As a few of you likely know, I recent participated in an academic conference — the first of my career — at the University of Minnesota Law School titled “Will the NAR Settlement End 6% Real Estate Commissions.” Many thanks to Prof. Cox and the UMN Law for the invitation and hospitality.
I attended to point out that the answer to the question in the title is an emphatic No. The NAR Settlement will do nothing to end (or even lower) the 6% (closer to 5% these days) real estate commission. But listening to the other presenters, and doing a bunch of Q&A, not to mention off-camera conversations has been extremely enlightening. One of those takeaways for me is both evergreen and surprising.
I have long said that the central issue in the Commission Lawsuits was steering. That remains true. But now, I think the central issue with the policy agitation over real estate commissions is agent incompetence. Fix what Swanepoel’s DANGER Report named as its A-1 issue, and we fix the concern of policymakers, of consumers, and of thought leaders.
What’s old is new again.
Let us remind ourselves how big an issue this was. Back in 2015, NAR commissioned Stefan Swanepoel (before he became T3 Sixty) to “detail 50 threats, risks, and challenges the real estate industry is facing today or could face in the near future. It has been widely discussed and debated on social media and has become the focal point of roundtable discussions, membership luncheons, leadership retreats, and planning meetings at REALTOR® associations nationwide.”
His A-1 Danger/Threat?
(It appears that DangerReport.com is no longer active as of this writing.)
When Swanepoel released that report, he was just saying what everyone in the industry was and has been talking about for years before 2015. In the almost a decade since the DANGER Report, guess what remains the #1 problem in the industry? That’s right — masses of marginal agents.
They’re doing far more than destroying reputation, however.
The Marginal Agent and the Commission Kerfuffle
At the Univ. of Minnesota event, as well as beforehand and afterwards, I heard critic after critic of the industry say straight up that buyer agents do in fact add value. I repeated my assertion that I have never wavered from: I have always used a buyer agent in all of my personal transactions, and they have been worth every penny… because the ones I have used have been excellent professionals.
Every single person, even Jack Ryan of REX who hates NAR and the commission system with the fire of a thousand burning suns, said that good agents add value and deserve to be paid. His issue, echoed by everyone else, was that such buyer agents should have their fees set by the marketplace, by the buyers, rather than by the seller or the listing agent.
Now, whether what they want is the right way forward or not is not the important takeaway. The important takeaway is that everybody agrees that good agents add value and should be paid for their time and expertise.
Here’s the thing: good agents add value and will be paid, no matter what compensation scheme the government or the industry comes up with. Let me give you an example from Reddit, where a consumer posts this:
Deal falling through…feel bad my agent isn’t getting paid
We have been looking for a home for three years. Our agent has taken us to see places three times, as we are not in a rush and the area is far away from our location.
Recently, we had an offer accepted but post-inspection things went a bit south. Long story short, it seems clear this deal is not going through. And we might not have our sale for months. While we will ultimately buy with our agent, I feel awful about the time he has spent with us on this one with no pay day. He constantly updates us and is so lovely.
Do you send something in this instance? Or this is just the life of an agent? Do we…tip him? That would be weird, right?
What is the scenario where this buyer would not find a way to pay this buyer agent. Seller concession? It will be written into the contract. Pay by the hour? The agent will get paid. Flat fee? Paid. Cooperating compensation? Paid.
Americans are not, generally speaking, totally selfish assholes. We insist on paying those who have helped us, added value, done things for us. We tip servers who have provided a great experience; we even tip servers who did a crap job. It’s a social norm.
Whatever the rules, there is no scenario where a great agent works with a family for weeks and months, provides all of the value that a great agent can and does provide, and then come closing time, the buyer turns to her and says, “Well, sorry! You signed an agreement with no commission, so you don’t get paid!” That just won’t happen.
If cash is tight, buyers will figure out a way to pay their great agents whether via financing or pay-over-time or whatever.
All of the agita over 6% commissions, then, actually stem from marginal agents — those agents who actually haven’t added value, who haven’t done much, who have in fact harmed the buyer… but still walk away with the same commission amount that a great agent would receive.
