The End of the 6% Commission
Obsolescence is barreling towards the legacy real estate industry like an asteroid in the form of legislation.
Many saw this coming. A 100-year-old commission that didn’t budge after the internet is an obvious price-fixing scheme just waiting to be uncovered.
The lawsuits are piling up. The writing is on the wall.
Realtors will have to adopt an attitude similar to mortgage brokers after the sub-prime mortgage meltdown, when they were no longer allowed to cash-in approving anyone for a mortgage.
“Well, it was fun while it lasted.”
U.S. homeowners pay the highest fees in the developed world, a hundred billion a year, one Trillion dollars every ten years. After two months of schooling it is possible to earn more as a real estate agent than a cardiothoracic surgeon. Economists referred to these fees as a social waste.
The jig is up.
Recently a jury for Burnett v. The National Association of Realtors determined in a $1.8 billion dollar ruling that Realtors are putting home buyers behind a giant paywall.
The class action lawsuits in a nutshell:
- A buyer-agent is not paid by their buyer. They are paid by the homeowner. Although customary, it is a peculiar arrangement making negotiation and free-market pricing totally unrealistic and impractical. This phone call recording was submitted as evidence. It features a Realtor, who, upon discovering that the seller is not providing a commission for buyer-agents, says, “I’ll tell them the property is sold”.
- Buyer-agents collectively expect a minimum commission of 2.5%, regardless of the property’s sale price or how much effort went into the transaction. Thus, fees are artificially inflated and that price fixing is a federal antitrust violation.
This gets articulated quite well in Moerhl v. National Association of Realtors, a colossal suit with estimated damages, post trebling, that could reach $40 billion.
Judges and attorneys are proposing the logical, rational progression would be to implement an injunction requiring the buyer and the seller just pay their respective agents.
While brokerages not listed in the suits would not be legally bound by the injunction, once one court imposes one injunction, other courts are likely to follow. An injunction in one case will likely have nationwide implications and prompt legislatures everywhere to enact new laws applicable to all brokerages within those states.
Of course, if we let buyers decide what to pay the agent they hired, we’d see a huge drop in Realtor compensation. This would subsequently cripple secondary industries selling things to agents.
Consequently, Zillow saw a drop in stock price in response to the ruling. Most of Zillow’s revenues come from agents paying big bucks for buyer leads. If these agents can’t count on homeowners to cough up 2.5%, they can’t continue to give Zillow big bucks for leads.
The Future of Selling a Home
If you take the temperature of consumers, it seems most people are sick and tired of Realtors, but we go ahead and pay the commission ransom so they release the hostage home buyer.
However, once these legislative asteroids make impact, and the new landscape relieves homeowners of having to pay their buyer’s Realtor, it will also lift the limitations that were placed on any real innovation and usher in the types of digital alternatives and marketplaces we’d otherwise expect in the 21st century.
I am certain the future of home selling will not be a paper-based, middleman-driven experience. I predict it will be a barrierless matchmaking platform — a digital marketplace that can efficiently connect buyers and sellers, eliminate all commissions and gatekeepers, and enable total market transparency. Every conceivable aspect of a transaction can be digitized and embedded into such a platform: pricing a home, negotiation, accepting and countering offers, scheduling home inspections, etc.
What I envision is society circling back to selling by owner the way we did prior to the Realtor concept, but with the modern benefits of digital tools making direct transacting a seamless experience. There is no downside to the extinction of the real estate agent. The data is very clear: when people sell their own homes, they don’t sell for less than identical homes sold by Realtors.
The Superfluousness of Realtors: https://insight.kellogg.northwestern.edu/article/the_superfluousness_of_realtors
Artificial Intelligence
In terms of how quickly Artificial Intelligence is advancing, we aren’t too far off from a market where those who do decide to use a Realtor are the same types of people who still have kitchen phones and landlines and simply prefer to do things the ‘old-fashioned way’.
In the very near future, you will be able to speak with a highly realistic AI avatar at 11 O’Clock on a Friday night that is prepared to have a conversation that is so astute and legally accurate about everything: pricing, process, home inspections, escrow, title, down payments, deeds, estimated closing costs, negotiation, and more.
We will have AIs much better and much more capable than the most experienced agent. We’re talking about the smartest, most competent agent ever conceived, with all that explanatory power embedded in an app and at your fingertips for a fraction of the cost. Our kids’ kids aren’t going to believe we used to pay Realtors forty grand to sell a house.
