Realtors Fleeing The Business

There will be fewer agents, which is a good thing. There are 20,000+ realtors in San Diego County, and last month there were 2,113 sales of attached and detached homes. Hat tip to Greg for sending in this article!

When real estate broker April Strickland looks at her local housing market in Gainesville, Fla., she sees a mismatch. Industry data shows that only a few hundred homes are sold each month, she said, yet there are more than 1,500 local Realtors.

Strickland has seen the ups and downs of the housing market since 1995, when she started managing her parents’ rental properties as a teenager. But she says the business environment of the past two years is the most challenging she can remember — slower even than the years following the 2008 financial crisis.

“Quite frankly, Realtors are running out of money,” Strickland said.

An industry that swelled with newcomers in 2020 and 2021 has recently experienced a harsh slowdown — leaving the field no choice but to downsize, experts say. One widely cited analysis predicts that as many as 80 percent of the country’s real estate agents could find a new line of work.

“Many industry leaders think there are way too many agents and would like to reduce the number so the professionals can service more clients, thus allowing a reduction in commission levels in order to maintain current incomes,” said Steve Brobeck, a senior fellow at the Consumer Federation of America.

By some measures, the exodus has already begun.

The Bureau of Labor Statistics recorded 440,000 full-time real estate agents and brokers in 2023, about 72,000 fewer than the year before.

Realtors will soon face new rules that could result in sweeping changes to how they do business and how they get paid.

Under the new rules starting in August, real estate databases no longer will include offers of compensation for buyers’ agents. That means those agents can no longer count on a cut of the seller’s windfall. Investment bank Keefe Bruyette & Woods has estimated that as much as 30 percent of the total U.S. commissions revenue might be lost as a result. They forecast that changes to the commission structure could cause 60 to 80 percent of U.S. Realtors to leave the profession.

CUNY Baruch College’s Sonia Gilbukh and Yale School of Management’s Paul Goldsmith-Pinkham estimated that about 56 percent of agents would exit the market if one side’s commission remained at 3 percent while the other became competitive, Gilbukh said in an email describing the study. A 2015 paper in the Rand Journal of Economics by Panle Jia Barwick and Parag Pathak predicted that a 50 percent reduction in commissions would result in 40 percent fewer agents.

Experts see a silver lining in a potential exodus of Realtors: Those who remain might be more experienced and competent. “This will be good for consumers because agents on average will be better at their job and will charge more competitive commissions,” Gilbukh said.

A “Realtor glut” has persisted since the industry’s pandemic high point, said Brobeck, who also sees a departure of real estate agents as probably a good thing for home buyers.

Gilbukh, the CUNY researcher, believes that only the most experienced agents will be able to keep charging high commissions.

Agents that survive the upcoming transition are likely to be better connected within their industry, having deeper relationships with professionals such as contractors, electricians, plumbers and appraisers, and “overall better poised to advise their clients,” Gilbukh said.

The proposed NAR deal was met with fear throughout the industry when it was announced in MarchStrickland said. But the panic has given way to a “wait-and-see” attitude, she said.

She characterized the NAR deal as a positive thing overall:

“It will eliminate people who quite frankly aren’t up to snuff, who can’t do the work, who don’t want to educate themselves and learn new ways or working. … This will be a good pivot for our industry.”

Link to free article

DOJ Speaks Up

The elimination of buyer-agents continues:

The U.S. Department of Justice broke its silence in court on Tuesday on the impending changes coming for the real estate industry in the wake of settlement agreements by major brokerages and the National Association of Realtors in what experts say was a statement Realtors should heed.

During a status hearing for a case in Massachusetts, Jessica Leal, an attorney for the DOJ, said the regulator would neither support nor oppose the NAR settlement agreement, which will lead to sweeping rule changes this summer. “We believe offers of compensation should not be made anywhere, but certainly not on the MLS,” Leal said.

Without any advertised commitment to pay them a commission, what will buyer-agents have to endure? At best, the seller-paid commission will be a moving target, and many, and probably most times it will end up being peanuts. Any agent who expects to be a successful buyer-agent will have to become experts at having their buyers pay them.

But even if an agent can get buyers to sign a commission agreement, the process of buying a home around here is very difficult.  I have an entry-level buyer right now who is making full price, all-cash offers, and over the last 45 days has struck out six times in a row.

Buyer-agents are being squeezed out by several market forces, and who will mind? The lack of transparency and the games the listing agents play are so unsavory that buyers and their agents will have to be extremely motivated to succeed just to eventually buy something. Agents won’t want to represent buyers under these circumstances, and just quit instead.

The real issue now is that buyers HAVE to hire a buyer-agent in writing to buy a house. Once they figure that out, will they investigate the choices carefully, or just grab someone? Or have Aunt Bea handle it? Or just go to the listing agents? Once the frustration sets in, going to the listing agent will seem like a way to improve their chances.

