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The Watershed Moment in Real Estate
Hello! I’m Aaron Kardell. In my Sunday newsletter, I pick one random topic to go deep on and have some disparate quick hits at the end.
Those who aren’t active in the residential real estate industry may have missed some big news over the last few weeks. It will likely become a watershed moment that disrupts residential real estate transactions. I’ll talk more about what happened in a minute, but first, let me give some background on why I believe this is such a big deal.
HomeSpotter was never a disruptor. For various reasons, I chose a path where we would partner with the real estate industry as it existed. Our primary customers were (and still are) mid-to-large-sized real estate brokerages and franchisors and the multiple listing services (MLSs) that serviced them. Eventually, before we were acquired, we also started selling to real estate agents.
When I started raising money for HomeSpotter, potential investors often asked me: “Isn’t residential real estate just going to get disrupted? And if it does, what does that mean for you?”
As I became familiar with the industry, a few things seemed obvious. Eventual disruption of the industry was inevitable. And… at least up until 2018, I could confidently say that it seemed apparent that disruption was at least 5-10 years out. However, around 2020, my tune started to change. I could foresee the potential disruption within a 5-year time horizon.
I would explain to investors that there is a strange quirk in the residential real estate market. In a nutshell, sellers of properties pay both the seller’s and buyer’s agent commissions. In a somewhat typical case, a seller might pay their agent 6% to sell their house. Assuming a buyer uses their own agent to buy the house, the seller’s agent pays the cooperating agent a pre-agreed upon commission (e.g., this could be any number a seller’s agent chose for a given listing, but market norms were often +/- 2.7%). This is the primary business reason a multiple listing service exists. For seller’s agents to post listings with a stated buyer’s agent commission. Notably, this behavior only exists in the US and Canada and is also specific to residential real estate – commercial real estate works much differently.
This coupling of how buyer and seller agents are paid made real disruption difficult. Most listings are on the MLS, and any listing not on the MLS is at a competitive disadvantage. To post a listing on the MLS, a member agent was typically required to post a buyer’s agent commission. Listing agents knew they’d need to post a competitive commission with what the market was paying, or other agents may opt not to show their property. So a disruptor looking to reduce commissions for sellers would have to either make a compelling case about how they can earn a seller just as much money by not posting on the MLS or they would need to post on the MLS and absorb the market norm buyer’s agent commission. Similarly, since buyers never felt like they were paying their buyer’s agent, they had little incentive to choose a disruptor on the buy side.
This is why I have always advised people to get their own buyer’s agent when buying properties. The seller’s agent will collect the full commission from the seller (~6%) either way. It is, therefore, better to get an agent that fully represents your interests as a buyer than to go directly to the seller’s agent, who will never solely have your interests in mind.
So, why did my tune start to change around 2020? Two reasons.
First, I saw the startup Opendoor start to gain a modest amount of market traction. Opendoor provided a prime example of how a disruptive startup could decouple the otherwise tightly coupled real estate transaction. Opendoor allowed consumers to sell their houses without the hassle of many showings or the unknown timing of knowing when a buyer would arrive. Opendoor offered a price to buy a property, often within an hour of the request, and could close in as little as a week’s time. No agents were required for this. While this was a meaningful disruption on the sell side, it also alluded to a path for disrupting the buy side.
In some cases, Opendoor could sell its listings to buyers without involving a buyer’s agent. It had the option to decide when to use the MLS or not.
The second reason my tune started to change was that a series of class action lawsuits had begun to be filed in late 2019 – known simply as Moehrl v. NAR and Sitzer/Burnett. Both cases earned class-action status and made similar allegations. They allege that brokerages and the National Association of REALTORs (NAR) conspired to inflate commissions to sellers by requiring sellers to pay buyer’s agents commissions. I lacked the legal expertise to know where these cases would go on their own, but the fact that there were two and likely more lawsuits to come meant there were legal reasons on the horizon that there might be a forced decoupling of how buyers’ and sellers’ agents are paid.
Fast forward to October 31, 2023. Deliberations in the Sitzer/Burnett trial had just concluded. A jury took less than a couple hours to deliberate and find NAR and the brokerages guilty of conspiring to inflate commissions. It awarded damages of $1.78 billion (likely to be automatically trebled due to antitrust law).
Since then, additional copycat lawsuits (some with a much broader scope) have been filed. And the Moehrl lawsuit is still pending.
It’s still plausible the Sitzer/Burnett award could be reduced or that a different outcome could be reached on appeal. But the tides have shifted. A legal outcome that makes sellers paying buyers’ agents at least an optional thing seems increasingly inevitable.
So, what’s likely from here? It’s hard to say as much is still up in the air, so I hesitate to pontificate too much.
But the residential real estate market in the US may look more like it does internationally. In most international transactions, commissions are closer to ~3% than ~6%. Typically, there is only one agent involved – the listing agent.
Fewer listings may be posted on MLSs, as the primary motivating factor for a listing agent is to advertise to buyer’s agents what they’ll pay them to bring a buyer.
If inventory on MLSs decreases, the search process may eventually become more complicated for consumers. When we were looking for properties in Puerto Rico, I mentioned that you had to triangulate from at least three different sources to find listings. That feels increasingly inevitable in the US. You might envision a future state where some listings never go to the MLS (and therefore don’t make it to many websites that rely on the MLSs). Those listings are on a limited number of other sites. This will, in turn, likely increase the power of a few small players like Zillow and others. Right now, no one pays to list a property on Zillow. However, paid listings on sites are the norm in countries like Australia.
Similarly, it may become even more problematic for residential real estate tech startups focused on the search process to get started. I doubt Zillow will license its listings to others. And suppose MLSs increasingly have gaps in the coverage of listings. In that case, it’ll be hard for those tech startups to compete with a sufficiently good experience.
What’s interesting in all of this is that the average real estate agent only makes, on average, $50,000/year. And I’ve always said it’s substantially more work to be a buyer’s agent than a seller’s agent. As a seller’s agent, your scope of work is somewhat finite. List the property on the MLS and make sure buyers can find it. Some seller’s agents go above and beyond that, but at least expectations are straightforward. However, as a buyer’s agent, especially in a hot market, you might take your client to dozens of properties, make multiple offers, and never close a transaction that results in a commission.
If buyers have to pay their agent directly to help them buy a property, how many will opt to do so? Maybe if the service can be part of the financing cost, it’ll remain commonplace. But if not? It seems unlikely that most buyers will want to pay on a percentage basis. Maybe fee for service (e.g., hourly) will become a more common thing with buyer’s agents.
There is much yet to shake out in the months and years ahead. But one thing is sure to me – meaningful change in real estate is on the horizon.
This Week’s Quick Hits
More updates to come soon on our home build process. For now, I don’t want to jinx anything.
For those of you in Minnesota, hope you’re enjoying the unseasonably warm day!
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