Back in March, right after the NAR Settlement was announced, I wrote a post on why I was disappointed in the settlement. What I wrote there was reinforced by the Minnesota conference:
Without the guaranteed unilateral offer of compensation, how else is the incompetent agent who fails to communicate with the client, who doesn’t know anything about the market, about housing, about laws and regulations, who barely knows the sales contract, never mind how to manage the transaction or the client’s emotions, who doesn’t know negotiation… how is that agent supposed to get paid? If the agent really only knows how to open doors and go, “Look at this lovely kitchen!” to become “procuring cause” and get a $15,000 paycheck, despite doing everything in his power to torpedo the deal through his incompetence….
And steering props up these incompetents. The listing agent doing her job has to advise the seller to offer compensation — whether the seller does so the old-fashioned way, or the newfangled way through “concessions” — the point is that the seller has a strong incentive to bribe the buyer agent, and the listing agent has a strong incentive to advise the seller to do so as long as steering remains a common thing.
Without commission steering, the buyer agent has to justify his pay to the buyer. The good professional agents would have no problems doing so. The incompetent hobbyist would. That would naturally shake things out of the market, and the best will rise to the top, while the worst would drop out of the industry… as they should. The newer, inexperienced, future professionals would find mentors or teams or other paths to gain the necessary experience and knowledge to one day make them top professionals who know what they’re doing.
When everyone agrees that good professional agents add value and deserve to get paid, and the only issue is how much they should get paid and who should get to decide that amount, then the fact that we are fighting over a system designed to keep marginal agents paid is downright silly.
Let’s go further, though. I have long believed — though I don’t believe I’ve ever said so straight up — that good professional agents do not engage in steering. I know a ton of great agents and they take actual offense to the idea that they would steer a buyer to one house over another because of cooperative compensation.
So who is? Here’s a clue:
I have long referenced this video of Randy Ora, a top agent in SoCal, who did this live listing presentation at a Tom Ferry event in 2015 or so.
The key phrase he mentions here is “a third of your income was relying on that sale.” In the full presentation, he points out that the average agent in Orange County sells three houses a year. If he were so inclined, he might point out that most agents in Orange County — based on MLS numbers — sell ZERO houses a year.
In this remarkable 2019 presentation by a16z (a top venture capitalist), we learn that their research showed that the mode (the most frequently occurring number in a list) of transactions for real estate agents in Washington State was ZERO.
As Alex Rampell, the a16z partner making the presentation noted, there may be two million real estate agents, but most of them are not gainfully employed.
Those people steer. They have to. If you were making a third of your annual income from a single transaction… or making 100% of your income from that one transaction… wouldn’t you steer? Of course you would. Self-preservation is simple human nature.
Fiduciary duty, ethics, reputation, relationships… all of those are wonderful things to have, but… that agent doing three deals a year has to put food on the table. If that means steering his client to the listing offering 2.5% instead of 1.5%… and this one sale is a third of his income? Yeah, he’ll be steering like Mario Andretti on the Momos.
This phenomenon is hardly unique to real estate agents. Lawyers who are desperate engage in all kinds of shenanigans with client funds. Employees in dire straits embezzle. Doctors who are in financial trouble get involved in pill mills or illegal schemes. Maslow’s Hierarchy is a real thing.
It’s easy to do right and resist temptation when you’re financially stable; it’s not so easy when you are struggling to pay your bills.
Fiduciary Duty Requires Financial Stability
I argue that we cannot have concepts like “fiduciary duty” apply to real estate until and unless practitioners of real estate have some level of financial stability.
It doesn’t have to be generational wealth. You don’t have to get rich doing real estate. But it does have to be enough that agents can resist doing the wrong thing.
We as an industry, and perhaps as a nation, need to figure out how to provide financial stability to those who help families with the biggest purchase of their lives. Most agents go into the business to help people. The great ones stay in it because they love the feeling of handing first time homebuyers keys to their own home. For those agents it’s not about the money; it’s about helping people achieve their dreams.
The good ones, of course, make enough money that they don’t worry about one sale. They would and do advise buyers not to buy, because that’s the best decision given the circ*mstances. They would and do advise sellers not to sell when the market conditions aren’t right. They’re not about the fast commissions; they’re about helping people.
The marginal agent? The ones who are not in fact gainfully employed?
In light of that central problem, I wonder if government regulators and policymakers might not take a different approach to the “problem” of the 6% real estate commission. Maybe instead of trying to punish everyone in the industry, consider creating conditions that disincentivize bad actions (e.g., steering) and incentivize the good ones (e.g., fiduciary duty).
