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The $418 million commissions lawsuit that was settled last week with the National Association of Realtors (NAR) is certainly a big deal. The NAR is trying to sound positive, but all signs point to this outcome being meaningful for the industry. TD Cowen Insights is forecasting that commissions paid in the US each year could fall by some $25 to $50 billion (from a total of ~$100 billion). And this is the headline you'll see everywhere right now. But how might this actually happen?
As we've talked about before, the status quo commissions set up is a good one for agents:
Sellers are typically the party who pays 100% of the commissions
But sellers don’t pay until the agent sells and they have fresh cash
Money being deducted from proceeds (a “take rate”) is a lot less noticeable and has a lot less friction than cash you just have to pay out of pocket
Buyers kind of don’t pay -- or at least that's how they're supposed to feel
This is "good" because it perpetuates the existing model. If buyers feel like they're mostly not paying, they're just going to go to the marketplace with the most supply of homes. And that marketplace is the Multiple Listing Service (MLS). However, this marketplace also does things like tell buyer agents how much commission they will make as part of each deal. And the belief is that practices like this are anticompetitive.
So as part of the above settlement, the following new rules are expected to go into place by July 2024 in the US:
Seller agents will no longer be able to set compensation for buyer agents
All fields on MLS displaying broker compensation will need to be removed
Furthermore, agents will no longer even need to subscribe to an MLS in order to accept compensation
Buyers working with an agent will need to enter into their own buyer broker agreement and negotiate compensation separately
However, there's nothing stopping buyers and sellers from negotiating whatever commission structure they want; the idea is simply that it will be more transparent and negotiated by each participant
Why this is meaningful is that it decouples buyer agents and seller agents in a way that they aren't today. Instead of everything originating from the sell side, each side of the transaction is now going to -- theoretically at least -- negotiate what they believe is fair compensation for their representation. At the same time, there's no obligation to even subscribe to an MLS.
This leads us to, at least, two important things to think about:
What is fair compensation? Well, it should depend. If I'm a first-time buyer, I may want someone to walk me through the entire process. But if I've done it many times before, maybe I need very little. Or, if I'm an investor looking to renovate homes, maybe I want representation that is also an expert on construction. The point is that, in a truly open market, one should be able to find an agent and pay them based on the value that they're creating. And this is presumably why everyone is expecting commissions to fall precipitously.
If there's no obligation to even subscribe to an MLS, does this then open the door for new and more open listing platforms? Right now, I don't know how this will play out. I'd like to better understand more of the details around this settlement item and what it could mean for the landscape. But I do know that the way to spur the most amount of innovation would be to have the marketplace run on something like a blockchain, and then allow anyone to create their own listing platform on top of it. One day.
This will be fascinating to watch play out. And I'm sure it's only a matter of time before it spurs similar changes here in Canada. Expect further coverage of this topic on the blog.
Photo by Tom Rumble on Unsplash
Over the last few weeks, a number of people have told me that, when it comes to their current home, they have a number in mind. They more or less said, "I've already spoken with my husband/wife about it and, if someone were to offer us $X, we would sell and move immediately."
What's fascinating about this is that it's a form of housing supply that generally doesn't exist anywhere right now. Sure, the people I was speaking with would sell and move for a price, but how does something like this actually happen? How do buyers find them?
I suppose it could happen through word of mouth. I now know their prices and so if someone I know were interested in such homes, I could tell them. It is a low probability, but it's still a possibility. Alternatively, someone (an agent or otherwise) might just show up on their doorstep and make them an offer. My dad actually sold his last home this way.
But again, how likely is this to happen? It doesn't seem scalable. And this is why Zillow used to have something called a "Make Me Move" listing. Rather than a traditional listing, it was a listing for, "I don't necessarily need to sell, but if you offered me $X, I would move." For whatever reason, though, Zillow no longer offers this service. Presumably, it's because it wasn't working. Hmm.
Here's how I'm thinking about it.
Today, most housing markets are binary. A home is either for sale or it's not. Sometimes enterprising people manage to secure an "off-market home", but generally speaking the market is binary. If a home isn't for sale, most people don't usually bother with it. Mostly because they can't easily find it.
But market conventions aside, the conversations I've been having suggest that it's actually more of a gradient. On the one side are people who really don't want to sell. Maybe they're never sellers. Let's pretend that the home has been in their family for generations and so to convince them to sell you'd probably have to offer them an absurdly high price and that might not even do it.
