\n<\/p>\n
New <\/strong>real estate commission<\/strong><\/a> lawsuits could change home buying and selling as we know it.<\/strong> Long gone may be the days of buyers walking away paying zero commission and sellers having to bear the entire burden of a real estate transaction. Two new class action lawsuits <\/strong>against the National Association of REALTORS (NAR) could change how agents are paid <\/strong>and deals are done, but should investors even care?<\/strong><\/p>\n We brought in James Rodriguez<\/strong>, Senior Real Estate Reporter at Business Insider, to explain exactly what could happen to commissions<\/strong>, what this means for the future of buying and selling real estate, and whether or not the next agent extinction <\/strong>is on our hands. With over $40 billion in damages<\/strong> from these combined lawsuits, real estate agents may wake up to an entirely new housing market<\/a> where their services are rarely needed.<\/p>\n But who\u2019s forging this fight against real estate agents, and why are they pushing for a \u201cdecoupling\u201d of commissions<\/strong>? And, if you\u2019re a full-time agent, should you be concerned about where your next paycheck could come from, or is this merely a hollow case with no REAL threat to <\/strong>hard-working agents and <\/strong>realtors<\/strong><\/a>? Stick around; we\u2019ll get into who should (and shouldn\u2019t) be worried.<\/p>\n Dave: Henry: Dave: Henry: Dave: James: Dave: James: Henry: James: Henry: Dave: Henry: James: Dave: James: Henry: James: Dave: James: Dave: James: Dave: James: Henry: James: Dave: James: Dave: James: Henry: James: Henry: James: Dave: James: Dave: James: Henry: James: Dave: James: Dave: James: Dave: Henry: Dave: Henry: Dave: Henry: Dave: Henry: Dave: Henry: Dave: Henry: Dave: Henry: Dave: Henry: Dave: Henry: Dave: Henry: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey, everyone. Welcome to On The Market, I\u2019m Dave Meyer. Joined today by Henry Washington to talk about Henry\u2019s favorite topic in the entire world, antitrust law. How excited are you?<\/p>\n
Oh man, I woke up this morning thinking, \u201cI can\u2019t wait to dive into more antitrust law.\u201d And here I am.<\/p>\n
I knew it. That\u2019s why we called you for this one. But all jokes aside, we were actually talking about something that is super relevant to real estate investors, which is the way that real estate agents are paid through commissions.
I\u2019m not sure if you all have heard about this, but there\u2019s basically two major multi-billion dollar lawsuits out there, that are saying that the way that real estate agents are paid, which we\u2019ll get to and talk about a lot throughout this episode is anticompetitive, and basically it needs to change.
And so we are bringing in an expert, James Rodriguez, who is a reporter for Insider to talk about these lawsuits and the potential implications for real estate sellers, obviously, for real estate agents, for buyers, for basically everyone in this industry because everyone is genuinely affected by the way that commissions are paid out currently.
So Henry, what should people be listening to, given your expertise on antitrust real estate law?<\/p>\n
Look, I\u2019m excited for this show because there is still so much confusion around how commissions are paid, who commissions are paid to, why people pay certain people commissions. It took me a while in this industry to even understand how all that truly works. And so being able to talk to somebody who has a general understanding of it and then talking about, how it might change or could change or should change is super interesting to me because obviously this affects my everyday business.
And if it\u2019s confusing to me, somebody who is in this business all day, every day, it\u2019s got to be scary and confusing to people just entering the market, trying to buy a home or people selling their home. These are peoples, typically, it\u2019s their only net worth. It\u2019s their only true wealth that they\u2019ve accumulated.
And so it\u2019s got to be scary to just go into this market and not fully understand how you might or might not be impacted and could it cost you thousands of dollars or should you pay thousands of dollars? And so I\u2019m super excited to dive into this topic and hopefully shed some light on both how agents are compensated and whether or not it should change or not.<\/p>\n
Yeah, absolutely. That\u2019s a great way of putting it. I think for people like us who have been doing this a long time, it\u2019s still confusing, don\u2019t fully understand the implication. So super excited to speak with James today.
Also want to say, I was joking about Henry\u2019s expertise in law. You probably know a couple things, but please don\u2019t expect that anything Henry or I say, is any way informed by actual law. Please consult an attorney before you take any of our advice in this episode or any episode.
But for real, this is a great episode and if you do like it, we ask that you please share it with someone that you know, I mean, I think this is going to impact anyone who or could, I should say, it could impact anyone who is involved in this industry, whether it\u2019s you know someone who\u2019s selling a home, buying a home, or is a real estate agent. And if you like the show, please don\u2019t forget to give us a review on either Apple or Spotify.
