What's Next for Realtors™?
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It was the best of times, it was the worst of times. Such has life been for realtors over the past several years. The best of times in that properties have been selling fast with rapidly appreciating values; the worst of times in that frenzied competition among buyers has made life stressful and frustrating for those work on their behalf. Moreover, the landscape right now is marked by low inventory and fewer sales that are getting spread out among a larger number of real estate agents. In fact, there are about 2 million licensed real estate agents in the country, but there are only about 700,000 homes for sale. Although many of these 2 million agents only work part-time or as a hobby side business, there are just a lot of agents out there trying to sell a smaller number of homes and that is not going to be sustainable for all of them.
If that weren’t enough, news broke last month of an historic settlement by the National Association of Realtors (NAR) in response to lawsuits around the question of commissions. The $418 million settlement potentially smashes the traditional 6% commission structure, most specifically in that sellers will no longer need to pay the share of the buyer’s commission. This is sure to cut into commissions as sellers see their transaction costs drop while things on the buyers’ side are sure to become more complicated.
Editor’s note: the word “Realtor” is actually a trademarked term for licensed real estate agents who are members of the National Association of Realtors (NAR); the term is owned by the NAR. You can be a licensed real estate agent without being a Realtor, however. To the layperson, “Realtor” and “real estate agent” are used nearly synonymously, and that is how I will sometimes be using them here (although I definitely know a handful of Realtors™ who scoff at the interchangeable use of the terms as they think a true Realtor™ is above simply being a licensed agent…apologies to them).
So What Comes Next?
The work of a real estate agent and the way agents are compensated is going to look a lot different a year from now than it does today (barring any delays or further legal proceedings; the new commission rules are slated to go into effect this summer). Here is what I see:
The big one: sellers’ transaction costs will drop. The traditional 6% commission that is usually paid entirely by the seller and then shared between agents on both sides of the transaction is going to go away. Seller agents may only be able to charge, say, 3-4% (or possibly even less) as savvier sellers will negotiate for lower expenses on their sides of the transaction.
The buyer’s side will look different too. Many buyers under current practice don’t even pay a commission: it all comes out of the seller’s side of the transaction. But now, since the seller will no longer be covering the buyer side, if a buyer wants representation from a real estate agent, their real estate agent will need to provide them with a contract for services with the costs clearly defined. This will be challenging for many buyers simply because of the added cost to their side of the transaction. It can be hard for buyers to come up with funds for a down payment and the usual set of closing costs, but now adding the cost of a real estate agent will make it even more expensive. Many buyers will simply forgo the use of an agent, or buyers’ agents will likely need to reduce the cost of their services so that more buyers can afford them.
Everyone in a transaction is going to have a better understanding of the commissions. For starters, I don’t think the majority of home sellers have known that a portion of their commission goes to the buyer’s agent. I was also interested to learn myself when I was doing research for this article this week that the average real estate commission nationwide in 2023 was actually closer to 5% than 6%, the latter figure being commonly accepted as an industry standard. I do not think most consumers know that these commissions have actually been negotiable even prior to the recent NAR settlement. It may be that a particular agency’s practice is to not go below 6%, but real estate commissions have always been negotiable, there just hasn’t been much transparency to the process under current practice. That is about to change. With increased transparency, the ability to negotiate, and a more well-informed consumer, the cost of a real estate transaction as it pertains to commissions is going to decrease, which of course is the overall intent of the recent lawsuits. Sorry, realtors, but decreased costs mean less in commissions.
There will be consolidation in the industry. Two million real estate agents is too many, even if many of them are part-time. With reduced commissions, some real estate agents will simply jump to other careers. For those who stay, they may actually see some benefits from a clearing out of many of the less active or more marginal agents. Value will be rewarded. But I would not be surprised to see 30-40%+ of current real estate agents exit the industry over the next 2-3 years.
Back to the buyer-side question above, there will be more paperwork at the beginning of a transaction, and more explaining of the costs. The best real estate agents will be the ones who can explain their value the most clearly, and that will take good communication skills and, quite honestly, the ability to sell themselves as well as they can sell a home.
