UNPOPULAR Realtor Insight…Realtor Commission Settlement

I will admit. I have been slow on getting a separate video out on this as I didn’t want to just react. I wanted to see how it was going to play out and see what other people were saying and what they would be doing as a reaction to what I would consider being the biggest development in our industry since at least the 20 years that I have been in it. 

And the reactions have been surprising. I have the luxury of networking with some of the biggest teams in the country. These people are far more successful than I am. Smart folks that are the top in our industry. And I have been shocked by their response or should I say lack of response.

It seems that… I can’t even say the majority. Because it feels like nearly the entirety of our industry is continuing to operate in a fashion that the business will stay the same, but the way we do it will be a little different.

Yes, we are going to talk about that. We are going about my opinion on the future and what I am seeing today. And what it means for you, the consumer. I think a lot of what I am about to say will surprise you.

Real quick, my name is Jeff Chubb and I am a retired investment banker turned real estate agent that has sold more than a 1,000 homes. If you have real estate questions, then know that I am here to help.

Let’s recap extremely quickly. The NAR settled with a group of seller’s in a class action lawsuit. With this settlement came agreements on changes to how the Organization operates and thereby how the industry will operate. Essentially what is being called for is a decoupling of the real estate commissions where the seller doesn’t pay for both the buyer and seller representation. There is more there, but in the end. That’s really all you need to really know.

Okay. So what’s happening now. What’s the pillow talk in the industry if you will? My perspective in looking around is that the majority are saying that nothing will change. Yes, everyone has admitted that a buyer appointment will need to be done from the beginning. Speaking of which, did you know that only 9% of agents had a buyer presentation? It just shows you how unprofessional so many of these agents running around were. And why part time agents were able to survive in this industry. The buyer agency fee being paid by the seller allowed for it. But more on that in a moment.

So agents have all pretty much agreed there won’t be anymore running to houses to show buyers property and that there will be a systematic approach to having a buyer consultation first where you go over the process and how an agent gets compensated.

I have seen some agents celebrate this saying they are now going to get a 3.5% commission! And team leaders saying it all comes down to training. They have started training their sales force already. It seems that everyone just believes that the consumer will happily agree.

This is where I disagree. I have said that I don’t understand how there can be a fundamental change in our industry, but there is no systematic change. If the fundamentals change, then the way things are done need to change as well. This seems as simple as 1 plus 1 to me. But I feel like what I am seeing and hearing is that people are yelling five from the rooftops.

And don’t get me wrong. In the end I actually think the consumer ends up losing… But more on that in a couple moments.

So everyone seems to agree that the way the buyer side is initially handled will change. And that will be for the better. More professionalism will help elevate the industry. But I don’t agree that a buyer is going to agree to paying a 2.5% or 3% or even a 3.5% commission. How willing or able is a buyer that is putting 3% down going to be to pay an agent a 3% commission on top of it?

And I know what buyer agents are going to say. They are going to say that the seller will pay the fee. And that it will be negotiated into the deal. But that is not a guarantee. I am already seeing a lot of seller’s balking at paying the fee.

And I have even seen one “industry leader” say that all agents need to sign a pledge explaining to a seller why they need to offer a buyer agent commission. A pledge. Really? There will be seller’s that will be set in their way and no matter what you do and no matter how you explain it… They won’t pay a buyer agent fee.

It’s just unrealistic. So here is what is going to happen. Come July there will be no compensation in the MLS. It won’t be allowed. So the agent will call the other agent and ask if there is a Buyer Agent Commission being offered. Let’s play it out that the agent says no. The buyer agent will go back to the buyer and let them know. The buyer will decide on whether they want to see the house or not. If they don’t, then that’s how it hurts the seller. If they do and then love the house and can’t come to terms with the seller on price with the fee negotiated in… Then everyone needs to be prepared for a world of mess.

And then the seller will get angry that the house isn’t selling or isn’t selling based on the comps pricing… Because keep in mind that those past comps worked in the buyer agency fee.

There will be attorneys who will jump at the opportunity to write an offer and charge a flat fee. They won’t offer any support from a pricing standpoint and won’t be out there showing properties. No advice or strategy on how to be more competitive… Because they won’t be financially motivated for the buyer to get an accepted offer. If anything, the buyer losing out means another thousand dollars for the next offer to be written.

Attorneys stealing deals off of agents’ backs will lead to seller agent’s not just showing houses to anyone and everyone. If someone wants to see a house, then a one time showing form will have to be signed acknowledging that if they like the house then they will pay whatever fee that they are charging and that they will be acting as a facilitator in the deal.

This is how so many agents are forced to leave the business. I have heard estimates from no agents leaving… Which is a load of you know what. To 250,000 agents to 800,000 agents! I don’t know the number, but the fallout will be big in this realignment.