But that, let\u2019s bring on James Rodriguez, who is a senior real estate reporter at Insider. James, thank you so much for joining us for On The Market. Let\u2019s start by having you tell us a little bit about your position as a reporter at Insider, what you cover and how you got into covering the national housing market.<\/p>\n
Sure. And thanks for having me. So I am a senior reporter on Insider\u2019s Discourse teams. So basically we focus on tackling big questions or ideas through analysis and feature pieces. And so for me, that means asking big questions about the housing market, whether that\u2019s what are the challenges for first time home buyers right now or these lawsuits that we\u2019ll be talking about, which could, as I mentioned in the story, could radically reshape how we buy and sell homes.
And I got my start in Denver, actually. I was originally a data reporter there. So basically any story that involved a lot of numbers I\u2019d be on in some capacity, and there was just so much real estate development and real estate news going on there at the time. This was back in 2018, and so I kind of just naturally fell into a backup real estate reporter role, just working on extra stories that the full-time reporter didn\u2019t have time to get to.
And then when that job opened up at the beginning of 2020, I took on the role of real estate reporter full-time, and kind of had a front row seat to the way that COVID just altered the landscape for real estate in Denver and then nationwide as well. And so then ended up moving to Insider and now focus on more of a nationwide housing market.<\/p>\n
We picked a very good time to get into the housing market. It\u2019s very interesting time to be in media covering the space, at least for us at BiggerPockets, and on the show it has been.
It sounds like you have very qualified background, James, and you wrote an incredible article. I loved reading it, called The multi-billion dollar lawsuit that could radically reshape how we buy and sell homes forever. And that\u2019s what Henry and I are so eager and interested to talk to you about today, is these lawsuits that could potentially change the way that real estate commissions are structured.
So let\u2019s just start at the top. We do have a lot of real estate agents who listen to the show, so they probably know this, but for everyone else who maybe hasn\u2019t worked with an agent before, can you just tell us a little bit about how agents are currently compensated and then we\u2019ll go into some of the prospective changes?<\/p>\n
Sure. So on a very basic level, most real estate agents are independent contractors, so they rely on commissions to earn a living, and they\u2019re affiliated with brokerages that provide mentorship and training. But the main feature that they provide is just the ability to hang their license to operate in the market. And so in exchange for that, typically the agents will provide them with a cut of their commissions.
And typically the commissions for a real estate deal will range between 5% and 6% in the US, and in most transactions that\u2019s split between the listing agent who\u2019s representing the seller, and the buyer\u2019s agent. Usually it\u2019s an even split, but there can be a lot of variation there. And that\u2019s pretty much at a basic level how real estate agents make their money today.<\/p>\n
Yeah. What\u2019s interesting is this article, well obviously the lawsuit is interesting in general, but I think there\u2019s a misnomer in general in the real estate agent space about how agents get paid.
I think most people think that each agent is paid by the prospective person that they\u2019re representing. I think everybody understands, \u201cI\u2019m going to pay 6%, the seller\u2019s going to pay 6% and that three goes to the buyer and three goes to the seller.\u201d But that\u2019s not really how it works, is it? It\u2019s that all 6% goes to one of the agents, who is then somehow responsible for paying the others.
Can you shed a little more light on what that truly looks like?<\/p>\n
Yeah. Absolutely. Because it\u2019s really interesting serpentine path that I described in this story, which is basically, when the seller lists their home for sale, they\u2019re working with the listing agent typically, and they say, \u201cLook, I\u2019ll pay you the listing agent 3%.\u201d But they\u2019re also agreeing to pay the buyer\u2019s agent say 3% as well.
And so at closing, the buyer pays the seller usually with the help of a mortgage, and then the seller will pay their agent, that say 6% commission, and then the listing agent will actually split that commission with the buyer\u2019s agent.
So even though the buyer is the one who\u2019s kind of fronting all the money, the commissions then come out of the seller\u2019s pocket. And actually up until a couple of years ago, buyer\u2019s agents could actually tell their clients that their services were free, because of this model, because the seller pays out the listing agent who then splits that commission with the buyer\u2019s agent.<\/p>\n
Yes, exactly. And so I knew this because we\u2019re doing deals all the time. And I don\u2019t know that a lot of people actually read through their contracts with their agents to understand that that\u2019s what\u2019s actually happening.
And so I think, you said it a little bit in the intro, but a lot of the times this can vary from market to market on what those actual percentages are, and those percentages could have an impact on how quickly or not quickly your home gets sold, because I know here even regionally here in Arkansas, so we\u2019re split between two counties, right? We\u2019ve got Washington County and Benton County. And in Benton County, each little niche market has its own general rules for how these agents deal with commissions.
