Britain and America – two countries divided by a common language.
America calls property, real estate.
Estate agents are realtors, and in most states are tightly and expensively licensed.
But, in return, they command what Brits and Europeans would declare to be exorbitant fees for their services.
I must declare an interest here; I gained my Florida Real Estate license a-good-few-years ago and still ‘dabble’ in the market.
Why not. It makes huge sense when you are based in a second home hot-spot, where beach houses change hands much more frequently that primary residences, and are typically a more emotional than practical purchase. Better still, in the case of our stretch of the Gulf, they can command seven figure selling prices.
Consequently, being a realtor can be a respected and often well remunerated profession.
That was until earlier this week.
In a landmark legal act, the NAR – National Association of Realtors, the trade body representing property hucksters – settled a number of potentially game-changing lawsuits.
A bit of back story.
Nationwide, realtors charge sellers a standard fee of 6% of the sale price.
$6000 per $100,000 of the selling price – $60,000 per million. You sell a couple of properties a month and you can see how realtors are the most popular customers at the Mercedes and Lexus dealerships.
But that fee is split a number of ways.
The realtor who listed the property doesn’t get all that loot.
Typically, they split it 50/50 with the ‘buyer’s agent’. Then, both the seller’s realtor and the buyer’s realtor will have a 70/30 or 80/20 split with their broker – the business that actually holds their license.
So, if a million-dollar home sells, each realtor picks up 30 grand gross, and then gets to keep about 22 or 24 thousand of that sum. Still not too shabby.
For that, on the seller’s side, they market the property with photos and videos, show the home, generate sales literature, and support the sellers with the various contractual and financial consequences of selling property. Importantly, they have access to the Multiple Listing Service – MLS – where most available properties are marketed, but only if they agree the commission split.
The buyer’s agent’s job is to bring the buyer to the table. It’s much simpler, and with my busy schedule, where I focus most of my energies.
Building and maintaining a data base of possible and potential buyers is easy when the market is red hot, people are wanting to get in first and working with a realtor who knows the market, knows what a fair price is, and will aggressively negotiate and secure you a piece of the beach is worth the money.
Especially when it cost you nothing – because it is the seller of the property who is paying the buyer’s bill.
Yes, you can see where this is going.
In October last year, in what had been an industry-quaking legal case, a verdict handed down in a Missouri court found the NAR and a number of brokerage firms liable for $1.8 billion in damages for conspiring to keep commissions artificially high.
Many predicted this would mark the beginning of the end for the current system of how homes are bought and sold in America, and it has hundreds of thousands of realtors worried.
Is it really a surprise though?
When you think about the changes in how we buy travel and holidays, or how we invest in our stocks and shares portfolios, paying a broker a fee to be the middle-man or woman is anachronistic.
The end was perhaps in sight for real estate agents a long time ago, but the powerful NAR lobby held back the impending tide of change for as long as it could.
In the Missouri case, two large real estate businesses Re/Max and Anywhere.com – the owner of realtor behemoth brands Coldwell Banker, Sotheby’s Real Estate, Corcoran, and Century 21 – saw the impending doom and settled out of court.
Warren Buffett and his Berkshire Hathaway real estate firms haven’t settled and will appeal the verdict and damages. American appeals courts can be very slow moving and it could be years, even decades, before a decision is finally arrived at. Buffett, as always, it appears is playing the long game.
One of the conditions Re/Max and Anywhere signed up to as part of their deal was that their real estate agents would no longer be required to join and pay subs to the NAR.
For its part, the NAR agreed to give up its right of appeal and pay a reduced $418 million in compensation, but would agree to slash its fixed commissions, making then more negotiable between agents and sellers and buyers.
The closed shop, it seems is being broken open.
While this appears catastrophic for the NAR and its realtor members, the reality is more complex.
The NAR settlement this week makes change more likely.
Industry analysts are forecasting that the cumulative commission pool of $100 billion per year split between the 1.6 million registered realtors could be slashed by around a third.
While that heralds a likely exodus from the industry for many realtors who couldn’t continue with such a heavy hit to their commission, it is also seen as a positive by consumer activists who expect it could lead to asking prices for homes – which often bake in the commission fees – falling.
Many housing sector analysts aren’t so sure.
They advise that home prices are set by the market and that mortgage rates and economic confidence are the primary reasons driving market price not the commission a realtor may or may not earn.
But in the background, brokers and agents are scrambling to keep the system afloat.
House sellers, informed of the news are already asking for reductions on the commissions they pay and are flat out refusing to pick up the buyer agents tab. Those who have recently sold a house might be eligible for a refund under the legal settlement, but with more than 21 million home sales in the covered period, for many it is likely to be less that a $100 after legal costs so, frankly, hardly worth the effort.
What property watchers are expecting is a change to the business model of selling a house, with the emergence of not just online listings like Homes.com and Zillow.com but of transactional digital apps and sites much like Expedia and Travelocity disrupted the travel agency and airline business.
But beware of the brave new world.
Buying a house is not only big business, it is a big deal.
For most of us, it is the most significant purchase we will make in our lives and involves a complex multi-decade set of financial, legal and insurance documents and agreements.
No doubt there will be some first movers who offer discounted deals, access to cheap financing and fixed price legal and conveyancing, but the risk of it going wrong without adequate recall or redress should make homebuyers and sellers proceed with caution.
There is already a system for selling homes without the involvement of real estate agents – FSBO – For Sale By Owners. Tellingly, in my zip code there are 1,127 properties for sale via real estate agents and only 15 by owners.
It appears, sellers and buyers appreciate the involvement of licensed, professional advisers in helping them source and sell homes – but equally, understandably, they just want to pay a fair price for that service.
