay per house tour by potential buyers, but that could turn out to be as wasteful as pay-per-click on the Internet.
The new normal in real estate will be too abnormal for many agents, especially those whose original motivation to sit for their license exams was that they had a family member or friend looking for a home and expected to make their first commission without much effort. Some will not be able to learn the tough new skills of communication, negotiation and selling. Some will not have the stamina or inclination to even want to try. In the end, the weeding-out process will create a leaner and smarter industry, one that might no longer require the services of a top-heavy trade organization like the National Association of Realtors.
The South Rises Again
…in Population
My wife and I returned last week from a stay in the Myrtle Beach area. On the way in and after driving around the area during our 10-day stay, we were gobsmacked by the extent of new residential construction, much of it three- and four-story buildings packed together. I could not help considering what that will do to the area and thought of one of Yogi Berra’s famous lines that could describe the future: “No one goes there anymore. It’s too crowded.”
It is hard to imagine that the infrastructure around the Grand Strand of Myrtle Beach will be able to handle the thousands of new residents over the coming years. The roads, especially Highway 17, are already jammed at certain times of the year – late spring, summer, early fall; even in the early spring season, which traditionally has attracted only buddy foursomes of golfers and Canadians seeking to get a jump on the golf season, we were in stop-and-go traffic at odd times of the day. In 1854, the publisher Horace Greeley advised a young friend, “Go West young man, and grow up with the country.” Today, the young and old alike are heeding the call of lower taxes, plentiful recreation opportunities, sunshine and warm temperatures and clean air — at least until more non-electric cars arrive in droves.
It isn’t just the coastal area of Myrtle Beach, or towns up and down the east coast, that are magnets for new residents. Recently, the popular magazine Southern Living ranked “The South’s Best Cities on the Rise,” and a good number of them are inland, a long way from sand and surf. True, the #1 rated town “on the rise” was Wilmington, NC, very much a coastal town, but the rest of the top 5 are all well inland; #2 was Franklin, in the landlocked state of Tennessee, #3 was Spartanburg, SC, #4 Huntsville, AL and #5 Columbia, SC. Current residents of these towns had better hope their towns’ leaders have planned for strong growth in populations.
The Sunbelt has been a strong draw for all generations since my grandparents moved from the Bronx, NY to Miami Beach in the 1950s. And, of course, Baby Boomers like me and many of you who subscribe to this newsletter live in the South today, at least part time. But since the pandemic five years ago, and the growth of remote working arrangements, many of our own children have fled to the nominally safer open spaces and lower cost-of-living places in the South. Real estate prices and inventories of homes for sale in the South have reflected the much stronger demand side of the supply and demand real estate economy.
Six years ago, just before the pandemic, I thought seriously about purchasing a two-bedroom, two-bath townhome in Pawleys Plantation, a golf community just south of Myrtle Beach. I planned to rent it to vacationing families, given the on-site Jack Nicklaus golf course and a beautiful Atlantic Ocean beach a mere six-minute drive away. It was priced at $119,000. Condos just like it are currently listed as high as $350,000 and a few sold last year in the low $300s. Single-family homes in the community have risen in price as well, some dramatically so. A “patio home” (on a lot smaller than ¼ acre) is currently listed just north of $700,000; five years ago, it would have fetched less than $400,000. Yes, I am kicking myself for not having pulled the trigger on that townhome.
High prices, lower inventories, more densely populated areas, the demands for infrastructure improvements… The South and its leaders’ ability to keep up will be stress-tested in the coming decade.
Thanks for reading,
Larry Gavrich
Founder & Editor
Home On The Course, LLC
