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
At the highest level, I agree with the premise of this tweet from The Real Estate God. The overarching argument is that one's main criteria for selecting a real estate market in which to enter should be "the place with the least competition." And the reason for this is that less competition equals less price discovery, which then equals more mispriced assets and more opportunities to generate outsized returns.
Going even further, the argument here is that you're actually taking on less risk by buying mispriced assets in less competitive markets because you can model reality (things like in-place cash flows and market rents) as opposed to betting on the future (things like rental growth and/or cap rate compression). Said in a different way, it's easier to find deals and "make money on the buy"; and, once again, I would mostly agree with this.
But in my mind there's a very important caveat. And it's akin to the advice that the late Charlie Munger supposedly gave to Warren Buffet: "Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices." While it is true that you might find wonderful pricing in less competitive markets, there remains the question of whether you're also buying wonderful real estate.
And I think that's an important consideration.
It is estimated that about 1% of the total housing stock in New York City is rent controlled (2019 figure), which is something different than rent stabilized.
Generally the way the former works is that you have to have been living continuously in the home since July 1, 1971, and the building itself needs to have been constructed before 1947. If this is the case, then in theory, you should have seen relatively minor rent increases over the years.
This was the case for the late real estate agent, Alice Mason, who died at the beginning of this year at the age of 100:
She never left the rent-stabilized [controlled?] apartment where she held her storied dinners, in a century-old building on East 72nd Street. (In Manhattan real estate parlance, it was a classic eight, a gracious prewar layout that included three bedrooms and two maid’s rooms.) In 2011, the developer Harry Macklowe bought the building for a reported $70 million and began to turn the units into condos, buying out the tenants to do so. But Ms. Mason refused to give up her apartment. When she moved there in 1962, the rent was $400 a month. At her death, it was $2,476. The apartment below her, in the same line, was recently on the market for just under $10 million.
Green, Penelope. “Alice Mason, Real Estate Fixer and Hostess to the Elite, Dies at 100.” The New York Times, 13 Jan. 2024, www.nytimes.com/2024/01/11/style/alice-mason-dead.html.
For better or for worse, this is an obviously awesome deal, and reason enough to never move and have family members move in with you before you die so that you can try and pass down this asset for generations to come.