And so in Benton and Washington County, it\u2019s expected that a buyer and seller\u2019s agent are both going to get 3%. I\u2019m sorry, in Benton County. But in Washington County it\u2019s typical to see that one agent is going to get, I think it\u2019s 3.7%, and the other agent gets 2.3%, and that\u2019s like\u2026<\/p>\n
I\u2019ve never heard of that.<\/p>\n
Could be considered normal for here, but that could have an impact on the amount of eyeballs that see your property. So I was wondering if you\u2019re seeing that in other areas of the country or can explain how that might actually impact your home sale?<\/p>\n
Yeah. And I think a lot of that just boils down to just how local real estate is in general. I think we see so many different ways of operating around the country, and a lot of that can depend too on guidance from local realtor associations. They\u2019re going to have different norms and different ways of organizing their members all under the National Association of Realtors umbrella of course, but everything can be so local.
And then of course, it also depends on the arrangements that the agents themselves have between themselves and their agents or the clients. So the buyer agent and their client may have an agreement that says, \u201cNo matter what the seller is offering, I would like to get two and a half percent.\u201d And so even if the seller is offering 2%, then it might be upon the buyer to pay that extra half percent, or there are all kinds of agreements that a buyer or seller can make with their individual agent to agree on commission before any transaction\u2019s done.<\/p>\n
Okay. So we have a basic framework of this. I guess it\u2019s not basic. Somewhat confusing framework for how real estate agents get paid currently, but the news here is that there are two currently very large class action lawsuits pending.
One is called Sitzer, is that Sitzer? Versus NAR and the other is Moehrl versus NAR. Basically trying to challenge the way that real estate agents are compensated. What is, basically what are they challenging?<\/p>\n
Yeah. And one interesting little wrinkle about the Sitzer case too. It\u2019s actually been renamed Burnett et al versus NAR et al, and then there\u2019s Moehrl, which is the larger of the two cases, but I can kind of break down each of those.
So in the Burnett case, which was filed in Missouri, it\u2019s the smaller of the two cases. It\u2019s scheduled to go to trial in October of this year. Both these cases have been bubbling since 2019, but really starting to gain traction now, especially when both of them were given class action status. So each of these cases is representing a broad swath, of home sellers who are the plaintiffs who are basically arguing that they were forced to pay unfairly high commissions, and they\u2019re suing the National Association of Realtors, as well as all of these large brokerages.
You think of RE\/MAX, Keller Williams, Anywhere Real Estate, which includes Coldwell Banker and Century 21, and they\u2019re saying that NAR and these large brokerages basically conspired to force sellers to pay these unjustly high commissions. And the way that they\u2019re doing this is through the rules of the multiple listing service or the MLS. And basically, because of this requirement in the MLS that says, \u201cWhen you list your home, you must promise to offer the buyer\u2019s agent some sort of commission.\u201d
Now, the NAR doesn\u2019t specify what that commission needs to be, but as we see in practice, it typically ends up being between two and a half or 3%. And that rule, it\u2019s the cooperative compensation rule, which is really at the heart of this lawsuit. That rule is really the reason why we have this strange way of paying out agents, where the buyer pays a seller who pays a listing agent, who then pays the buyer\u2019s agent. That\u2019s because of this rule, which is when you list a home, you\u2019re promising that compensation.
And so these lawsuits basically contend that, because of this rule, these sellers don\u2019t want their homes to go overlooked in the MLS. And so they feel that in order to entice buyer\u2019s agents to show their clients the property, they need to promise a commission that\u2019s in line with kind of the going rate. So they\u2019re essentially forced to pay for this buyer\u2019s agent service.
So I mentioned the Burnett case, which is scheduled to go to court, go to a trial in October this year with a backup date in February 2024. The damages in that case could total nearly $4 billion. And then you have the Moehrl case, which is the larger of the two cases. Damages in that case could actually total more than $40 billion. And that case includes a much wider group of home sellers. And there hasn\u2019t been a trial date set. People that I talked to expect it to be sometime in 2024.
