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Commission compression is likely to be a result of the National Association of Realtors’ settlement that has rocked the real estate industry. But that doesn’t mean agents and brokers are otherwise out of the woods legally-speaking.
That’s according to panelists at a webinar hosted by Luxury Presence earlier this month called “Executive Insights: Steering Through Real Estate’s Transformative Moment.”
Jack Miller, president and CEO of real estate consulting firm T3 Sixty, stressed that his firm had been auditing brokers’ buyer brokerage agreements for the past 18 months and had, therefore, reviewed agreements in 45 of 50 states.
“If you have not done a self-audit of that, you’re probably a walking set of violations right now,” Miller warned.
“It’s not paranoia if they’re really out to get you. The reality is, you have an industry of litigators that are looking at this first settlement, and saying, ‘Well, I wonder what else is in there?’ So we need to be really good about: How do you handle unrepresented buyers? If you’re in a state that allows dual agency, how do you handle that in the most appropriate way possible?”
Transaction forms may lead to future litigation
Miller particularly emphasized that transaction forms, which had to be changed due to the NAR settlement, may lead to future litigation.
“If your forms are created by a committee of brokers who all got together and decided how business was going to work in a market territory, I know you could say they had the best of intentions, but from a regulator’s perspective or from a consumer advocates’ perspective or from an antitrust lawyer’s perspective, you could say, ‘That looks like you guys straight-up collaborated to preserve a commission structure in a certain way or to incentivize certain behavior in the market,'” Miller said.
“With a lot of our clients, we advise them ‘You need to question the documents on which your business is based, which is your listing agreement, your buyer agreements, any of your addendums, and how you actually transact to work with the consumer. And if you think you’re clever working around the agreement, you’re not. It will mess you up. Please don’t.'”
Settlement hacks and workarounds
Miller said he knows the industry is in for more legal trouble because when he pokes his head into some real estate Facebook groups, he finds agents and brokers talking about doing workarounds around the NAR settlement.
“I go look them up, and it’s like, wow, you do a fair amount of business, and you’re hacking the settlement,” Miller said.
“You’re trying to work around it in this clever way. You’re having your buyer sign three different versions of the buyer agreement with different percentages in them because you think that’s clever, right? No, no, no. Please do not. Stop.”
James Dwiggins, CEO of national real estate franchisor NextHome, spoke as someone who has been in the commission litigation trenches, noting his legal fees for defending his company were $100,000 per month. He seconded Miller’s warning.
“Robby Braun, Michael Ketchmark — negotiated with both of them,” Dwiggins said. “What Jack just said is dead-on accurate. The next class action is going to be forms created by a group of competitors that are propping up compensation.
“The second one’s going to be companies doing cooperative compensation who are screwing sellers. You do not want to play around with these guys. They’ve got unlimited resources, and they’re not done. This is just the beginning, unfortunately.”
He encouraged brokers to assess their legal risks and rethink anything they’re doing that could land them in litigation.
“They’re coming back to the well, and it’s going to be bigger this next go around,” Dwiggins said.
“The system is rigged. They can sue you for anything, and you will have to pay to defend it, and it’s cheaper to settle than going to court. The whole system is designed to get money out of you, so you want to avoid everything possible that could get you into that spot.”
Moving away from cooperative compensation
Dwiggins said he saw two camps in the industry currently: brokerages trying to do things “the old way” and continuing to share compensation and those moving to “the new way” and not doing cooperative compensation any longer, including NextHome, eXp Realty and Baird & Warner.
“I think that you’re going to see that continue to divide, but then consolidate, where the whole industry moves away from cooperative compensation eventually,” Dwiggins said.
“Obviously, it’s going to be a competitive disadvantage for people that are doing it because you compete with an agent on a listing presentation that isn’t doing cooperative compensation, and your fee is going to be higher. You will lose market share, which is what’s happening.
“No. 2, it’s a massive legal risk. And then, No. 3 is it’s actually harming sellers when you’re doing cooperative compensation.”