On the other end of this gradient are people who are ready to sell today. In an extreme example, they might even need to sell by a certain date, or else. In this case, a below-market price could get them to sell. They are highly motivated and one sure-fire way to increase speed is to lower price.
But for everyone else in between, it is a big unknown gray area where price and desire to sell are, I would think, inversely correlated. As desire to sell increases, expectations around price probably need to come down until they reach a point where the market can bear it and a transaction will occur. This is my hypothesis at least.
But if it's true, and there's a big untapped gray area, then the housing market is a lot bigger than we think it is.
Farhad Manjoo of the New York Times published an article this morning about Opendoor – a startup that I have written about multiple times on this blog – called, The Rise of the Fat Start-Up. (His definition of “fat” is that the startup owns lots of hard assets, which considered atypical in tech.)
Below are a couple of interesting tidbits from the article:
Opendoor has raised over $300 million in equity and over $500 million in debt since inception.
Opendoor plans to be in 10 cities by the end of this year.
Average commission charged on Opendoor is 7.5%, which is higher than a traditional real estate agent and higher than what was quoted before in the press. The higher % is because of certainty and convenience.
Opendoor offers a leaseback option if you’d like to stay in your house for a period of time after you’ve sold it.
Their conversion rate (offers made to closings) is about 30%.
Other startups are now in the market with similar models, including Offerpad and Knock. Zillow is working with Offerpad on a pilot. Someone is starting to feel threatened.
The article also quotes a blogger and real estate analyst named Mike Delprete. Heads-up: His blog is called “Adventures in Real Estate Tech.” I’m sure this will appeal to many of you. I obviously just subscribed.
Mike dug into MLS records in order to figure out Opendoor’s transaction volumes, since the company is not releasing this information. Here’s what he found (the chart is up to March 2017):
The trend line is certainly moving in the right direction. But Mike also believes that Opendoor is only netting around $8,320 in profit per home and that much of it is driven by appreciation. There’s also substantial risk in owning so many homes – each one is usually held for a few months.
But you can be sure they’re thinking well beyond where they are at today. Expect many more updates on this blog.
The $418 million commissions lawsuit that was settled last week with the National Association of Realtors (NAR) is certainly a big deal. The NAR is trying to sound positive, but all signs point to this outcome being meaningful for the industry. TD Cowen Insights is forecasting that commissions paid in the US each year could fall by some $25 to $50 billion (from a total of ~$100 billion). And this is the headline you'll see everywhere right now. But how might this actually happen?
As we've talked about before, the status quo commissions set up is a good one for agents:
Sellers are typically the party who pays 100% of the commissions
But sellers don’t pay until the agent sells and they have fresh cash
Money being deducted from proceeds (a “take rate”) is a lot less noticeable and has a lot less friction than cash you just have to pay out of pocket
Buyers kind of don’t pay -- or at least that's how they're supposed to feel
This is "good" because it perpetuates the existing model. If buyers feel like they're mostly not paying, they're just going to go to the marketplace with the most supply of homes. And that marketplace is the Multiple Listing Service (MLS). However, this marketplace also does things like tell buyer agents how much commission they will make as part of each deal. And the belief is that practices like this are anticompetitive.
So as part of the above settlement, the following new rules are expected to go into place by July 2024 in the US:
Seller agents will no longer be able to set compensation for buyer agents
All fields on MLS displaying broker compensation will need to be removed
Furthermore, agents will no longer even need to subscribe to an MLS in order to accept compensation
Buyers working with an agent will need to enter into their own buyer broker agreement and negotiate compensation separately
However, there's nothing stopping buyers and sellers from negotiating whatever commission structure they want; the idea is simply that it will be more transparent and negotiated by each participant
Why this is meaningful is that it decouples buyer agents and seller agents in a way that they aren't today. Instead of everything originating from the sell side, each side of the transaction is now going to -- theoretically at least -- negotiate what they believe is fair compensation for their representation. At the same time, there's no obligation to even subscribe to an MLS.
This leads us to, at least, two important things to think about:
What is fair compensation? Well, it should depend. If I'm a first-time buyer, I may want someone to walk me through the entire process. But if I've done it many times before, maybe I need very little. Or, if I'm an investor looking to renovate homes, maybe I want representation that is also an expert on construction. The point is that, in a truly open market, one should be able to find an agent and pay them based on the value that they're creating. And this is presumably why everyone is expecting commissions to fall precipitously.
