#008: A rude awakening for realtors
NAR's guilty verdict and impending national lawsuits are poised to disrupt a century-old industry norm for commission structures. But does it also create an opening for business model innovation?
2023 has already been a tough year for real estate brokerages and their agents with interest rates rocketing up and sellers still enamored of 2021-2022 home values leading to low inventory. And it just got a lot worse for them.
A shocking verdict against the National Association of Realtors (NAR) and several brokerages made The New York Times breaking news this week for good reason. In just two hours of deliberation, jurors found the defendants guilty of collusion to maintain high commission rates, awarding 500,000 home sellers in Missouri a whopping $1.8 billion in damages. These damages could triple to over $5B due to antitrust laws. Immediately after the ruling, the plaintiff’s attorneys filed a national class action lawsuit to cover home sellers all over the US—in it, they name several more brokerage firms.
What are the lawsuits all about?
These lawsuits center on seller and buyer’s commissions, and previous policies (which are now being adapted in reaction) by NAR and the multiple listing services (MLSs) to require “cooperative compensation”—a revenue-sharing model that has existed for over a century.
This rule required the listing broker to compensate a buyer’s broker in order to list on the MLS, and guess who operates 97% of the MLSs? NAR’s local Realtor associations. Not complying with this rule would be sales suicide as the MLSs are incredibly powerful marketing tools: 86% of sellers in 2022 listed their properties on the databases.
The consequence of this “steering” is that prices get inflated to cover these fees, and it’s argued that buyer’s brokers aren’t actually incentivized to get their clients the best deal. There is little-to-no negotiation on the fees because lowering the standard commission de-incentivizes buyers agents to even show the properties. One study found lower buyer’s agent commissions led to properties that were 5% less likely to sell and take 12% longer to trade.
So what does this mean for real estate sales?
Especially in a slow sales environment, this could spell a race to the bottom for real estate agents. With no guardrails in place, and a desire—if not downright necessity—to get listings and sales traction, both sellers and buyers can negotiate on commission structures, and agents may be willing to concede to win business and close sales.
For homeowners and seekers, the rub is that without guaranteed compensation, we may see fewer agents willing to work with buyers where they are not representing the listing, especially for the mid-to-smaller size deals. It may have been worth an agent’s time to arrange and go with you to 10 open houses when they were going to make 2.5-3% on the final sale, but if they get negotiated down to 1%? That agent might just decide to focus that time and energy on getting new listings.
Not only could this spell slower sales cycles while new norms are set, it could also lead to certain types of buyers not having agents to work with, and therefore deals being negotiated without a representative or relevant expertise.
Uncertainty can breed new models.
When an industry as established as real estate sales has to reimagine its revenue model overnight, it’s going to get messy. Even more so in an already turbulent time for the industry.
This cracks open the door for some new models to emerge—many startups have tried to enable homeowners to sell without a broker, support auctions, and other alternative marketplaces—but most have failed to go mainstream amidst such an entrenched incumbent system. It’s hard to break 100+ years and near-complete market penetration. But, these changes seem like the best opportunity for new entrants, or new commission/rev share models, to leverage that uncertainty into a wedge for a “new normal.”
Given it took a jury just a little over 2 hours to award $1.8B, it’s an indication that people are eager for a change.