Full disclosure: This email is going to be a bit different. There was a massive real estate-related lawsuit that is in the process of getting settled, and it’s been blowing up the media.
Which means, two things:
- We’re getting lots of questions about it!
- And, the media is getting lots of stuff wrong (per usual)
(PS – If you were looking for a traditional market update, reach out, and we’ll fill you in! TL;DR: It’s been a VERY busy Spring for us, and things – across the board – are picking up quickly!)
Ok, back to the lawsuit…
If you haven’t heard, here is more about it from CNBC and HousingWire.
As you can imagine, we have LOTS of thoughts on this – some is good and some hasn’t really been thought through, so still TBD. To keep it as simple as possible, here is what we think this means for the short and long term. And, here are the things we’ll continue watching!
Let's break this down further...
Short Term:
As we say to all of our buyers right out of the gate – “we fully recognize that the world of real estate feels a bit like a black box…No one teaches us how to buy or sell a home, and the process needs more transparency.” So, we LOVE some of the modifications to come. It will make it abundantly clear that commission is (and has been) negotiable. And, each buyer’s agent will set his/her price of service and spell that out up front.
On that note…There have always been choices for buyers (i.e., choose a realtor with a flat fee model, a discount commission, etc.). But, now, it will be even more clear that there are choices. For example, a buyer could choose to go with an agent who is new and willing to do it for less; they could go with someone with more experience (and likely at a higher fee); or, they could even choose to represent themselves.
But, while buyers will have choices, they will also be expected (in fact, legally obligated) to choose who they plan to work with and sign a contract with that agent – similar to what sellers already do before listing their home. This agreement will outline the expected fees, who pays what, what services will be provided, etc.. In the way the settlement is currently written (not yet officially approved by the judges)… buyers will not be able to tour a house without this or an agreement. Once the new documents are released, we’ll happily walk you through them and explain what decisions you need to be ready to make!
Long Term:
We’re at a fascinating crossroads here in the industry. The combination of this lawsuit settlement + the emergence of AI (and its ultimate power) will absolutely change the real estate industry of the future. And while change can be scary and rocky along the way, we are SUPER excited about it! I spent 10 years at early stage startups – I’m all about disruption and being better! Here’s a little parallel with Uber but you can really substitute in any familiar tech giant (AirBnB, Amazon etc.) –
Let me be clear – real estate agents are here to STAY, and will be held more accountable to providing client value – and also articulating that value. In addition, AI will not replace agents, but, as I already know from personal experience, it will help me do my job better and more efficiently. Frankly, with these changes from the settlement, many agents just aren’t going to be able to cut it anymore. They will leave the business. (Did you know that there are estimated to be ~3M licensed agents in the US, and there are ~5.2M homes sold per year! This ratio isn’t good for agents or consumers!)
This is good – we need a good shaking in the industry! As more leave, and the full-time professionals stay, there will be more sales per agent (on average). If / when the per agent volume goes up…COMBINED with the power of AI to more efficiently serve such clients… we believe that, then, commissions across the board will start to be compressed!
At the same time, buyers and sellers will look across ALL of their closing costs, which currently total about 1-2% of the home’s purchase price. The biggest of these fees are escrow fees, title insurance, lender origination fees, and appraisal fees. As there continues to be more pressure on making housing more affordable, we anticipate that these fees – like realtor fees – will also be scrutinized and, hopefully, compressed as well. (Speaking of affordable housing…we also really need to look at permitting fees, permitting timelines, and costs of construction in general, but that’s another conversation for another day!)
Finally, What We’ll be Watching:
While there is a lot of good coming from this settlement, we, unfortunately, feel it will disproportionately impact the lower end of the market and some first time home buyers – who need quality support (arguably, more than most) but who are also more cash-strapped. We will be watching to see what changes, regulations, and programs may be introduced to help make home ownership more attainable for them in this model.
On a similar note, lenders currently do not allow buyers to finance the commission for their agent. The irony is: If the commission is baked into the home price, it is financeable. That said, we anticipate creative financing options to become available in the future to help with this, so we will be tracking that closely.
Lastly, the #1 reason agents get sued is when they “double-end” a deal – aka when they represent both the buyer and the seller (Dual Agency). In some states, it’s flatout illegal because it is an inherent conflict of interest – Let’s put it this way: Can 1 NFL coach fairly coach both the Chiefs and the 49ers to a Superbowl victory? Heck no. Well, it is legal in CA (for now).
With this settlement, buyers are going to be tempted to go to the listing agent and ask him/her to also represent them. Don’t be tempted – it is NOT in your best interest, and it is NOT the best way to win the home at the best possible price. We cannot stress this enough! However, others may not be so smart and give in to the temptation to “just have the seller’s agent represent them too.” If this happens, we expect to see an increase in agent lawsuits and unhappy buyers and sellers.
Still here? Still awake? Thanks for taking the time to read this! We want to emphasize that the settlement is NOT yet officially approved by the judges (we’re hoping for final approval in the coming weeks). Regardless, there will be so much more happening between now and the end of the year on this. We’ve been following this lawsuit since it started in 2019, and rest assured that we will be all over the good, the bad, and the ugly!
