Are Realtors Going Extinct?

Realtor bus bench ads, cheesy head shots on for-sale signs, grocery store shopping cart ads, brick and mortar offices and six percent commissions are as anachronistic as VHS players, late fees and the big blue and yellow Blockbuster sign. Yet, this antiquated middle-man-driven industry has prevailed.

The question, “Are Realtors going extinct?” yields 7.3 million results, more than any other variation in phrasing.

This particular phrasing implies a kind of mass awareness that the industry is under attack by everyone from economists, the White House, DOJ, consumers and class action law firms. Compare this with the less searched, “Are Realtors becoming obsolete?” comparatively yielding 315,000 results. The distinction between going extinct and becoming obsolete is an important one. I would argue Realtors are already in-fact obsolete but have stuck around because of anti-competitive business practices that are now being scrutinized by antitrust officials. Why now? Well, that’s the beauty of being obsolete, it creates a real juxtaposition. How is it possible without interference that in our free, peer-to-peer market, in the year 2021, people are paying $42,000 to sell a house? In today’s connection economy, fixed fees and sellers having to pay their buyer’s unnegotiable commission can’t be overlooked like it could even just ten years ago. The country’s awareness of these issues is only going to increase. By definition, if a thing is obsolete the free market would leave it behind. But the accusations are that the market is not free, its captive. If you objectively look at what has been going on, its clear that the claim has merit and this is not going to end well for the residential resales brokerage industry.

There are four asteroids on a collision course with the Realtor profession right now; lawsuits, legislation, culture and tech. Should they make impact, they’ll permanently alter the resales ecosystem, destroying 5 and 6% commissions and Realtors and brokerages by extension, insofar as they can’t be untangled.

It is fallacious to equate real estate agents with other agents

The real estate transaction can’t be condensed to a ‘point-and-click’ the way travel, stocks and insurance was. Movies, retail, stocks, travel, hospitality — all on-demand with the help of technology, reduced to a point and click. ibuyers (instant offers) have accomplished this, but will never persuade the majority of homeowners to accept an offer for their home dramatically below a fair market valuation. The most objective comparison to the Realtor industry is the very successful multi-level marketing industry; Amway, Herbalife, Avon, etc. These companies are so entrenched in referrals and networking it protects the business and renders the product and disruptive tech a moot point. Of course, there isn’t anything unique about the generic vitamins they’re peddling that would prevent them from being sold on Amazon and delivered faster and for less cost, but they are in the business of sales people. Herbalife, unbelievably, trades at $51.25 today, up 3% year-to-date, because their business is their selling force, not the supplements. Brokerages, similarly, are in the sales force business, the product happens to be real estate.

Realtors are superfluous and neither a technical necessity, like a civil engineer is if you want to build a home, nor are they required, like banks, appraisers, title and land transfer companies are. The Realtor profession exists for its own sake, like Herbalife. It certainly wasn’t born out of an unmet market need for people to blow up balloons and attach lock boxes. The profession was devised in the early 1900s, during our country’s antique years of door-to-door salesman. Home buyers used to transact directly with homeowners under the supervision of attorneys. It is a little ironic that technology has actually reinforced the Realtor industry’s ability to erect giant barriers between parties otherwise perfectly willing to transact directly. Consumers weren’t scratching their heads or bumping around with a serious problem on their hands, to which the Realtor was a solution. No, it was an opportunistic, sales-driven industry that has since blossomed into the world’s largest trade group and second largest political lobbying organization. We mustn’t refer to it as a problem solving business.

The origins of price-fixing

In the 1940s, a group of salespersons formed the first Realtor chapter and in a meeting, the infamous 6% commission was born. In the early 1950’s, the Supreme Court ruled that establishing a 6% commission is illegal. They got to keep the variable rate remuneration however, which was and still is a common way to compensate sales people, whereas commissions remain an illegal form of compensation for home appraisers and tax preparers.

The problem with using commissions as compensation in a real estate transaction is it completely destroys any sense of proportionality. This is true of a 1% commission, let alone an unconscionable 6% fee. This is not how, but why Realtors will go extinct.

Commissioning sales people is usually economically rational. The prices for the products and services are typically within reason, the higher the price the more effort involved, and the ranges of price points aren’t too distance. None of this applies in real estate. There is absolutely no correlation between selling prices and effort, and the standard 5–6% is fixed and grossly inflated. Does it inherently involve twice as much effort to sell a $500k home than a $250k home? No, but the fee doubles, triples, quadruples, regardless of effort. Imagine paying a tax accountant a percentage of your income, irrespective of how difficult it was to file your returns, or a home appraiser charging a percentage of the home’s value for their compensation. The flaws in that compensation are just as obvious as they are in real estate. Fixed commissions lead to what economists refer to as social waste.

I’ve sold dozens of homes, from million dollar mansions to seventy thousand dollar tear-downs. I wouldn’t say this profession attracts self-important people, but it is comprised entirely of people who have an inflated sense of self-importance. This is because Realtors, maybe more than any other profession, have to defend their living to avoid apologizing for the fixed, inflated fees. As cognitive dissonance would have it, its rather difficult to knowingly charge people in excess of the value you provide, so, when someone earns forty two thousand dollars for twenty hours worth of work, as I have several times, its easier to triple down on the belief that without them, none of this could have possibly gotten done. Realtors are completely disillusioned, and their arguments for arbitrary fees aren’t logically sound, just grounded in emotion; “I work really hard”, “I don’t discount”, “I know what I’m worth”, “I bring a lot of value to the table”, etc. Meanwhile, studies show the value Realtors provide is zero. Their services do not pay for their commissions in the form of a higher selling price, and as one academic study shows, agents are so commission hungry that for-sale-by-owners get higher prices than Realtors selling identical property.

https://www.nber.org/papers/w13360

Why do sellers have to pay the buyer’s agent? Should homeowners have to leave for showings?