So really these cases are starting to gain a lot of traction. Both of them. A judge reviewed them and granted them both class action status, and so they\u2019re moving forward and they could have these really profound effects for the ways in which we buy and sell homes. And I\u2019m sure we\u2019ll get into that, but that\u2019s kind of the basic state of play right now.<\/p>\n
Okay. So for clarification\u2019s sake, because it sounds like there\u2019s a few things here. They\u2019re sellers and if they\u2019re saying, \u201cI don\u2019t want to pay for a buyer\u2019s agent.\u201d Or, \u201cIs the rub that if my agent is taking a less than what\u2019s considered fair commission, and this gets posted on the MLS where all of the prospective agents can see this, that I won\u2019t get eyeballs on my property and it might take longer to sell.\u201d What specifically are they concerned about and what\u2019s driving this lawsuit?<\/p>\n
Yeah. The real issue here with the plaintiffs that the sellers are seeking to accomplish is a decoupling of the commissions. Basically, they\u2019re arguing that if each side just pays their own agent separately, it doesn\u2019t go through this process where the seller then pays the listing agent and so on, that there will be more transparency, more incentives for both sides to actually negotiate rather than accepting, \u201cThis is the way that things have always been done.\u201d \u201cThis is the way that they\u2019ll continue to be done.\u201d
So this decoupling they say, would incentivize buyers to negotiate more for themselves and negotiate lower commissions with their buyer agent. And then for the listing agent, they wouldn\u2019t have to then pay out the buyer\u2019s agent at all, and they could focus on negotiating with their listing agent and getting what they feel is a fair commission there as well.<\/p>\n
And James, sorry if I\u2019m not understanding this, but all this, what you\u2019re saying makes sense. I\u2019m tracking what you\u2019re saying, but what about it is illegal? I get that there\u2019s sort of this frustration here by sellers, but what is the law that they\u2019re saying is being broken?<\/p>\n
They\u2019re basically arguing that this is an anticompetitive practice, that this is discouraging competition because of, there\u2019s also what they\u2019re concerned about is this issue that you alluded to Henry of steering, which is basically they\u2019re arguing that, because they are forced to offer compensation to the buyer\u2019s agent.
They don\u2019t want to offer less than the going rate because if they do, then buyer\u2019s agents might be more inclined to just steer their client away from that property altogether that they\u2019ll just say, \u201cLook, I can get a better commission somewhere else. I\u2019m just not going to even bother showing my client that property.\u201d
So the issue is basically they feel like because they\u2019re forced to pay the buyer\u2019s agent, they\u2019re being forced to kind of meet that going rate. And again, the NAR argues that commissions are always negotiable. They\u2019re saying that basically if you wanted to offer the buyer\u2019s agent $1 or 1 cent, technically, that would comply with the rules of the MLS.
Which again, these MLS there\u2019s about 600 independent local databases where agents list properties, they\u2019re governed by rules, they\u2019re controlled by local realtor associations and governed by rules mandated by the National Association of Realtors, the NAR. So that\u2019s why the plaintiffs are taking issue with the NAR because they\u2019re handing down these rules that they feel are basically forcing them to have to pay this kind of going rate of two and a half or 3% to buyer stations.<\/p>\n
Henry, can I just ask you, have you ever paid anything other than 5.7 to 6% in your life?<\/p>\n
Absolutely not.<\/p>\n
It\u2019s just what it is. I\u2019m not saying that\u2019s right or wrong, but I\u2019ve never seen someone really successfully negotiate a different split in my life, at least.
Do you know, James, if that\u2019s common, is that part of the lawsuit that are people refuting the idea that it\u2019s negotiable with evidence?<\/p>\n
Well, that\u2019s the thing here is we\u2019ve seen, you can look at average commission rates in the US which have admittedly gone down slightly, it\u2019s around 5% now, is that the average commission rate for real estate deals in the US. But it\u2019s been pretty stubbornly high despite all of these innovations in the market.
You think of the ability to look for homes online, you think of new technologies and as well as an influx of agents over the past decade. You\u2019ve had all of these real estate agents kind of chasing deals in the wake of the great recession, as we\u2019ve seen home prices rise. And normally you\u2019d expect that to result in more price competition to see in a competitive market, you\u2019d expect to see maybe some type of, you expect to see commissions fall maybe, as a result of that more competition in the marketplace.
And you do have, I will say, some discount broker models out there that will work with you for say, a 1.5% commission rate or some sort of flat fee model. They do offer less service in some cases. I can\u2019t speak broadly for every single one of them, but that model hasn\u2019t gained traction in the way that I think when it was initially introduced, people thought it would. So that\u2019s why we have seen commissions remain where they\u2019ve typically been at despite all these changes.<\/p>\n
So it seems like a lot of the hangup is with the model of having to sell on the MLS, is it possible for homeowners to sell their home without using the MLS or are people forced to use this system?<\/p>\n
So the MLS is pretty much the best way to get the most eyeballs on your home to theoretically get the best price for your home. So when you look at last year, the NAR reported that roughly 87% of sellers used the MLS. So it\u2019s still the most widely used method of selling a home, and that data from the MLS then filters to sites like Zillow and Redfin. And so that\u2019s how you have online listings.
And if you\u2019re a seller, you probably want access to the MLS. And the way that you get that access is through at dues paying member of the local realtor association, which operates that MLS. So about 97% of MLS are operated by a local realtor association. So one of the best arguments for working with a realtor actually is you get access to this MLS, and you get as many people looking at your home as possible.
