Sparks That Ignite Change
May 6, 1937 played out like most other spring days in Lakehurst, New Jersey. Afternoon thunderstorms and high winds- typical weather for that time of year- buffeted the military community sixty miles northeast of Philadelphia. However, as a result of something as innocuous as an errant spark, the small, anonymous town would soon be forever associated with tragedy. That evening, the German passenger airship The Hindenburg was dramatically destroyed in a catastrophic fire, killing thirty-seven and permanently changing the landscape of air travel.
History is often a tale of pivotal moments born from invisible or unforeseen catalysts. A spark of a different sort, this one generated by the Department of Justice, created a firestorm of change in the residential real estate industry several weeks ago. While profoundly different in nature and consequence, both events serve as reminders of how singular moments can lead to sweeping transformations. On March 15th, the Federal Government successfully settled with the National Association of Realtors over antitrust violations, irrevocably transforming many of the traditions that dictated real estate sales for the past several decades.
This settlement, while complex and riddled with nuance, poses profound implications for the future of real estate transactions. Some of the proposed changes, still under debate, hint at a landscape in flux, with final rulings, which are expected in July, promising further evolution.
Let’s start with the financial settlement. Although it doesn’t directly impact consumers it is, nonetheless, staggering. The N.A.R. agreed to pay an incredible $418 million in damages to resolve its issues with the D.O.J. Surprisingly, before this, the organization had over one billion dollars in its teeming coffers, sparking debate among members about its use for defense and PR efforts.
More broadly, consumers will be impacted by several key provisions:
Winners
Today’s homeowners and sellers are, once again, clear winners, ultimately poised to negotiate lower commissions. I use the word “ultimately” because, at the moment, it’s probably in the best interest of sellers to continue to compensate both the buyer’s and the seller’s agent. Why?
The listing agent’s North Star is clear – sell a client’s home for as much over asking price as possible. And the surefire strategy to achieve this goal? Casting the widest possible net to reel in eager buyers in order to whip up a competitive bidding frenzy. For now, that means compensating the buyer’s agent, an investment that pays dividends by ensuring the property gets maximum exposure and broad interest. After all, 89% of all buyers work with an agent and you can’t have heated competition without multiple players at the table. Most sellers that I’ve spoken to seem to agree that paying a three percent commission is a decent return on investment if it results in a house selling for $85,000 above asking. (That being said, my job is to simply inform and educate my clients. I work for them. If they should choose not to compensate the agent on the other side, I am more than willing to abide by their decision.)
At some point in the next few years, the motivation that sellers currently have to compensate a buyer’s representative will no longer exist. As the number of homes available for sale begins to rise, bidding wars will become less common and the calculus that currently compels sellers to cooperate will vanish. Why pay an additional 3% if it doesn’t increase your net sale price, right?
Losers
Post-pandemic, buyers have endured a seemingly unending series of hardships, one after another. For the past four years, house hunters have had to endure a lack of inventory, rising home prices, soaring mortgage rates, record-low affordability, and, now, the very strong possibility that they will have to pay for the services of their agent. This latest indignity, further financial burden, seems to be one of the unintended consequences of the government’s intervention.
At first blush, it makes sense that buyers should have to pay for their agent. They are, after all, the direct beneficiaries of the service. However, when you peel back just a layer or two of the proverbial onion…
Buyers, first-time buyers, in particular, have to have a lot of money to purchase a home. There’s a down payment, escrowed taxes and insurance, engineers, attorneys, etc. A $250,000 home is going to necessitate a minimum $25,000 cash outlay. Because of this financial burden, sellers were historically asked to pay for the services of the buyer’s agent. Sharing the expense associated with a home purchase increases the number of buyers who enter the market thus greasing the skids of commerce; everyone benefits.
So how is it, exactly, that buyers will find the additional funds necessary to join the landed gentry? There are a few ways that this can happen:
- The Bank of Mom and Dad could, perhaps, step in with an outright gift or loan…
- Newlyweds are, increasingly, asking for cash as a wedding day gift to help fund the acquisition of a roof and four walls.
- Another possibility is that buyers will simply save more money to cover the cost of their buyer’s agent. While a viable option, it will increase the age at which a first time buyer is able to secure a room of one’s own. Already, the average age for first time buyers has increased to an astounding thirty-seven years!
- Banks and other financial institutions are experimenting with loans that will help with elevated closing costs, however, as appraisers find it more difficult to justify sky-high valuations and loan amounts, this is not the ready-made panacea that all would hope for.
My current thinking is that, eventually, a cost-sharing agreement will be forged between buyers and sellers. I can see a culture in which sellers agree to pay a commission to cover the cost of their agent as well as an additional percentage to contribute to the cost of the buyer’s broker. The buyers, themselves, would then be required to pay the difference between what the seller is contributing and whatever commission they are able to negotiate with their agent. But, then again, who knows! There are so many unknowns and the situation is so fluid that members of my team disagree with my forecast!
Agents
This leads to one final idea that bears further conversation- the tremendous pressure that is going to be placed on buyer’s agents. Suddenly, the vast majority of agents representing buyers are going to have to prove that they are doing something other than opening doors and filling out contracts. An enormous number won’t be able to do so and it’s likely that the industry is going to finally see an exodus of agents who, frankly, shouldn’t be selling anyway. Last year, fifty percent of all agents in the nation sold only one or two homes. Sixty-five percent sold five homes or fewer. After expenses, this leads to an annual income of approximately $20,000.
Moving forward, if a buyer is going to be responsible for paying their representative, they’ll probably begin scrutinizing the expertise of this advisor in a manner that is not currently the norm. As they prepare to make one of the largest financial transactions of their life, buyers will benefit as a result of having a higher percentage of savvy experts from which to choose.
- A great real estate expert will make buyers aware of opportunities before they’re available to the general public.
- They’ll facilitate the possibility of walking through homes in advance of others.
- They’ll provide a detailed analysis of the value and future growth potential of a prospective purchase.
- A skilled middleman or woman will write an offer that increases the probability of a successful outcome.
- And, they’ll actively negotiate and leverage existing relationships with colleagues to ensure that a client’s offer will be the one that prevails. Unless an agent can demonstrate a history of success, their ability to thrive in this new frontier will be severely curtailed.
Conclusion
It will be years before the fallout from the DOJ’s victory is settled. What the landscape will look like and how it will impact agents, brokerages, ancillary businesses, and consumers will only come into focus with the passing of time. Until then, to paraphrase Heraclitus, “The only constant in business is change.”
I’ll conclude by saying that, personally, I’m excited about the changes that are forthcoming. As is always the case both in life and in business, if you’re willing to reframe that which, at first glance, is an obstacle, you can find great opportunity. I know that, once the dust settles, my team and I are going to come out stronger and more successful. And, we look forward to conducting our business surrounded by colleagues who have been vetted by consumers and are the surviving best of the best.
If you have any questions in regard to real estate, feel free to call me at (585) 330-8750 or email me at [email protected]