But the old-school listing agents will cop an attitude and either not want to do dual agency at all, or they will want the buyers to be unrepresented. Progressive listing agents will encourage buyers to come to them directly, and it is inevitable that it will become the prevailing trend. It’s how the commercial brokers do it, and it’s mostly because agents don’t like other agents – not because it is what’s best for the buyers and sellers.

These agents discuss some of the pitfalls here. They have built a realtor team of 51 agents since covid, and have sold 448 homes in Connecticut over the last 12 months – so they are in the game. But they don’t come up with any perfect solutions – because there are none:

In other words, it’s going to be a mess of a market as agents turn their focus on getting buyers to sign an exclusive agreement. It will just complicate further what is already a very challenging environment.

Buyer-Broker Agreement – The Problem

Every realtor-related entity is scrambling right now to train agents how to get their buyers to agree to a contractual relationship where the buyer pays the buyer-agent commission.

It would all be well and good – and be similar to the listing agreement we have with sellers – if it weren’t for the paragraph in red above that allows for cancellation by either party. Even if the parties agree to Exclusive Representation, the buyer can still cancel with a 30-day notice (in C1ii). Both boxes on the left need to be checked to eliminate the option to cancel.

The big problem is that listing agents will be advertising to buyers to come direct to them to buy their listing and not pay ANY commission.

Will agents be able to convince buyers to sign the Exclusive Representation with no cancellation? Or will it be a happy compromise just to agree to representation that they can cancel at any time. Yes, the happy compromise will be preferred, mostly because it is so clearly laid out on the form.

But it means that the minute the buyers see a hot new listing advertised as No-Fee-If-You-Come-to-Me, they will cancel their existing buyer-broker agreement and go direct to the listing agent.

Buyer frustration builds quickly even if you have a great buyer-agent because the good deals or cool houses are competitive and almost all picky buyers will lose a few bidding wars before they win one. Buyers don’t like losing houses they had their heart set on winning, and the temptation to go direct to the listing agent – especially when you can save the fee – will be very high.

I’m guessing this will all blow over in a few months because listing agents will be advertising to buyers directly – leading with the No-Fee-If-You-Come-to-Me mantra – and it will expedite the industry’s transition to single agency, and eliminate buyer-agents altogether.

Hiring a Buyer-Agent

The commission lawsuits and action by the DOJ will cause buyers to wonder if they need to pay for representation, and what do they get if they do.

It will also be a function of how much it costs. If the service was free, everyone would do it.

It’s been like that in the past, but it also caused buyers to be a little too casual about who they selected, and they tended to just grab someone – which doesn’t always bode well.

  • If the fee was 1% at closing, you’d probably do it – if you liked them.
  • If the fee was 1.5% to 2.0% and the terms were clean and non-exclusive plus the agent made a really good case why he’s worth it, then yeah, maybe.
  • If the fee was 2.5% to 3%, there would need to be some guarantees or real promise that you would get exactly what you wanted, and be very impressed with the service too.

Buyers will be able to include in their purchase offer that the seller pays all or part of the buyer-agent commission. But there won’t be any promises about what a seller might pay – if anything. So buyers should be prepared to pay the entire amount to their agent, as agreed up front.

What should buyers expect? What are the skills that good buyer-agents possess and implement on behalf of their buyers? Here is my quick list:

Overall analysis of general market conditions

Video /audio tours of prospective homes for sale

Pinpoint Home-Value Analyses

Measure up the sellers and listing agents

Winning-price predictions

Offer Strategies

Bidding-War Management

Contingent offers that win

Tough and detailed inspections with free quotes on repairs/improvements

Expert deal management

Foreclosure hunting

Bridge-loan financing

Off-market homes for sale

Sniff out any shenanigans

See the new listings in person every week.

There are also the 132 things agents do for buyers linked here, but the real problem is demonstrating the skills. How will buyers know what they need? How will agents show them what they have to offer?

When you go to the car dealer, they let you take the car for a drive around the block. How can you do that with a buyer-agent?

It would be fruitful for agents to have a blog where they demonstrate how they work, and provide evidence of their results. But that may be asking too much of agents.

We do free consultations for sellers. Let’s do them for buyers too.

Buyer-agents should offer their list of services AND be willing to meet any prospective clients-to-be at a home for sale so agents can show them what they do. A tour of a house to point out the positives and negatives will give the potential buyers a great sense of the agent’s expertise.

Agents – let’s make the free consultation at a home for sale part of the effort to assist buyers. Besides, you want to get a sense of whether you want to work with these buyers too.

Before you get married, you should have at least one date!

What do you look for when you meet your potential realtor at a home for sale to see what they have to offer? If they add to the experience something you didn’t know, then you’re on the right track – ask questions! If they say, “Here’s the kitchen”, it is an automatic disqualification – just run to your car!