The National Association of Realtors will lose influence. According to Open Secrets, the NAR spent over $52 million in lobbying in 2023. The year before, it spent $81 million! In fact, in most years in recent memory, the NAR has been one of the top two lobbying entities nationwide (with the other being the U.S. Chamber of Commerce). The dollars the NAR has to spend on lobbying come largely from NAR member dues. Part of the recent lawsuits against the real estate injury are meant to loosen the stranglehold the NAR has on things like the the MLS listing service. If the blockades to accessing some of these tools are eroded and the benefits are more broadly available to non-NAR agents, many agents will simply forego the annual dues to NAR, which will lessen the income and influence of the NAR as a lobbying organization. (That being said, NAR dues in 2024 are only $156, which is not a huge amount in the great scheme of things; nearly half of that goes to “advocacy,” per the NAR).
More on Compensation
The sales process of convincing buyers to pay a commission to a real estate agent will be challenging. Some buyers will not understand why it costs so much, even though buying a home is one of the most significant and complicated financial endeavors that many people will embark upon at any point of their lifetime. On the math, however, my concern on behalf of realtors is this: 1, 2, or even 3%+ is a lot of money on a transaction that runs into the multiple hundreds of thousands of dollars.
I will give a comparative example. Prior to working in banking, I worked as an investment advisor. We would charge 1.00-1.25% to manage money. Now on a $10,000 account, that is $100. Not bad. On a $100,000 account, it’s $1,000. That starts to feel more real. On a million dollar account, it’s $10,000. Are investment advisory services worth $10,000/year? For many investors, the answer is yes because a good advisor can save a client many times more than that simply by preventing them from making bad decisions. But tell a customer they are paying 1% and it is something they generally are okay with even on a million dollar account. But tell them they are paying $10,000/year, nearly $1,000/month? That hits differently. When selling a home, telling someone the fee for the real estate agent is 3% and that feels a certain way. Tell them it is $12,000 on the purchase of a $400,000 home and they need to pay it out-of-pocket, and that starts to feel much different (and much more onerous) even though it is the same math. Real estate agents will need to explain up front at the beginning of the transaction what the fee represents, and they will need to be able to justify it.
The Macro Concern
As if all of the above weren’t enough, one overarching (although related) concern for realtors is just that the consumer is just changing. There is a generational shift happening. Younger consumers are more comfortable with technology: they trust it and they value transparency and ease of use. And oftentimes they don’t even WANT to talk to someone. They’d rather peruse real estate listings on their own from their pajamas on the couch at night. They're comfortable talking to chatbots and using algorithmic analysis to determine values. They might need a navigator to help with the process or someone to fill in the right sections of a Purchase & Sale Agreement, but with regard to a lot of the traditional work of a realtor like helping to determine a house’s value, finding properties to match their interests, talking about locations and amenities, etc., younger consumers do not necessarily see the need or the value when they can oftentimes do it themselves.
With that in mind, I’ll repeat a mantra I’ve been sprinkling into these articles more and more often lately, which is that AI and technology are coming for a lot of industries. I took on my own industry (banking) a few weeks ago, so realtors can be assured I am not playing favorites here. As far as real estate is concerned, however, a lot of the traditional ways realtors provide value can be done to a certain extent through technology, especially if the MLS listing service for properties becomes ubiquitously available. Even the viewing of a home can change as lockboxes with keypads can be used to allow would-be homebuyers the chance to enter and view a home on their own without an agent even being present, much like how people “check in” to an AirBNB by punching in the code on the keypad; they may not ever even talk to the host/owner, nor do they necessarily want to.
The most bearish case for the future of real estate agents I have heard recently was someone making comparisons to the travel industry. As recently as 30 or 40 years ago, if you wanted to book a vacation you often had to go through a travel agent - someone who would compare flights and hotels, make recommendations, arrange all of the logistics and bookings, and offer ideas for things to do on said vacation. But then Priceline and Expedia and all the others came along and took a hammer to the travel agent industry. Today there are about 50,000 people employed in the travel-agent industry today, which is about half of what it was in 2000. The concept of hiring a travel agent is a foreign one to most consumers today, particularly younger ones who, again, are more comfortable with technology and more confident in their abilities to book vacations on their own.
Is the real estate industry destined for a similar fate? It’s a scary proposition for those hundreds of thousands of Americans who do make their living as licensed agents. The same factors that led to disruption in the travel agent industry (i.e. technology, a changing consumer, and costs) are now coming to the fore in the real estate industry. So time will tell.