There are ways to, you see for sale by owner, which is someone just kind of going out on their own and maybe advertising through other methods, Craigslist or even just hanging out flyers or just putting a for sale sign in their front yard. There are companies as well that offer flat fee MLS listings, which is basically you pay them a few hundred dollars.
They\u2019ll get your property on the MLS and kind of call it a day from there, or you could again work with a discount brokerage that offers maybe fewer services, but we\u2019ll get you on the MLS and get you some of those services that you need to get your home out there.<\/p>\n
So in the case that the plaintiffs win and there is some decoupling as you called it, what would this mean for how agents are paid and what do you think it means more broadly for the home buying industry?<\/p>\n
Yeah. It\u2019s really interesting, because basically the way that it works right now, is the buyer is essentially able to off-load the payment for their agent, who they work with to the seller, of course, they\u2019re usually financing their home purchase, and so they\u2019re kind of able to bundle that into their mortgage, they pay for the house, and then their agent eventually gets paid out.
If they\u2019re paying for their agent directly, the plaintiffs say, and an expert from the Consumer Federation of America who I talked to, basically you might see more buyers choosing to just kind of pay their agent on an hourly basis and just this is, \u201cI\u2019m paying you for this work, this service of help me find a house and maybe some negotiating in there.\u201d But you won\u2019t get a piece of the eventual price, which it brings up an interesting question of, if you\u2019re a buyer working with an agent and you theoretically want to get a home for the best price, one person I talked to basically said, \u201cWhy are you paying? Why are you paying them a commission? Why are they getting commission that\u2019s incentivizing them to basically get a higher price?\u201d Which would mean a bigger commission for them. Why are they getting a commission in the first place?
So you might see more of that kind of paying a buyer agent hourly, but also on a more dramatic scale, you might just see fewer people using buyer\u2019s agents altogether. If they\u2019re forced to pay for a buyer\u2019s agent out of their own pocket, you might see people not wanting do that. That could be a lot of money. If that\u2019s a two and a half or 3% of a house, that\u2019s tens of thousands of dollars in some cases.
And so you might see in other countries where the Netherlands or Australia or the UK where only five or 20%, between five and 20% of home buyers actually work with an agent compared to, you see much more buyers here in the US using agents. And as a result, you see total commissions in those countries far less than, than what we\u2019re seeing in the US.
Two to 4% instead of this five to 6% that we\u2019re used to. And if commissions were to fall to three or 4%, the Consumer Federation of America estimates that consumers could save 20 to $30 billion every year through smaller-<\/p>\n
Wow. Oh my god.<\/p>\n
\u2026 smaller commissions.
So you would have basically, fewer buyers may be using agents, using agents in a different way. We have this oversupply of agents right now, because so many people kind of dove into the industry, in the decade after the recession, but particularly during COVID when we saw prices skyrocketing and people were looking for that flexibility, looking for ways to get into the industry and capitalize on rising home prices. And so you\u2019d see those agents kind of scrambling to get deals and kind of more of an emphasis on maybe working on the listing side as well.
So basically the plaintiffs argue, when you have each side paying their own agent, there\u2019ll be more incentivized to negotiate. And so they\u2019re predicting that commissions would fall. Now, the NAR has pushed back strongly against this as have the other brokerages, but the NAR is really the lead defendant here, and they take, they\u2019re the shield for the industry in this case.
And so they argue that this is the most efficient way of doing things and that it would actually be a calamity for first time buyers and low-income buyers. If they have to pay their agent themselves, they say they need that expertise, but they wouldn\u2019t be able to afford it. So that would be a really big problem.
And basically they also say as well that the seller gets a lot of benefit from the buyer\u2019s agent, bringing forth a buyer who\u2019s willing to pay hundreds of thousands of dollars for their home. And so they should be willing to pay for that service of procuring a buyer for them. And so that\u2019s kind of the dramatic, earth shaking scenario in which you have far fewer agents, far fewer buyers who are using agents, using them in a different way.
You can also make a case for the status quo, which would basically be, even if the sellers aren\u2019t required to pay out the buyer\u2019s agent, they might just continue to do so anyway because it\u2019s the easiest way. Again, if you\u2019re a buyer, you\u2019re not allowed to fold your buyer agent commission into the mortgage.
It\u2019s kind of done implicitly through this process in which the buyer\u2019s agent get paid, but you can\u2019t just tack on this extra amount and say, \u201cThis is going to go straight to my agent once I get this loan.\u201d So the industry might be highly incentivized to find some way to allow financing for these buyer\u2019s agents.<\/p>\n
There we go.<\/p>\n
Find some way so that even if the buyer can\u2019t pay their agent out of pocket, find some way for them to still be able to afford to do that through some sort of loan.<\/p>\n
Yeah. That\u2019s where my brain went, James. You talk, I can understand thinking that yes, this might be problematic for new home buyers because not understanding the process of how this is supposed to work, and then getting themselves into a situation where they either, they\u2019ve gone into a transaction and didn\u2019t get the amount of money that they could have gotten had they been educated.
