Many of my readers are interested in hearing from me about the price fixing/antitrust lawsuit settlements (and now one court decision) going against the National Association of Realtors (NAR-Realtors™)[1]and various real estate brokerage companies. These cases challenge the longstanding home selling market orthodoxy and control[2] created by tying listing a house for sale on the multiple listing services (MLS) to the sellers’ agreement to pay buyers’ brokers’ commissions.[3] Real estate brokerage companies are now facing an industry-wide onslaught of these cases. Of course, I have thoughts on those lawsuits, but less about the complicated legal and antitrust issues presented or even what the likelihood of success is on appeal. Rather, it’s the huge implications for the reinvention of the whole homebuying process that I find fascinating and worthy of this Musing. But first, some level setting.
Brokers represent the deal
One of the most valuable insights I ever received as a young real estate lawyer was that despite all the expertise, leg-work, information, and sincere (or insincere) chumminess and empathy provided to their clients, real estate brokers do not actually represent their clients; rather, I was told, brokers represent the deal. That’s a gross oversimplification, but still helpful to know, because these real estate professionals[4] are only paid a commission if the transaction closes. As a result, brokers are primarily motivated to see the closing occur; even if it might not be the best thing for the buyer or the seller themselves. That doesn’t mean brokers are bad or unnecessary, but recognizing their motivations,[5]and considering their function and role is critical in assessing the information and value they provide.
Few consumers, however, understand the different motivations behind advice from a real estate agent and advice from say a lawyer[6] or doctor. Still, as someone who has spent his whole career in real estate, I have seen real estate brokers provide essential and highly valuable functions and information for buyers and sellers that enhance order and liquidity in the housing markets and peace of mind through shared knowledge and experience.[7]
Do I need a Realtor™?
But real estate agents haven’t really had to make the case for their own value to the process (i.e., answer the question, “do I need a Realtor™?”). That is because they built a figurative dam which controlled the sale of homes in the US. I would add that the dam worked well for a very long time for consumers and agents alike, but as I have been known to say, “Mom is on the roof”[8] on that now. Realtors are now going to have to put more work into convincing consumers about their value instead of just controlling access to the market.[9]
The Realtors dam
For as long as anyone can remember, selling and shopping for homes in the US has been controlled[10] by the Realtors™ who have dominated access to home sale listings through the local MLS. The basic deal in most places has been that if you want to get your house exposed to all potential buyers[11], you need to list the house with a Realtor™ to get it on the MLS. Meanwhile, Realtors’ listing agreements have also required sellers not only to agree to pay the selling agent a commission, but also to pay the buyer’s agent’s commission too.
By tying (i) home sellers’ ability to be on the one place where buyers can search to find homes (the MLS) with, (ii) agreeing to pay the “cooperating” broker, Realtors essentially built a dam that effectively controlled the market for home sales (and which virtually assured that most real estate agents would also become Realtors). This arrangement ensured that sellers would pay for the shopping assistance and professional homebuying advice provided by any cooperating broker bringing a potential buyer. Of course, the buyer really just paid for their own broker because that commission expense is baked into the purchase price, but either way, selling and buying consumers were served by agents who split a roughly 6% commission on the purchase price. [12]
The dam is leaking
The first thing to open a crack in this 100-Year-old dam was the internet and search engines. In a pre-internet age, it made all the sense in the world to have a single place to list and find houses for sale. Pre-internet, the existence of the MLS enhanced liquidity in the housing market by simplifying the search process to connect both sellers and buyers. Realtors expended a lot of capital and effort to maintain the hegemony of their local MLS
The internet, however, (coupled with imaging, video, data aggregation and search engine technologies) offers a vastly more open, direct, inclusive, and enabled marketplace for home sale listing and shopping than any locally controlled MLS[13]. Companies like Zillow and Redfin have sought to enter the internet space by getting their own real estate licenses and then serving as a tool for real estate agents to use, but they haven’t been able yet to effectively serve as a true marketplace competitor to the MLS for home sales directly to consumers. Instead, they make their money through selling leads, advertising and obtaining commissions for referrals to other brokers. Alas, the dam was stronger than the internet and search engines alone.[14]
What will the future hold?