How to Make It as a Buyer’s Agent
People probably have random movie lines they quote in all sorts of contexts even if there is no real connection the movie itself. One of mine that annoys my wife to no end is, “Life finds a way,” from Jurassic Park. I have actually always misquoted it as “Nature finds a way,” but I digress. I bring up the concept of life finding a way here in the context of the real estate industry finding a way to still get compensated for the services of agents.
And as noted earlier, a real estate purchase is a complicated and potentially cumbersome transaction. A good real estate agent can save a would-be buyer a generation’s worth of financial peril by steering them in the right direction. So there is value there, for sure.
I think there are several things real estate agents will need to do to adapt:
Offer services for a flat fee or an hourly rate instead of being based on a percentage of the transaction. The dollar amount of either of these tracks will likely be less than what a, say, 3% commission might have been worth, but it is transparent and easy for buyers and sellers to understand.
Agents can offer tiers of service ranging from simple help with navigating an offer and understanding a Purchase & Sale Agreement to rigorously reviewing and soldiering through every aspect of the transaction. A certain tier might include showing properties, while another tier might not include that. A premium level of service would justify a higher commission.
Selling agents could still figure out how to share commissions with buying agents, they just might need to call it something different like a “buyer credit.” This could be set up as cash from the seller’s side of the transaction to the buyer’s, which is then paid to the buyer’s real estate agent. However, this is not too far off from the current practice that has now been disallowed through the lawsuits, so it would have to be different somehow (i.e. more transparent, fully disclosed, etc.) to not run afoul of the very rules that the recent NAR settlement was meant to fix.
One random idea I read about in researching this article was the idea of loan officers also being licensed as real estate agents, and perhaps the bank or mortgage broker charges a fee on the transaction in lieu of a real estate commission that is meant to replace it. This feels complicated and legally murky, but it’s one idea that is out there from Robert Broeksmit, who is the CEO & President of the Mortgage Bankers Association, who said recently at a conference:
License your loan officers as real estate agents and offer the buying agent service for less than a 3 percent fixed fee point…some of you will say I want nothing to do with that. Others of you will say that is a great retention opportunity for my loan officers and the market will figure all this out.
Final Thoughts
I know I have a lot of realtors who read this newsletter each week, and I know what I am about to say will offend some of them, but here it is: some realtors are actually not worth the money. The good realtors know who the other good ones are, and they know who the bad ones are too. It has been too easy for some of the bad ones to slap their name on a transaction, do very little to help the transaction along, and then show up to the closing and collect a fat commission check. Sure, some transactions go super sideways and a realtor does actually earn their commission and probably should be even paid more. But there are also countless transactions where the agents do relatively little and still share 6%.
Moreover, anyone in banking who does loans can tell you that sometimes the real estate agents actually make the process worse. I can’t tell you how many times I’ve sat at my desk as a loan officer and felt like I was the only person involved who was holding a transaction together; I was the one coordinating with the title company, scheduling the closing, reviewing the closing statement with the buyers and sellers, making sure people showed up where they needed to with checks written out to the correct people in the correct amounts; meanwhile the agent is nowhere to be found, but shows up at the end to collect their share of 6%. Like I said, people in the industry know who the good ones are, and they know who the not-as-good-ones are, too. Some consolidation for the industry would not necessarily be a bad thing.
To end on a more positive note, however, nature finds a way. And buying real estate is more consequential than booking a vacation, and people out there are always going to need help. Good real estate agents will still get compensated for that, and may even benefit from some consolation and a general industry reset. Plus, inventory will eventually come back to the market, so even if commissions are down a bit, the number of transactions should start to bump up, and maybe more transactions at a lower commission but with fewer other agents in the pool will all kind of be a wash. Time will tell.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.
I don’t have many links this week in part because I was off for part of the week for school vacation with the kids. I’m also spending less time on social media, which has been good in general but not as good for catching good links out there. I do have One Good Long Read, though, and I’ll be back with more links next week.
One Good Long Read
Baseball season is upon us, although the outlook is bleak for those of here in New England who are fans of the Sox. Nonetheless, here is a fascinating little story (okay, not the longest of long reads this week) about the oldest living former Major League Baseball player. It’s an interesting story full of lots of bits of trivia and nostalgia, even if it is about a Yankee. You can read “Oldest MLB player turns 100” via Daniel Brown of The Athletic here.
