Ruling set to change real estate market
Years ago, as disruption was forcing many in the financial services industry to come to terms with declining mutual fund and trading fees, one stockbroker said to me, “I'm going into real estate, because the 6 percent commission is sacred!”
I thought about his comment recently, after a federal jury in the U.S. District Court for the Western District of Missouri found that the National Association of Realtors (NAR) and some big real estate brokerage companies conspired to artificially inflate commissions on home sales.
The $1.8 billion price tag in damages (which the defendants will appeal) may be a small part of what could become a larger dismemberment of the sacred 6% commission that has been in place for decades.
Currently, although there are two sides to every housing transaction — a buyer and a seller — only the seller has to pay the brokers involved. They do so by agreeing to cough up 5-6% of the purchase price to pay the buyer's broker in addition to their own listing agent.
That may not seem like a lot, but if you consider that the median existing home sells for nearly $400,000, this means that $24,000 comes off the top, and is then split between the two agents, regardless of the time spent on the market.
This would seem to be a business that is begging for change, but agreeing to a different compensation structure has meant that the home in question would not show up on the ever-present multiple listing services (MLS), where properties can attract attention from would-be buyers and their agents.
The Missouri decision and similar other lawsuits winding their way through the courts could mean big changes are coming to the industry.
The most obvious is that commissions could be unbundled and those who opt out of paying the buyer's agent would still have access to MLS. But that also means that buyers who want representation may have to pay their own way.
It is doubtful that doing so would mean paying 3% of the purchase price out of pocket. More likely is that there would be an opportunity to pay a flat or hourly fee, or if mortgage companies and their regulators agree to it, buyers might be able to add in the cost of an agent into the overall financing of the home.
And some buyers would opt to go it alone, without the assistance of an agent, a practice that is common in other parts of the world. Doing so would likely mean that buyers would lean on real estate attorneys more in the negotiation process.
These potential changes to housing transactions could upend the real estate brokerage business.
Analysts such as Keefe, Bruyette & Woods predicted that there could be a 30% reduction in the $100 billion that Americans pay in real-estate commissions every year.
That in turn might push out a sizable portion of the nearly 1.6 million agents currently in the industry. Those likely to call it quits could include part-timers and dabblers, whose exit could make those who remain more valuable to their organizations.
The Missouri decision
may also allow a startup to succeed in the real estate space.
The industry is littered with stories of those who attempted to offer different and more affordable pricing options, but could not find a way to succeed, given the ingrained commission structure and the grip over which the industry kept non-conformers off of MLS.
Now there are likely to be more choices for consumers, which should be beneficial over time. In other words, the 6% commission will no longer be sacred and could become extinct.