With these recent antitrust decisions and settlements, however, there is no denying that dam is leaking badly. Despite what will likely be a lengthy appeals process for litigation and statements from those who believe the leaks can be repaired[15], it seems to me that the days of real estate agents controlling access to home sale listings are numbered. Changes are already afoot in many markets seeking to separate out the buyer’s broker commission from the listing and seller’s obligations. At a minimum, real estate brokers everywhere must reassess their consumer disclosures and engagement/listing agreements to be explicit about the relationships, commissions and obligations of the parties in light of these issues.
But what will the future hold for home shopping and the role of brokers? Real estate agents are all over the board on what it all means, but what do these changes mean for mortgage lenders who get business from real estate agents? Will change be incremental or sudden?[16] I certainly don’t have all the answers, but I think a few observations bear consideration as the changes play out.
New shopping models will emerge
First, if the Realtors can’t maintain the MLS stranglehold on local listings, there’s really nothing stopping (licensed) websites with search functions from aggregating all the property listings in any given area. So, new models for shopping and sale are likely to emerge. In fact, if Amazon, E-Bay, not to mention Zillow, Redfin and the next genius soon-to-be Silicon Valley billionaire software geek are not already working on this business plan right now (with some neat artificial intelligence hooks thrown in for good measure), they should. Listing agents are going to have to make the case how they can enhance value beyond just putting a house on an MLS type marketplace and swags at value for sale prices.
Will consumers pay for advice?
Meanwhile, most of my readers[17] would agree that the typical consumer needs professional guidance in the homebuying and selling process. Listing a home for sale or selecting a home to buy is one thing, and while the Amazon/E-Bay approach might work well for those functions, it seems much less well suited to deliver the professional advisory/counseling services brokers currently provide in the home purchase/sale transaction.
Whether consumers are willing to pay for those advisory services (if not opaquely buried in the sales price as it has been), however, is an open question. Maybe consumers won’t get the advice they need or will be willing to pay by the hour or fixed fees for broker’s advice. Again, absent market control, real estate sales professionals are going to have to do a better job articulating the case for why buying or selling a house is something that consumers need to hire a licensed real estate professional to get it right. They might also hire attorneys or other advisors on a fee basis. Or, perhaps, other participants in the market might offer consumers advice as a loss leader.
Could lenders step up?
For example, lenders are already largely aligned[18]with an advisory role on the buyer’s side. Lenders too want to make sure their borrower doesn’t: (i) overpay for the house, (ii) buy a home with costly repair issues, (iii) have a problem repaying the mortgage loan, (iv) allow a minor issue to cloud their judgement on the broader transaction, and/or (v) become an unhappy or unsuccessful homeowner.[19] So, I don’t think it is too difficult to imagine expanding the lender’s role as consumer advisor.[20] But, if you are a lender who calls on real estate agents to find borrowers, where are you going to find them now and how will you pay for these added advisory services when the margins are so slim for lenders already?
Hamstrung by regulation
From TRID, QM/ATR, RESPA and LO Comp to GSE, FHA and VA[21] guidelines, the regulatory environment and underwriting standards for mortgage lending have been designed with certain assumptions about real estate broker fees and involvement in transactions. As noted above, those assumptions are changing, and the market will respond. The responses are not yet known, in particular how to deliver consumer transactional advice, but I don’t have any confidence that the regulatory environment can be responsive to flow of the water from this crumbling dam. My unfortunate expectation is that the regulatory environment will in fact hinder and discourage innovation in response to consumer needs. Regulations being counterproductive to consumer protection and market innovation, especially in times of significant change, is likely going to get a more robust discussion in future Musings.