If there's no obligation to even subscribe to an MLS, does this then open the door for new and more open listing platforms? Right now, I don't know how this will play out. I'd like to better understand more of the details around this settlement item and what it could mean for the landscape. But I do know that the way to spur the most amount of innovation would be to have the marketplace run on something like a blockchain, and then allow anyone to create their own listing platform on top of it. One day.
This will be fascinating to watch play out. And I'm sure it's only a matter of time before it spurs similar changes here in Canada. Expect further coverage of this topic on the blog.
Photo by Tom Rumble on Unsplash
Over the last few weeks, a number of people have told me that, when it comes to their current home, they have a number in mind. They more or less said, "I've already spoken with my husband/wife about it and, if someone were to offer us $X, we would sell and move immediately."
What's fascinating about this is that it's a form of housing supply that generally doesn't exist anywhere right now. Sure, the people I was speaking with would sell and move for a price, but how does something like this actually happen? How do buyers find them?
I suppose it could happen through word of mouth. I now know their prices and so if someone I know were interested in such homes, I could tell them. It is a low probability, but it's still a possibility. Alternatively, someone (an agent or otherwise) might just show up on their doorstep and make them an offer. My dad actually sold his last home this way.
But again, how likely is this to happen? It doesn't seem scalable. And this is why Zillow used to have something called a "Make Me Move" listing. Rather than a traditional listing, it was a listing for, "I don't necessarily need to sell, but if you offered me $X, I would move." For whatever reason, though, Zillow no longer offers this service. Presumably, it's because it wasn't working. Hmm.
Here's how I'm thinking about it.
Today, most housing markets are binary. A home is either for sale or it's not. Sometimes enterprising people manage to secure an "off-market home", but generally speaking the market is binary. If a home isn't for sale, most people don't usually bother with it. Mostly because they can't easily find it.
But market conventions aside, the conversations I've been having suggest that it's actually more of a gradient. On the one side are people who really don't want to sell. Maybe they're never sellers. Let's pretend that the home has been in their family for generations and so to convince them to sell you'd probably have to offer them an absurdly high price and that might not even do it.
On the other end of this gradient are people who are ready to sell today. In an extreme example, they might even need to sell by a certain date, or else. In this case, a below-market price could get them to sell. They are highly motivated and one sure-fire way to increase speed is to lower price.
But for everyone else in between, it is a big unknown gray area where price and desire to sell are, I would think, inversely correlated. As desire to sell increases, expectations around price probably need to come down until they reach a point where the market can bear it and a transaction will occur. This is my hypothesis at least.
But if it's true, and there's a big untapped gray area, then the housing market is a lot bigger than we think it is.
Farhad Manjoo of the New York Times published an article this morning about Opendoor – a startup that I have written about multiple times on this blog – called, The Rise of the Fat Start-Up. (His definition of “fat” is that the startup owns lots of hard assets, which considered atypical in tech.)
Below are a couple of interesting tidbits from the article:
Opendoor has raised over $300 million in equity and over $500 million in debt since inception.
Opendoor plans to be in 10 cities by the end of this year.
Average commission charged on Opendoor is 7.5%, which is higher than a traditional real estate agent and higher than what was quoted before in the press. The higher % is because of certainty and convenience.
Opendoor offers a leaseback option if you’d like to stay in your house for a period of time after you’ve sold it.
Their conversion rate (offers made to closings) is about 30%.
Other startups are now in the market with similar models, including Offerpad and Knock. Zillow is working with Offerpad on a pilot. Someone is starting to feel threatened.
The article also quotes a blogger and real estate analyst named Mike Delprete. Heads-up: His blog is called “Adventures in Real Estate Tech.” I’m sure this will appeal to many of you. I obviously just subscribed.
Mike dug into MLS records in order to figure out Opendoor’s transaction volumes, since the company is not releasing this information. Here’s what he found (the chart is up to March 2017):
The trend line is certainly moving in the right direction. But Mike also believes that Opendoor is only netting around $8,320 in profit per home and that much of it is driven by appreciation. There’s also substantial risk in owning so many homes – each one is usually held for a few months.
But you can be sure they’re thinking well beyond where they are at today. Expect many more updates on this blog.
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