When my wife and I began the initial search for our first home, I was against using a realtor.
We knew where we wanted to buy. We talked to the bank ahead of time so we knew our budget. We could search for homes online. We were in a good negotiating position because we didn’t have a house to sell (this was back in 2007 when it was hard to sell a house).
Why hire a realtor?
Then we went to a showing and the realtor selling the house started asking us questions.
Why aren’t you using a realtor? As a buyer you don’t pay a dime out of pocket. The seller pays the buyer’s agent commission.
I didn’t really know this at the time. Why wouldn’t we use one?! Sold! We got a realtor.1
We’ve been on the other side of this transaction as well, where we, the seller, paid a 5-6% commission, split evenly between both realtors.
I never really questioned this practice because that’s the way it’s always been done, but someone finally put their foot down and sued the National Association of Realtors.
Why?
It creates a conflict of interest since the buyer’s agent effectively works for the seller. I don’t completely buy that premise but it is a bizarre practice when you think about it that way.
This bizarre practice might be finally coming to an end. Last week the NAR settled its case with a $400+ million payout, and now the realtor business is in flux. Home sellers will no longer be forced to pay the buyer’s commission.
I have more questions and answers at this point so here are the main points I’m considering in terms of what this means next when buying or selling a house:
Will this impact housing prices? If the fee falls from 6% to something like 2%, will housing prices decrease to account for the lower fees?
Considering how the endowment effect works for homeowners, I’m not certain it will work this way.
But I’ll be interested in reading the research reports in a few years to see if there is any linkage between lower commissions and lower housing prices.
Will houses turnover more now? Transaction costs in the stock market have been falling for years. As those barriers to entry have broken down, transaction volume and turnover have shot up.
It’s like how people always drink more at an open bar.
I’m not sure I’ve ever met a homeowner who stayed in their home because realtor commissions were too high.
But it’s possible we could see increased activity among real estate investors with lower costs.
Will we see new real estate business models? The current commission model could finally see some competition. I’m guessing we’ll see realtors try to get ahead of this by offering flat fees. There might be different tiers of service depending on how much you pay.
You could also see realtors who charge by the hour.
More negotiations will also occur now that consumers smell blood in the housing waters.
Will we see a fee war? Over the past few decades, retail investors have been the biggest beneficiaries of fee wars in the fund world. More competition and new fee structures should also benefit home buyers and sellers.
I would expect to see some bigger brokerages offer lower fees to corner the market.
Real estate is one of the few industries where technology hasn’t been able to break through in a big way. Will we now see tech firms make this space more efficient and cost-effective?
Will we see fewer realtors now? According to the National Association of Realtors, there are more than 106,000 real estate brokerage firms in the United States.
The NAR boasts nearly 1.6 million members. Considering there are currently around one million existing homes for sale in the U.S., there are obviously too many realtors.
There is a Pareto principle in this space where most of the sales are done by a small number of realtors, but it would make sense for there to be some consolidation and fewer realtors in the years ahead.
I would imagine many of the part-time players in this space will become casualties.
Who benefits the most? The easy answer is home sellers, who will (hopefully) pay much lower fees. The downstream winners will probably be large institutional investors, who can now more efficiently buy and sell homes.
How long will it take to see actual change? What if some buyers can’t afford the out-of-pocket costs of paying their own commission? Will buyers and sellers just negotiate and the seller will pay it anyway? Some buyers may write that into their contracts.
It would be nice to see this industry change in a hurry, but it’s unclear how long it will take to play out.
What are the unintended consequences? Are many first-time homebuyers screwed if they can’t pony up for a flat fee or commission out of pocket? Will fewer people use a realtor altogether? Will the power in this industry shift to a new platform or company that puts together buyers and sellers?
This industry has been stuck in the past for far too long. I don’t know what it all means just yet, but I’m excited about the opportunities this could create for consumers.
Michael and I talked about realtor commissions and much more on this week’s Animal Spirits video:
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Further Reading:
How to Buy a House in Today’s Market
Now here’s what I’ve been reading lately:
- 5 reasons to ignore magazine cover indicators (Downtown Josh Brown)
- The victim mentality (Money with Katie)
- Why are U.S. stocks so expensive? (Irrelevant Investor)
- How to hedge against sequence of return risk (The White Coat Investor)
- When is the Fed going to cut rates? (Discipline Funds)
Books:
- The Fish That Ate the Whale by Rich Cohen
- Three Inch Teeth by CJ Box
- Losing the Signal by Jacquie McNish & Sean Silcoff
1We’ve used realtors for other housing transactions over the years. I look at it like a financial advisor — they can be of great value to some people. Others don’t need onw. It’s circumstantial.