[1]The Realtors™ jealously guard their trademarked name and while there are other real estate sales associations (particularly in certain locations like New York City), the Realtors™ are by far the largest trade association in the US and, in fact, have the reputation as the most powerful lobby in Washington, DC due to the size of their membership of millions of agents all paying significant annual dues.
[2] I am not an expert market control economist nor is this blog post a legal opinion about market control. My use of the word “control” and its derivations herein just describe my observations of the marketplace over my career.
[3]Generally, a real estate agent needs to be a member of NAR to be able to access the local MLS.
[4] The business of assisting consumers with the sale of homes requires a real estate sales license in every state. Having state issued licenses for certain occupations is supposed to ensure that consumers are protected from working with unqualified and/or unethical people. It is unclear if licensing actually does that for many occupations. Sometimes, occupational licensing can be like a state sponsored monopoly raising costs through limiting supply. I don’t know about real estate agents, but I wouldn’t want an unlicensed doctor or lawyer.
[5] I tend to discuss motivation and professionalism a lot in these Musings. See, e.g., Ed. #64: Professionalism, Conflicts and Housing Policy (mortgagemusings.com). See also, Ed. #35:Ted Lasso, Intent and RESPA Narrative (mortgagemusings.com) and Ed #43: Of Evil Minds & RESPA (mortgagemusings.com)
[6]Lawyers are ethically bound to only represent the interests of their client. Still a lawyer’s fees, whether time-based or otherwise can sometimes create conflicts with those duties too.
[7] Agents can also provide emotional support and common bridging solutions to resolve buyer’s or seller’s, disputes, remorse or other concerns that typically arise before closing.
[8] “Mom is on the roof” is one of my favorite illustrative jokes. A guy leaves his cat with his brother to go overseas for a few months. He calls about week later and asks about the cat. The brother says, “Sorry, your cat is dead.” Overseas brother says, “What!! You can’t just spring that on me like that! You need to tell me something like, ‘the cat is on roof, and we can’t get it down.’ Then I call back a week later and you tell me ‘the fire department is here trying to get the cat down’. Then maybe finally the next time I call you tell me ‘there was nothing anyone could do and the cat is dead’. By the way, how is Mom?” Brother pauses and then says, “Mom is on the roof.” HT to MB for introducing me to that classic.
[9] Similarly, lawyers like me who provide counseling (as opposed to litigators) generally have to make the case to clients why paying me now is much better than paying me (or my litigation partners) later.
[10] Plaintiffs would probably say “monopolized”.
[11]You could also just put out a “for sale by owner” sign on the lawn (or on the internet) and hope to get lucky.
[12] Important note for my fellow RESPA nerds; there is an express exemption from RESPA’s anti-kickback prohibitions for real estate commission splitting by licensed agents, but not for any other settlement service. This exemption’s potential for solving wholesale lending’s RESPA challenges was covered in one of my first Musings.
[13] Needless to say, also much less expensive.
[14]Most of the current internet marketplace models avoid competing with local MLS as a true open marketplace or running afoul of NAR’s rules. Internet companies seeking to circumvent the NAR’s MLS rules have historically faced stiff opposition to any effort to avoid the dam. See e.g., NAR Triumphs in REX Antitrust Lawsuit
[15] All I hear is this clip from Monty Python’s Holy Grail, “Tis just a flesh wound!”
[16] Or, perhaps, this dialogue from Hemingway’s The Sun Also Rises will be prescient, “How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.”
[17] Most of you are sophisticated real estate lending and legal professionals who know a lot more about the home purchase and sale process than the typical consumer.
[18] I’d ballpark 85% alignment presently.
[19]This is another way of saying lenders hope their borrowers don’t want to sue everyone involved in putting them in a bad deal.
[20]Some lenders like to think of themselves in this role already, but their E&O insurance companies might disagree.
[21]My apologies to readers who don’t instantly know what all those acronyms stand for.