It is customary that the homeowner pays their buyer’s agent’s fee of 2.5–3%, and homeowners are expected to leave the house for showings. We can see how what’s customary necessitates their existence. They create the problem, then offer the solution. Sellers have to leave for showings, so the buyer agent has to open the door. If home buyers scheduled showings directly with home owners, that would undermine their utility and and more homeowners would ask more often, “What did my Realtor do to deserve tens of thousands of dollars?” Can buyer agents disappear the same way other middlemen have disappeared? Not until buyers are the ones paying their agent. If the buyer was required paid their agent, buyers wouldn’t even dream of paying the 2.5–3% fee Realtors and their brokerages, with massive brick and mortar overhead, require to exist. I can’t help but mention that I’m imaging Thanos snapping his fingers, and 50% of all agents disappearing. Its true to say the buy-side transaction account for nearly 50% of every real estate brokerage everywhere. Will it ever be customary for buyers to pay their agent? No. Could it come about through law suits and legislation? Yes. Talk about a Big Short: If the Cohen Milstein’s injunction sticks, as spelled out in their class action lawsuit against the National Association of Realtors, REMAX, Realogy, Keller Williams, and company, it would, per section 16 of the Clayton act, categorize this arrangement as an anti-trust violation.

www.cohenmilstein.com

An antitrust violation it most certainly is. Requiring sellers pay the buyer-agent is a manipulative arrangement that infringes on the ability to negotiate their commission effectively, freely and without consequences established by the service provider, rather than the market. The residential real estate market is not free, its captive. Buyer-agents hold their buyer’s hostage for the fee they want, not the fee a free market would dictate, or as dictated by the buyer’s who hire them. Buyer-agents wouldn’t be able to command more than a thousand dollars for opening doors (if sellers continue to leave for showings), recommending inspection companies and pushing paperwork. This lawsuit might just make it to the Supreme Court. A CM victory is a huge victory and sets a serious precedence. At a minimum it means more law firms suing more MLS’s and brokerages not mentioned in the case above and State legislators will follow suit. It is very likely that by 2030, it will be illegal for the buyer-agent to receive compensation from anyone other than their agent-employer.

By 2030 the Realtor profession will have died out.

There are dozens of nascent, full-service flat-fee brokerages, homie.com, door.com, trelora.com, houwzer.com, homebay.com, to name a few, whose businesses are doing well and they’re helping homeowners save money, but only on the listing side. Its not a compelling enough proposition to help someone save five or even ten grand. While that's a serious sum of money, it gets blurred by the lack of relationship (Realtors are introduced by friends and family), and the heightened sense of risk and confusion as people only sell their home once every ten or fifteen years. Again, a great many people are using these flat-fee firms, very different than the ‘helpUsell’ discount brokerages of the past, but there is a risk to reward ratio that tips slightly in favor of the referral. There are currently no brokerages out there that can help you sell your home and avoid having to pay the buyer agent without consequence. Rexhomes.com is the first brokerage to advertise to the public that they and their sellers don’t offer the buyer-agent a commission, but what ends up happening most of the time is that the agent submits an offer with a standard commission agreement addendum. The National Association of Realtors cleverly doesn’t require the buyer’s signature on this document.

So, the buyers have no idea that their Realtor’s commission has caused the deal to fall apart. The agent just tells their buyer, “Sorry, they didn’t accept your offer.” “The home is no longer available.”, etc. Homeowners know this, so they just agree to pay it.

Realtors are some of the most distrusted professionals, per Gallup Poll research. The industry is riddled with incompetence because anyone with three months and three hundred bucks can become a Realtor. This criteria is determined by each State’s Real Estate Commission, who deems this profession to be of so little significance, a few months of school will just about cover all the bases. Under these conditions, you cannot claim if you are a Realtor, that you are that essential or that your profession is all that cerebral, unless all the Kool-Aid is drank. The vast majority of homeowners do not want to pay 6% to sell their home, they do it because its customary.

However, customary is not the same thing as necessary.

Unfortunately, the Realtor fate is sealed, because nothing false can last. The truth always has a way of coming out. It is true to say, there is no sound defense for the practice of charging fixed and inflated fees, the highest in the developed world: https://www.economist.com/united-states/2019/08/29/why-americas-real-estate-brokers-are-such-a-rip-off

There isn’t a single solitary individual in the world that has ever said, “You know, I like my Realtor but I wish he would charge more.” Consumers pay over a hundred billion dollars a year in completely unnecessary, wasteful and excessive commissions. That is to say the US homeowner’s net worth per capita is decreased by a trillion dollars every ten years. The six percent fee is the worst thing to happen to the American homeowner in the history of capitalism. The future of real estate will be barrier-less, with home owners and home buyers transacting directly, freely, and without the imposition of 80 year old fees. This will all be made possible by changes to legislation, shifts in culture, and marketplaces that can facilitate it all.

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I used to add miracle grow to data-analytics firms, now Im a proptech founder bringing offline consumer experiences online.

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John Fulton

John Fulton

I used to add miracle grow to data-analytics firms, now Im a proptech founder bringing offline consumer experiences online.

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