Realtor Apocalypse

It is coming. It is inevitable. It is going to be brutal. It is very much needed.

There is this saying, “an industry that isn’t adapting, is going extinct.” The residential real estate industry, led by the realtor associations, has refused to adapt. Even worse, they put policy in place, policy that must be adhered to, to prevent the industry from adapting. Well, that extinction level event is about to hit, and it comes in the form of Moerhl v. NAR.

The last time you sold a house you probably noticed that within the listing agreement there were two paragraphs regarding compensation. The first laying out the commission you would pay to the listing brokerage and the second regarding cooperation with other brokers. That second paragraph stating that should another broker bring the buyer for your property, you agreed that the commission paid would be split with that broker.

So, why is it like this?

To start, and contrary to what NAR, state, and local realtor associations like to forcefully proclaim, membership in the realtor associations is not voluntary. Almost every large brokerage requires their agents to be members; and association policy actually requires that if a broker is affiliated with the realtor associations than all agents under that broker must be as well. However, the real coercive force is the ability to compete in residential real estate. The realtor associations hold access to the vast majority of MLS systems, lock boxes, and standardized industry forms. As a realtor association exec once said to me, the ability to compete is a perk of membership. It all sounds rather forced, doesn’t it?

So, with just about every residential real estate agent forced to be a member of the realtor associations, NAR can put forward rules that must be strictly adhered to. And if an agent runs afoul of those rules, that agent might find themselves out of the game all together. The rules at issue here are cooperation and the requirement that the seller compensate the buyer agent.

The NAR code of ethics requires that all realtors must “cooperate” with one another. That simply means that realtors must allow other realtors to show their listings to buyers. However, the code of ethics also states that cooperation does not include compensation. The requirement that you as a seller compensate the buyer agent comes from MLS policy. To place your property in the MLS, you must make a blanket offer of compensation to the buyer agent. Oh, and I say MLS policy, but the overwhelming majority of MLS systems are owned by local realtor associations. So, MLS policy is actually NAR policy. In theory that blanket offer could be as little as $1.00, but theory is far different from reality; and this is where Moerhl v. NAR comes in.

The plaintiffs in this case are alleging that NAR, many major MLS systems, and several national real estate corporations have conspired to fix commissions around 6%; and because of this sellers have paid twice the amount that they should’ve. The main crux of the issue revolves around steering. That in theory, yes, a seller could only offer $1.00, but in reality if they did not offer the “standard” or “expected” rate, buyer agents would simply not show their property. The damages they seek are massive and they also seek an injunction to do away with the blanket offer of buyer agent compensation. I have read the case documents, and based off of what I have witnessed as a real estate broker, it is my opinion that their argument is very strong.

So, the hundred billion dollar question, what happens if they win? For sellers, you are going to be paying a lot less to sell your property. Commissions will likely drop to around 3%. You could always choose to compensate the buyer agent, and if that buyer agent is being paid by the hour a 1% or even .5% bonus might help drive traffic to your property. However, it will be 100% voluntary.

I see buyer agency disappearing as we know it. Sellers will no longer be forced to compensate them, and how many sellers are going to shell out an additional commission if they don’t have to. Many transactions are just going to have one agent, and in Florida that is perfectly fine, as all agents operate as Transaction Brokers by default. Those that want a buyers agent will likely be paying by the hour and only the best agents will be able to justify that price. I also believe that attorneys will play a bigger role in transactions, because for a flat fee or hourly rate they can help a client negotiate a price and draft the sales contract, all for a lot less than 2.5% of the purchase price. This is going to result in a much more transparent, professional, and competent residential real estate industry.

So, what is my opinion on this? I think it will be great! I think it is exactly what the industry needs and likely would’ve happened on its own if NAR had not created policy to prevent it from happening (I’m looking at you Clear Cooperation). As technology improves, the value that a buyer agent brings to the table is slowly decreasing. Where they once searched a paper MLS that they printed off everyday, most buyers are finding their potential properties on their own. Although there are great buyer agents out there that do far more, most simply open doors and fill in the blanks to a form sales contract. Is that level of service worth 2.5% or 3% of the purchase price? I mean, the listing agent can open the door, submit a contract to the seller, then coordinate the entire transaction. In fact something we see a lot of, especially in luxury sales, is for the buyer agent to disappear after the contract is accepted, leaving everything to the listing agent, only to show up at the closing to get their check.

The real hit is going to be to the realtor associations and largest legacy real estate brokerages. For decades real estate brokerages have been able to double dip, taking commission from property listed with the brokerage and a commission when one of their agents brings the buyer for a property listed with another brokerage. Not to mention the entire commission when one of their agents is the listing agent and another of their agents is the buyer agent. Their revenue is likely to get cut in half. And if the plaintiffs get the damages they are seeking, NAR, several major MLS systems, and the largest national brokerages are likely to get wiped out. These damages will be massive, likely making the big tobacco damages look mild in comparison.

An industry that isn’t adapting is going extinct. An industry that refuses to adapt, or does everything in its power to prevent adaptation, will likely find that extinction come far sooner than anticipated. That time has come for realtors. But here is the really frightening thing, almost no realtors know about this case. They have no idea what is going on and what could very well happen. As an industry, I think that says a lot about the quality of most of the professionals in it.

Oh, and a side note. Even though the status quo is still in place, there is a way that you as a seller can save money. Next time you discus commission with your listing agent demand Dual Variable Compensation. This creates two different commissions, one to be paid if there is a buyer agent and a lower commission to be paid if the listing agent brings the buyer. For example, 5% if a buyer agent is involved and say 3% if the listing agent submits the contract on behalf of the buyer. Otherwise, your listing agent is taking the whole 5% when you could be paying less. Dual Variable Compensation is standard with Kratzer Property Group listings.

Until next time,

Zach