Real Estate Revolution?
A century-old cartel has been broken.
Yesterday’s episode of The Daily, “The Bombshell Case That Will Transform the Housing Market,” featured an interview with NYT real estate reporter Debra Kamin based in part on a report she filed last with with Rukmini Callimachi headlined “Five Ways Buying and Selling a House Could Change.”
A settlement reached this week threatens to strike a blow to an established standard of residential real estate: the 6 percent sales commission. It also will change who pays it. The deal, reached after a yearslong court battle initially brought by a group of home sellers in Missouri, calls for the powerful National Association of Realtors, which has long regulated the way U.S. homes are sold, to amend its rules on how Realtors for sellers and buyers are compensated.
In most real estate transactions in the United States, both the seller and buyer have an agent representing them. For decades, there’s been a standard for paying these agents: a commission of between 5 and 6 percent of the home’s sale price, covered by the seller and split between the two agents.
Commission rates are significantly lower in many other countries. In Britain, they are just above 1 percent, while in Singapore, the Netherlands and Denmark, they hover between 2 and 3 percent, according to a study by the investment firm Keefe, Bruyette & Woods. The homeowners who sued in federal court in Missouri said that N.A.R., through its rules on agent compensation, conspired to artificially inflate the commissions paid to real estate agents.
Now those rules are set to change as early as July, pending court approval of the settlement that includes N.A.R.’s agreement to pay $418 million in damages.
I had, of course, read about the settlement when it came out but, as I’m not likely to buy or sell a house any time soon, hadn’t given it a whole lot more thought.
My longstanding view, both as one who has bought and sold multiple houses and one who has read Freakonomics and other treatments of the issue, is that the real estate market is essentially a criminal enterprise. It’s rather obviously a cartel because of the way the Multiple Listing Service works. Paying a commission on the gross proceeds of a sale—and having no realistic alternative—amounts to extortion.
Most importantly, in my view, is that, while “Realtors” represent themselves as fiduciaries, they’re essentially scam artists whose interests are wildly misaligned with that of their ostensible client. Given that their commission is based on the gross, not the net, they are incentivized to price the house to sell quickly, minimizing their work. An extra $10,000 in their client’s pocket is, after all, only $300 in theirs, since the 6% commission is split both ways. (Indeed, it’s less than that, since they usually have to pay part of their earnings to the firm.) Further, information given to them in confidence will surely be given to the other party since, again, their incentive is to make as many sales as possible with as little time investment as possible. And don’t even get me started on their recommendations for home inspectors and the like.
So, I very much welcome the judgment in Missouri and the broader capitulation by the NAR. Indeed, the $418 million settlement strikes me as a pittance compared to how much their cartel distorted the market.
Kamin argues that not only will commissions to real estate agents go down with open competition but that owing to buyers no longer needing to fork over such a huge chunk of the selling price for their services, they will be able to lower the selling price of homes. She likens this to the end of the travel agent monopoly on vacation planning brought on by the advent of online price-searching tools.
That sort of transformation was already underway even before the settlement. When I bought my previous houses (in 1997, 2003, and 2007), I was totally at the mercy of the real estate agent in looking. In 1997, the only information was newspaper ads and the like and, in 2003 and 2007, Internet searchability was only slightly above the classified ad level. When shopping for the current house in 2019, I had panoramic views and all manner of detailed information via Redfin, Zillow, and the like. The only reason I needed an agent at all was to get access to the houses I identified as possibles.
Still, there are a large number of people who make a pretty decent living as listing and selling agents. Presumably, the only ones willing to take a major haircut are those with no other options.
We used a Redfin agent when buying and selling our previous home. Because our needs were unusual (5 bedrooms plus two additional spaces suitable for home offices; parking for at least 3 and preferably 4 vehicles; good schools at both the elementary and secondary level; etc.) my wife and I looked at a lot of houses over a span of two or three months. Like, in the neighborhood of 50 of them. For the most part, I was able to group these into chunks or 3 to 5 per visit but, still, that’s a lot of visits. That’s an investment well worth making with a payout of 3% of a million-dollar house at the end of the rainbow. If not, are they going to want to be paid per visit? Per hour?
Does the model simply change entirely? If buyer’s and seller’s agents aren’t splitting a commission, the incentives for shady conduct mostly go away. But what will the new system be and what incentives will it create?