Also, the cost of paying your agent, if you\u2019re a buyer. I get that, but buying a home in general is expensive and people are figuring out ways to do it, just like you said, because they\u2019re forced to figure out ways to do it. That either means they\u2019re saving up enough or there\u2019s programs or incentives out there that are helping them be able to afford that. And I don\u2019t see why that couldn\u2019t be the case for also helping you pay for your agent. We just don\u2019t have to go figure that problem out right now because the system doesn\u2019t force people to.
So I am kind of on the fence about all of this because I\u2019m in this business and are educated on the practices, and I think there are those people who are from the outside looking in, see agents as people who just unlock doors and show you properties. And a lot of the work that they do is that. But I think everybody\u2019s like, \u201cI could do that for myself.\u201d Until it comes down to things like negotiation.
Most people are uncomfortable with negotiations and a lot of these transactions, a lot of the money that we\u2019re talking about that goes back and forth happens in this negotiation. And so I think that if you decouple it and now you have to go pay for your own representation and then you get into this negotiation that you don\u2019t know how to do, you could end up hurting yourself.
And so I think there\u2019s a lot of weight with saying, \u201cI want to pay a professional, especially when it comes down to the negotiation aspect of real estate.\u201d And when you think about negotiating in terms of professional services that are outside of real estate, we do pay people based on percentage of the deal, if they negotiate for us better. That\u2019s a common practice amongst other industries to say, \u201cI\u2019ll pay a professional to negotiate with me and if they get me more money, I\u2019m happy to pay them a percentage of whatever it is they go get me.\u201d And then there\u2019s some areas of real estate where, \u201cWe don\u2019t pay people based on a percentage.\u201d
I don\u2019t pay my plumber based on the percentage of the value my home is. I pay them hourly based on the service that they provide. And so I can kind of see both sides, but I think negotiation is in our form and I don\u2019t know that agents even do it really well. I think that having a good negotiator doesn\u2019t necessarily mean your negotiator needs to be an excellent real estate agent to get you the best outcome.<\/p>\n
Yeah. I think that\u2019s a really interesting point about the need for some professional help and guidance along the way, I even, I talked to Steve Brobeck who\u2019s a senior fellow for the Consumer Federation of America. Very outspoken critic of the current system of agent commissions and has argued that basically, why are agents being paid essentially the same commission, whether they\u2019ve been in the business for 30 years or at the peak of their game or they\u2019re just fresh out of getting their license and going through a few weeks of coursework and passing that test.
Even he told me that he works with the real estate agent would never go through this process without a real estate agent, because a lot of times you really need someone who can just kind of guide the process along to, aside from even the negotiations, just there\u2019s so many different steps along the way and paperwork and different processes to go through to actually reach that finish line. And then on top of that, you do have the issue of the strategy of what kind of offer do you put in and what kinds of contingencies should you push for and all these different things that really do require some expertise here.
And so you do see a case, and I think the plaintiffs aren\u2019t saying, they\u2019re not arguing for the debt of realtors altogether. They\u2019re basically saying that there should be more negotiating on commissions. And that\u2019s really their key point here is that there just isn\u2019t enough negotiating right now. There isn\u2019t enough competition on commissions relative to what you\u2019d expect to see in a competitive marketplace.<\/p>\n
James, how concerned should real estate agents be about this? Is this going to be a threat to their livelihood?<\/p>\n
It is interesting, because when I started reporting on this back in the spring, it hadn\u2019t really been on my radar too much, prior to that with the Moehrl case getting class certification in the spring, that\u2019s the bigger of the two lawsuits.
Again, more than $40 billion at stake there. That started to raise more eyebrows, I think. But even then, when I was talking to agents, I would ask them just at the end of a conversation, \u201cAre you worried about these lawsuits? Is this causing any concern?\u201d And for the most part they would say, \u201cNo, it\u2019s really not even on my radar that much.\u201d
I think we\u2019ve started to see that change actually over the summer as I talk to people. Those conversations at least, that conversation of action, \u201cWait, should I be worried about this? Is this something that I should be thinking about?\u201d<\/p>\n
Now that you mentioned it, I\u2019m worried.<\/p>\n
I think you are starting to see more of those conversations. Now, on the other hand, it\u2019s practically guaranteed that whichever side loses at trial, they\u2019re going to appeal. The NAR has a very powerful lobby. If they were to lose, obviously they got to push back the other side as well.