Regarding how much agents end up getting paid, Dwiggins said he’s seeing a small percentage of agents actually charging more for their services than what listing agents previously offered.
“They’re going in and articulating value clearly and having the buyer sign a different rate than what they were being given by the listing agent,” Dwiggins said.
“I think agents who are not as good at articulating value are going to see some type of drop in compensation, let’s say 25 to 50 basis points. And then agents that are new, that aren’t good at the craft yet will see a lower amount. So you’re gonna see the market push people up or down.
“The well-educated, well-trained agents are gonna do very well in this new world. The fact is, consumers are willing to pay a premium for convenience and service. It’s a matter of how good you are at articulating that value to consumers to get them to agree to it.”
Commission drops and a rise in unrepped buyers
Spencer Rascoff, founder and former CEO of Zillow, estimated that overall commissions would drop from 5.2 percent now, with 2.6 percent to each side, to somewhere “in the low fours,” with 1 to 1.5 percent going to the buyer agent and the rest to the listing agent.
“That probably puts me a little bit on the bearish side,” Rascoff said.
“I’ve seen numbers that are even more negative than that, but it is important to remember before everybody throws tomatoes at me or freaks out too much that there’s been so much home value appreciation. When we started Zillow in 2006 we were at about 6 percent, but that was $60 billion of commissions.
“Today we’re at 5.2 percent, but it’s $100 billion of commissions. So yes, the commission percentage has come down quite a bit from 6 to 5.2, but the dollars have gone up a lot because there’s been so much appreciation in home values.”
Rascoff also said he thought the share of unrepresented buyers would go up to a quarter or a third who choose not to hire a buyer agent.
“Obviously, those are going to be on more modest homes,” Rascoff said.
“They’re not going to be on the super high-end homes, and there’s going to be commission compression overall on the agents that do continue to be hired by buyers.”
Dwiggins agreed with Rascoff regarding commission compression but not on how many buyers would go unrepresented.
“We’re in a world where mom and dad both work, don’t have time to do anything, and if you have kids like I do, it just makes things more complicated,” he said.
“I don’t think people in an infrequent transaction that they’re going to do two to three times in their life want to go into it without some type of representation.
“What that is is debatable. Whether that’s an agent by the hour, a flat fee, just dealing with the contract, I don’t know. But unrepresented, like doing it on my own, I think is unrealistic at this point in time. Time will tell who’s right or wrong on that.”
Miller said he thought Rascoff’s predictions regarding commission compression were “very bearish” and said low-cost business models have been around for decades and largely rejected by consumers. Miller estimated that commissions overall would drop a quarter or a half a percentage point rather than a full percentage point.
Rascoff agreed that lower-cost models, such as Redfin’s, hadn’t gained traction, but said the media attention around the NAR settlement could make the difference.
“All my friends that are not in real estate, they say to me, ‘Oh, I heard the government lowered commissions. Like, finally, it’s not 6 percent anymore because the government said commissions are lower, so now I finally can negotiate commissions.’ That’s new news.”
Sellers seek to negotiate commission
He noted that he’d talked to one top agent in Florida who told him that in 12 of her last 12 listing presentations, the seller tried to negotiate on commission and that that had never happened before. But he said that in all of them, she was able to keep the sellers at the 5.5 percent or 6 percent commission with cooperative compensation she had gotten before the settlement.
“I think she’s an example of what James is referring to, of a top agent that’s able to demonstrate value,” Rascoff said.
Dwiggins said that was a good thing.
“I mean this respectfully, but we suck as an industry, as a whole, of articulating value, and now we have to get really good at it,” he said.
“So the agents that are doing that, she just got better, and the buy side needs to get better, and everybody needs to up their game.”
Dwiggins said he thought 20 percent to 30 percent of agents would “go away” as a result of the NAR settlement.
“Honestly, good riddance,” he said. “We have too many people with a real estate license as it is. We will get more professional when we are pushed to be better at our job and our craft.”