This decrease in agent count will also lead to a consolidation of real estate companies… As well as companies that support the real estate industry. It’s going to be a depression from a job standpoint in the industry and all the industries that support it. But we will circle back on this in a couple moments.

This new world will ultimately result in an environment where a buyer has options and gets to choose. Do they want to work under contingency for a certain percent at the time of closing or do they want to pay as they go and possibly save thousands of dollars depending on how long they look and how much they utilize their agent. Using a more experienced agent would ultimately cost more then using a newer agent. In the end, I think this is where the consumer wins out.

I mentioned earlier that I felt that the consumer ultimately loses, so how does that happen? While the consumer picks up choice from the buyer agency standpoint, they lose out on transparency. You will ultimately see more pocket listings that don’t hit the MLS. You will see backroom deals between agents on fees. Consumers will lose a lot of the “freebies” that they have gotten very used to over the years from the agent community. I think the real estate industry becomes a lot like the law industry. Lawyers don’t give anything for free with the exception of that initial consultation. After that, you are on the clock! It will end up being very similar.

You see, the reason an agent gets paid so much money on a per transaction deal is that they aren’t guaranteed income for their time and material costs. The compensation needs to be higher in order to account for that risk. Reduce that risk through say a pay as you go model and the agent can charge less.

With the decreased value of a buyer lead and decreased earnings comes the trickle down effect. Zillow, Realtor.com, Homes.com and other sites like that only exist to generate a lead and then sell it to the agent community. Well if that lead is no longer worth the $500 or $750 then companies like this are going to have to adjust their business model. I am not smart enough to figure out where they are headed, but know there will have to be changes made there to their model if the agent model changes. The consumer ends up losing here.

But the big place that the consumer loses is that the National Association of Realtors will soon cease to exist. While I as an agent was paying for the NAR, the NAR didn’t really care about me. They were always focused on the consumer. Their philosophy was that if they take care of the consumer then the consumer will take care of them. There were little to no benefits to us agents for the boat load of money that we were forced to spend on this organization each year.

So where did that money go? The NAR was considered the strongest lobbying arm in the country. Politicians have been trying to get rid of the interest deduction that homeowners have enjoyed for years. The NAR has always been in their way. You can consider that tax benefit that all homeowners love gone and it will happen in a relatively short period of time. The next benefit that they will go after is the Capital Gain tax exclusion where each individual doesn’t have to pay capital gain tax on the first $250,000 of profit and half million for a married couple when selling their home.

This ends up killing the consumer. Especially the lower income consumer which has gotten used to housing being the vehicle as a built in savings to have at least something for retirement. My guess is the greedy politicians will start at the higher tax brackets and then move their way down. They won’t go for it all at once. But it will all disappear quickly.

Investor incentives. Call me naive, but I actually think they stay. A lot of these investors, especially the bigger ones, have some political pull.

Speaking of investors and less transparency, this is where the investor wins and the consumer loses. Homeowners will have less information to utilize and will ultimately be at a disadvantage when going up against professional investors.

The first time and Veteran home buyers are going to get really hurt throughout this process. The fee that they can offer when buying a house will most likely be a lower fee. They will struggle securing houses even more in a tight inventory market. And a lot of buyers will ultimately end up going directly to the seller agent and have no one looking out for their best interests. This will lead to them getting worse values on a house while going it alone and getting no advice on issues that come up through the transaction like in home inspections. I guess you could say this is a huge win for the sellers… But it will create a lot more litigation… So I guess it’s really another win for the attorneys.

In the end I see big changes in the industry. I see fees going down. I see the amount of agents in the industry drastically decreasing. I see consolidation of real estate companies. I see the industries supporting the real estate industry consolidating as well. I see the level of service decreasing as a whole, but also being a more sliding scale… Think of it as “You Get What You Pay For”. I see the rate of home ownership decreasing. I see a lot more dual agency or unrepresented buyers. And because of that, I see a lot more lawsuits. I see less transparency in the marketplace. And as I said earlier… I ultimately see the consumer losing.

No one knows for sure what’s going to happen. There will be a lot of testing and adjusting. I personally just rolled out a 1% seller plan. Maybe that is what the market wants. If not, then I will adjust. And on the other side I rolled out an hourly Buyer Agent plan. Maybe that is what the buyer has wanted all along. Again, if not… Then I will adjust. I believe the consumer should have choices which is why my seller plans range from 1 to 4% and why a buyer can hire me on a contingency basis or pay on an hourly basis. It’s my bet that this will become the industry standard.

The consumer should have choices. I tried to roll out a program that gave the consumer choices years ago and was shut down by our local MLS. I just don’t know if the way these choices are coming about was the best way for the consumer.

The industry will adapt. The industry will contract. And those left standing will thrive.

Again, it’s Jeff Chubb. Don’t hesitate reaching out with questions or if you are thinking about buying or selling a house.

Until next time.

Jeffrey Chubb