So, I am a real estate attorney in the Chicago metro area. I absolutely hate this. This is going to cause me nothing but massive headaches. A couple of things up front:
1. I couldn’t sell a house to save my life, most people can’t.
2. A huge number of Brokers are absolute morons and I hope they get driven out (any way it takes)
3. This is going to increase costs across the board. The average cost of a real estate attorney in the Chicago metro area has been about $450 since sometime in the 90’s. Some attoney’s but not many have pushed their prices up to about $750. These are flat rates. When we represent Buyer’s we make about $5 an hour. Now, in Chicago, we are all title agents and get paid to Sell title. Without that, my flat rate will be about $2,500.
You want to know a fun fact about real estate in Chicago? Because attorneys are title agents, we’re incentivized to do a good job on the title work (it’s our bread and butter) and consequently, there are very few lawsuits over title issues. You wanna imagine how expensive that can get if that doesn’t work?
Specifics:
I have a client with this exact view. He cost himself over $30,000 and a year of carrying costs because he think’s he’s smarter than everyone else. This is is the norm. You may be more capable than many, but most are not.
You have a typo in there I think. I highly doubt anyone is going to lower the cost of their sales because of this. The vast majority are either going to be stuck paying the Buyer’s agent anyway as part of the contract or are going to be paying increased attorneys fees and title costs. In addition to increased litigation in places that don’t use attorneys. mucho savings.
Plus, you’re going to take a situation where feelings tend to run high and add in a whole extra lawyer of competition. Brokers now don’t really have the incentive to work together to get the deal done. The vast majority of real estate transactions are for people to buy homes to live in, that’s the ultimate goal. You’re line of thinking (and I’m not trying to be shitty, I promise) turns the ultimate goal in to paying the absolute lowest amount for the property, for the other services, it becomes solely about price which is a nightmare.
Absolutely not. If you think this is going to make shady conduct go away, I have a quit claim deed for a nice bridge in Brooklyn that I’ll give you for $100. easy peasy, just go record it.
Also, this could not happen at a worse time for the real estate market. It’s a NIGHTMARE right now. We’re not in 08 territory, but we’re in a neighboring state.
The vast overwhelming majority of people do not have the time, knowledge or ability to be able to buy or sell real estate. I know this, because I have been working in this industry for about 17 years. I’ve seen a ton of dumb shit. This is going to drive costs up, make things harder, and make people miserable.
As an aside, I’m pretty sure this whole litigation was driven by a bunch of rich libertarian asshole types who think they are smarter than everyone and are going to force that down everyone’s throats.
I have bought 2 homes and sold 1 so far in my life and both times I used the same real estate agent, even though the transactions were 10 years apart. I loved that guy and was very happy to pay the 6% commission because he made it so easy on me. I didn’t have to figure out what to do, just do whatever he told me to do which was a very great relief.
I really hope that there is an easy path forward for ignorant people like me.
For Sale By Owner has always been an option for you in all of your transactions, both buying and selling. If it is so easy, why didn’t you go that route with all of your transactions and save the middling 6%?
@Thomm: I’m inclined to think that this is another of those situations where Americans don’t object to the service, they object to paying for it. (Sort of similar to Internet news content.)
@Beth:
Perhaps. But a powerful trade association determining industry rates sounds like a classical case of price fixing to me. If this isn’t anti-competitive behavior, what is?
@just nutha:
You might be kind-of correct and I suspect a lot of folks are about to discover that real estate transactions are not as easy peasy as they think they are.
If folks end up having to retain an attorney they might end up realizing that it would have been cheaper and less of a hassle to close a deal if they just went with a competent Agent and just paid the 6% off the top.
Anyway, this apartment dweller will not be in a position to buy a home anytime soon so this decision does not stress me out.
It does feel like a decision that gores the oxen of both political parties so it will be interesting how things work out in the months and years to come.
If things do not work out as planned in the aftermath of this decision then maybe people will soften their rhetoric towards real estate agents…calling them criminals does seem a bit harsh though.