Decoupling commissions could help, but only if the result is the glut of marginal agents leave the business, so the remaining buyer agents can make a decent living helping buyers. That might mean GSE reform or some other market mechanism for paying buyer agents. Without financial stability, all you’re doing is creating incentives for desperate people to do desperate things.
Another idea to consider would be eliminating the 1099 exemption for real estate, thereby making all agents employees of the brokerage. We might end up with 200,000 real estate agents instead of 2,000,000… but those 200K would have enough financial stability to resist temptations. Those agents who want “unlimited income potential” can always go open their own brokerages. That’s how every other industry works. Why not ours?
Increasing requirements for real estate license, or going to single licensure so that brokerages are no longer some kind of parent in situ but merely a conglomeration of licensed professionals (you know, like law firms?) might help as well.
Maybe it’s something as simple as requiring a minimum annual income to get the REALTOR designation, to try to ensure that those who carry the “R” are those great agents who are truly there to serve their customers over themselves. Let all aspiring agents be apprentice REALTORS or something like that. At least consumers might then be able to identify those agents who are skilled professionals - the ones who do right by their clients all the time - instead of an agent who is relying on that one sale for a third of his income.
Dar-al REALTOR
Let me conclude with some free advice to REALTOR Associations; worth exactly what you paid. Hopefully some of the leadership will actually discuss these at the next board meeting.
You should get ahead of the curve and re-orient your mission to ensuring financial stability for everyone who carries the R as opposed to maximizing the per-transaction check size for the marginal agent. Since that is impossible given current numbers of REALTORS, you must reduce the number of REALTORS. That’s just logic and math.
I did some hypothetical scenarios in this post:
The other default setting that we all operate under is the reality of hypercompetition in real estate. In 2023, there were about 3.8 million existing homes sold, versus 1.6 million REALTORS. That’s about 2.4 homes — or 4.8 transaction sides — per REALTOR.
The idea that a REALTOR would somehow be blasé about telling a buyer, “You can’t afford me; go find someone else” is simply unthinkable if the default setting is that said REALOR only has 4 buyers a year.
But what if the changes ahead of us means a smaller denominator: far fewer REALTORS? What if the 50% or so of REALTORS who do zero transactions can’t possibly convince any buyer to pay them a retainer, and certainly not a high hourly rate. So they leave and find something else to do with their time. What if another 25% or so can’t make it work on $20 an hour and end up as a paid assistant on an agent team? 7.6 million transaction sides divided by 400,000 working REALTORS is more like 19 transactions per REALTOR.
Work on reducing the denominator: the number of REALTORS. I think you will find that most of your issues disappear once the marginal agents end up finding something else to do with their time.
Yes, that means your dues revenue will drop. So what? You don’t exist to generate dues income; you generate dues income to serve the consumer, the REALTOR and the public. The best way to serve all three today is the reduce the number of REALTORS, period.
I say “get ahead of the curve” because the alternative is to have the government come down on you hard. During the Minnesota conference, the phrase “orange jumpsuits” was uttered a few times. Given that many of those attending via Zoom were federal regulators, law enforcement agencies, State Attorneys General and the like… orange jumpsuits are not out of the question. At all.
It’s a common trope that there is opportunity in crisis. I think more and more that this is precisely our situation as an industry.
Yes, we are going through a crisis. Yes, things are chaotic and fear is dominant right now. But there is a major opportunity for long-needed reforms — reforms that address long-simmering problems, reforms that if we make them would take us all to the next level.
Without question — at least in my mind — one of those reforms has got to be finally doing something about A-1 from the DANGER Report. We have got to remove marginal agents from the industry. Steering becomes a non-issue or at least far less of an issue without hundreds of thousands of marginal agents running around. Professionalism improves as does overall skill in representation. Consumer complaints about agents getting paid too much go way down because consumer perception about the agent’s value goes way up with fewer crappy agents dragging us all down.
There are so many great men and women in this industry today. They work hard, they care about their clients, they’re successful, they have never steered anybody, and have just followed the rules as they knew them. Sure, they’ll adjust like they always have, but punishing everybody equally is throwing the baby out with the bathwater.
And too many in the industry today want the narrative to be something like “them” against agents. That’s not true. The reality is “good agents” against “bad agents.” The truth is that the right reforms will help professionals who bring credit to the industry and hurt marginal agents who bring everybody down. That should be our goal.
Fix the central problem of too many bad agents and it will fix most of our crisis issues today. Without the need for any orange jumpsuits.
-rsh