There\u2019s a lot of money and just kind of the way of doing things is at stake right now, and so you\u2019re likely to see this continue to play out in the years to come. And that I think makes it hard to prepare for agents, the question of should they be concerned right now? I think the kind of logical thing right now is to, there\u2019s not much they can do at this point other than be really upfront and clear about their compensation and getting things kind of nailed down through representation agreements so that every site feels like they\u2019re very clear on the commission that they\u2019re going to be paying or receiving and what they\u2019ll be getting in exchange for that.
So it sounds kind of nebulous, but providing value for clients, I mean, that\u2019s something that brokerages are really going to be, I think pressing upon their agents in the months and years to come is really making sure that clients feel like they\u2019re getting their worth out of the commission that they\u2019re paying. And so making it clear to them kind of what they\u2019re getting in exchange.
And again, you might see people kind of shifting more toward trying to get listings, which is under less of a threat than the buyer agent commissions just because of if you have fewer buyer agents out there or fewer buyers willing to work with a buyer agent, you\u2019re still going to have people who are needing to sell their home, they\u2019re still going to be listing their home, and you can still work with them on that side as well.
So that\u2019s kind of how people might start to think about preparing, but again, this is going to be a long road. There\u2019s going to be a lot of twists and turns along the way, and it\u2019s going to take a while to fully play out.<\/p>\n
Yeah, I mean, I agree with you. When you think about, should agents be concerned right now, in my opinion, this kind of just goes along with what we\u2019re seeing in the real estate industry as a whole, as things are tightening, as interest rates are rising, we\u2019re starting to really see that the people who are succeeding both with investing or with navigating this process are the people who are educated and the people, I think if you\u2019re an agent, you don\u2019t need to be concerned.
If you\u2019re focused on being the best agent and running the best business you possibly can, because if you\u2019re going to set yourself apart, I think the top percent of real estate agents are going to continue to be the top. They\u2019re going to continue to get the business because they understand their value, they understand how they help people, they understand how to be good marketers to find their customers.
I think the people you\u2019re going to see this hurting are the people who are just average agents, who are just in it because they want to pick up a few commissions here and there, and aren\u2019t really running a tight ship or a great business. I think those people might potentially get hurt as things change, if things change. But the market is kind of weeding those people out anyway, because it\u2019s harder as an agent right now to sell homes because there\u2019s not a ton of them and there\u2019s a ton of agents and buyers. There\u2019s not as many buyers as we would typically see because of people getting priced out.
So I mean, the market\u2019s already trimming the fat, so I think those who are left behind are going to be top producers and continue to be top producers.<\/p>\n
Mm-hmm. That\u2019s definitely something that I\u2019ve been writing about over the past few months, is we really saw this glut of agents, during the pandemic a lot of people, again seeking that flexibility, seeking those fatter commission checks, and since mortgage rates have risen over the past year and a half and deals have become harder to find.
I mean, it\u2019s still competition for the homes that are on the market has been fierce, but with fewer homes being listed, that competition among agents has really heated up, and that\u2019s something that just keeps coming up again and again in the conversations that I have.<\/p>\n
Well, James, thank you so much. This has been incredibly insightful and you did a great job explaining this situation to us and we really appreciate it. If people want to follow your reporting, where should they do that?<\/p>\n
Sure, so insider.com, under my byline James Rodriguez focusing on big stories about the housing market. On Twitter as well, Jamie, jamie_rod, R-O-D. You can keep up with my stories there as well.<\/p>\n
All right. Thank you so much, James. We appreciate it.<\/p>\n
Thanks so much for having me.<\/p>\n
Henry, I know you have a lot of thoughts about this one, so just let it rip. Just start going.<\/p>\n
You know what? I think it\u2019s cool from the perspective of it\u2019s shedding light on a system that\u2019s been in place for a long time, that may or may not be fair. I\u2019m not here to tell you or say that I think it\u2019s a fair system or not a fair system. I can argue literally both sides of whether or not I think it\u2019s fair.
I do think decoupling to some level makes sense because why should I have to pay for someone who doesn\u2019t represent my best interests? Just on its surface, sounds like a fair question to ask, but man, I think that this system has been in place for a long time and there\u2019s a lot of, I mean, this is like a legacy business. There\u2019s lots of agents and lots of people with a lot of money that are going to have a lot to say about them not wanting this to change, and I think it does need to change somewhat.
Now, does it need to just be completely thrown to the wind and we need to bring in this new system? I\u2019m not sure, but man, I know there\u2019s a lot of ruffled feathers amongst agents when they hear about this lawsuit. And I think at the end of the day, no matter what side you\u2019re on, we need to remember that this is about people in protecting people with them buying and selling, what in most cases will be their most valuable asset.