@drj:
I don’t pretend to know enough to predict how this settlement will affect the real estate industry, or whether the net effect will end up being positive or negative. I suspect it will end up being a little of both. But whatever the effect, it’s pretty clear that the game Realtors were running was an invitation to a lawsuit and that, like it or not, the law was on the side of the plaintiffs. “We’ve been doing this illegal thing a long time” really isn’t much of a defense, as both the National Association of Realtors and our former president have learned (though with respect to Trump, I’m not sure lessons are ever really learned).
I’ve known lead counsel on this case for close to thirty years–worked in the same firm with him for a few years, and referred cases back and forth to each other after we each left that firm. If you’re on the opposite side of a case from him, I’m sure you’d think he’s an asshole. If he’s your lawyer, not so much. He’s had some incredible results against some bad actors. You can google “Robert Courtney” if you’re interested in one of his more interesting verdicts against a KC pharmacist who decided to dilute the chemotherapy drugs prescribed for cancer patients.
Kind of like Ticketmaster and the NCAA.
I’ve been reading quite a bit about this, and reporting and analysis are all over the map. It seems like many news reports are flat-out wrong when they report that the decision “ends” the 6% commission. That has always been negotiable.
If you read agreement terms, it basically stipulates:
– Sellers can’t put buyer’s agent compensation offers on the MLS
– Buyers agents have to have written agreements with buyers
That’s it. It doesn’t get rid of the “standard” 6% commission at all. Commissions are still negotiable.
Based on my reading and the experts I’ve read, it seems to make things more difficult for buyer’s agents in terms of their compensation, but it also eliminates the bad incentive of buyers’ agents potentially steering buyers to houses that offer a higher buyer agent commission in the MLS.
I don’t know how that will all shake out, but it doesn’t seem like a sky-is-falling, or huge sea change to me.
@Andy: Re; negotiable – yes, I have first hand experience with that, sort of. The realtor I’ve worked with on my transactions drops her rate by 1% for military, first responders, and teachers. She started doing that after she left on of the large firms to set up her own shop and reduce her overhead. It has made her one of the highest volume realtors in town (in terms of the number of closings, not the total $$ value).
@inhumans99: I grew up in Seattle where where brokers started opening 1% commission agencies in the 70s, so count me among the “hell of a way to run a cartel” contingent.
“She likens this to the end of the travel agent monopoly on vacation planning brought on by the advent of online price-searching tools.”
Yeah – and that’s brought us to travel today: a purely price-driven enterprise where it’s all a race to the bottom of cut corners that’s full of hidden fees and traps.
I’ve started using travel agents again for longer trips and I can’t even tell you how much nicer it is. And because agents have relationships, the cost is still competitive (honestly it might not be that different) but if something goes wrong we call the agent and they take care of it for us.
Be careful what you wish for.
My wife and I have done over 30 personal real estate transactions over the years, and for the most part, the agents involved have been providers of keys to open doors, and boilerplate NAR documents with a few things filled in. I agree with New York that RE agents should not be practicing law.
In any event, we have paid somewhere in the neighborhood of half a million dollars to real estate agents over the past 30 years for very little value.
I applaud this ruling, I will happily hire lawyers to review my documents and negotiate deals in the future, and I will probably not bother with a buyer’s agent at all.
Realtors overplayed their hand, and are learning what taxi drivers learned a few years ago when Uber and Lyft came around.
@Thomm: The argument isn’t that real estate agents provide no value but rather that they operated in a cartel system that radically increased what they could demand for their services. As noted in the short excerpt from the NYT report, those in other advanced countries command only a fraction of what they do here.
@just nutha: Again, the objection isn’t to paying for a service but to a price-fixing system that radically distorts the market.
@Alex K: I really don’t take the kinds of trips where a travel agent would be useful. It’s a giant pain in the ass to research VRBOs for a family beach vacation and I’d offload it for a fee but, since I drive rather than fly there’s not really any place for a commission.
@Tony W: At least in the case of taxi cab drivers, they’d actually paid a handsome up-front fee for a government-sanctioned monopoly. That the same government allowed people who hadn’t done so to break said monopoly continues to astound me.
If you’re moving to a new area, a local realtor may well provide real value in terms of insights into neighborhoods, schools, and the like. But, yes, they’re mostly just door-openers (and NAR actually had a monopoly on the locks!) if you know what you’re doing. On our last house-hunting stint, Redfin occasionally sent a substitute agent who was a complete moron and a distraction from our inspection of the property.