And so no matter what side you\u2019re on, if we can look at this from the perspective of truly wanting to make sure that the people selling these assets are the ones that are protected, then I think maybe we can find some middle ground.
But I\u2019m all for ruffling some feathers and getting people to look at old systems and deciding if we need to potentially think differently about how we do things because there\u2019s some commissions that I\u2019ve paid and went, \u201cI just paid a whole lot of money for nothing.\u201d<\/p>\n
Yup.<\/p>\n
And there\u2019s some commissions that I\u2019ve paid and went, \u201cI\u2019m so glad I had that agent on my side and I would\u2019ve paid him more if I needed to in that situation.\u201d<\/p>\n
Totally. Yeah. And I agree we\u2019re ruffling some feathers. Just for the record, I think NAR is one of the biggest lobbying organizations in the entire country. It\u2019s like they spend hundreds of millions of dollars to protect these commissions, so you can expect them to put up a very big fight.<\/p>\n
Yes.<\/p>\n
I agree. Listen, I respect the work that real estate agents do. I obviously use them and think that they\u2019re serve a very valuable part of the real estate industry. I do think it\u2019s kind of interesting though, just like you said, rethinking how these professionals are compensated.
Something I keep thinking about is it\u2019s been 3% and 3%, but over the last couple of years, a seller\u2019s agent deserved no percent, and a buyer\u2019s agent deserves 6% because it was so hard to buy for the last few years. And meanwhile, the sellers are dictating it and they\u2019re doing nothing. You could have just put it up on the MLS.
So I do think there are some more flexibility about the way the system works might be beneficial to everyone. I\u2019m not saying agents don\u2019t deserve to be paid. They do, but I just think whether it\u2019s a little more flexibility or maybe some-<\/p>\n
Transparency. I think is more-<\/p>\n
\u2026 unbundling. Yeah, transparency. But sometimes it\u2019s like, \u201cYeah, are you paying for negotiation? Are you paying for them just to really move the transaction along?\u201d Maybe there\u2019s some way that you can unbundle this so that you can pay for what you need and not pay for things that you don\u2019t need. I don\u2019t know, personally, I doubt anything\u2019s going to change, but I think it\u2019s going to be really interesting to see how these lawsuits play out.<\/p>\n
When I think about the most beneficial real estate agent relationships I\u2019ve had, it\u2019s been where my agent has come in thoroughly explained the process of what happens and then how they play a role in making sure my best interests are protected in that. Because I do think a lot of people who are uneducated about real estate transactions, think that an agent just unlocks doors and shows them properties, and that\u2019s not true.<\/p>\n
No.<\/p>\n
There\u2019s a lot of work that an agent does that they make sound way more difficult than it actually is. But there are some very key important steps in the real estate process that you are absolutely going to want a professional to help you navigate. And I think adding that transparency in payment will also add transparency where agents are going to have to explain to you the process, where they\u2019re going to add value, why they\u2019re going to add value, and then people can decide if that\u2019s something that they want or not.<\/p>\n
Yeah. Yeah. I think that\u2019s a great way of putting it, and I agree. I\u2019ve gotten so much value out of my agent relationships and really don\u2019t want to make it seem like what they do is trivial. I do just think it is a weird, I think we can all agree it is weird the way they are compensated, and there\u2019s probably a way.<\/p>\n
I mean, it took us a while to explain it in the beginning of-<\/p>\n
Yeah. Exactly.<\/p>\n
\u2026 how this actually works. A lot of people still don\u2019t know that you don\u2019t pay your agent, you pay one side and they pay the other. Just that in itself shows you we need more transparency.<\/p>\n
Yeah. I know this isn\u2019t really of necessarily part of this lawsuit, but my sincere hope is that somehow out of all this, the MLS just gets standardized and there\u2019s just one MLS in the country instead of 350.<\/p>\n
Yes. That would be amazing.<\/p>\n
Can we sue NAR for that? That\u2019s not a real threat, anyone BiggerPockets, that\u2019s a joke. It\u2019s a joke. We\u2019re not suing anyone, but man, that would be cool.
All right, well, before I get myself in trouble, let\u2019s get out of here. Henry, if people want to connect with you, where should they do that?<\/p>\n
You can reach me, I\u2019m best to find on Instagram. I\u2019m @thehenrywashington on Instagram and I have no relation or to Dave Meyer or anything he just said, so don\u2019t come at me NAR.<\/p>\n
Absolve you of any connection to what I just said. It was a joke. We love you. And I\u2019m Dave Meyer. You can find me at Instagram, @thedatadeli. Thank you all so much for watching On The Market. We\u2019ll see you for the next episode.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Puja Jindal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team.
The content on the show, On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.<\/p>\n