Dominance vs. Fiduciary

These Palo Alto guys have been making national headlines since they rolled out their reduced-commission program last week. They are offering a $10,000 fee to buyer-agents, instead of a percentage, AND encouraging buyers to come directly to the listing agent to avoid paying any fees (which is my beef).

Why would a high-end independent brokerage that sold 100 homes in the last 12 months – mostly in the $3,000,000 to $10,000,000 range (with sales of $40,000,000 and $44,000,000 too) – feel the need to effectively shut out their fellow real estate agents? Beats me.

Last week, the Department of Justice stated that commissions should be decoupled and NO fee be offered up front to buyer-agents by the seller or listing agent (though they did agree that buyer-agents can include a seller-paid commission in their buyer’s offer).

What gets lost in the discussion is the 120-year history of broker cooperation – where other agents can sell my listings, and I can sell theirs. It is a terrific system that best serves the sellers and buyers, which is our fiduciary duty.

But greed and market-share dominance is pushing fiduciary duty to the sidelines. Instead, brokerages are taking advantage of the current uncertainty to craft a quasi-single-agency package that effectively shuts out the cooperating buyer-agents under the guise of saving the seller money. Is it in the seller’s best interest to discourage the outside buyer-agents?

This is one of their first listings to hit the open market that offered their $10,000 fee to buyer-agents, and it went pending in seven days:

Keep this house in mind – I’m listing a house near it this weekend!

Buyer-Agent Compensation

Yesterday, we attended Gov’s annual update on new laws and forms for 2024.

He touched on many topics – including that landlords in California might be agreeing to tenants for life because it’s so hard legally to get rid of them – but the most interesting was his comments on the realtor lawsuits and commissions for the buyer-agents.

To demonstrate the difficulty of coming up with a viable solution, the best the California Association of Realtors can do is to add paragraph G3 into the purchase contract (above) and hope the buyer’s agent already has a written agreement for the buyer to pay the commission. At least paragraph G3 will pass the responsibility of paying the buyer-agent commission along to the seller so the buyer doesn’t have to pay it, but in a multiple-offer situation, all it will do is send your offer to the back of the line.

When in a bidding war, buyer-agents will be forced to omit paragraph G3 and saddle the buyer with the commission payment instead.

What’s worse is that the federal judge presiding over the successful realtor lawsuit will be deciding in May whether or not to make it a national law that PREVENTS the seller from paying the buyer-agent’s commission altogether, or let the current commission structure ride until the appeals process is complete.

It appears that the buyers will be paying their agent’s commission, sooner or later.

In an interesting twist, Gov was describing how the best solution for evicting a tenant is to bribe them with cash-for-keys and we even have a form for it now. But bribing a buyer-agent is completely out of line? A home seller should have the ability to pay the buyer-agent commission if they see fit.

Home Sellers Disclosing Repairs

From our broker of record:

Q. The seller told me that when he bought the property seven years ago there were drainage, soils and foundation issues.  He said he has fixed everything and there have been no issues or problems during his ownership. He said because he fixed everything there is nothing to disclose to a buyer.  Is that correct?

A. No. Past defects, even if repaired by the seller or others, are to be disclosed. Not only that the seller should provide all relevant information regarding the repairs to any prospective buyer but also any improvements or modifications. The information would include but not limited to the person(s) who performed the repairs (i) the property owner (ii) a licensed contractor (iii) an unlicensed tradesman (iv)all paperwork related to the repairs/improvements/modifications to the property.

In addition, the new “Flipper Law (AB 968)” which will become law July 1, 2024, means a seller of a residential one-to-four property who accepts an offer within 18 months from the date when title was transferred must make the following disclosures: 1) The seller must disclose repairs and renovations when performed by a contractor with whom the seller entered into contract; 2) the name of each contractor and their contact information; and 3) any permits obtained (or if not obtained, the contact information of the third party who can provide the permits). It happens regularly that sellers do improvements without obtaining proper permits, so double-check at the city or county to verify.

Net Listing

Sellers can decide their price in the beginning, and I’ll take the rest:

A net listing is used only with sellers, not buyers. It is structured as either an open or an exclusive type of listing. The net listing is distinguishable from all other listing arrangements due to the way a broker’s compensation is calculated.

In a net listing, the broker’s fee is not based on a percentage of the selling price.

Instead, the seller’s net sales price (excluding broker fees and closing costs) to be received by the seller on closing is stated in the listing agreement. The broker’s fee equals whatever amount the buyer pays in excess of the seller’s net figure and closing costs.

However, the broker discloses to the seller the full sales price paid by the buyer and the amount of the broker’s residual fee before the seller accepts an offer on a net listing. Failure to disclose to the client the benefits the broker receives on any transaction leads to loss of the entire fee. [Calif. Business and Professions Code §10176(g)]

For example, if the seller enters into a net listing agreement with a broker for a net sales price of $500,000, the broker will not receive a fee if the seller accepts an offer selling the property for $500,000 or less.

On the other hand, if the property sells for $575,000, the broker’s fee is $75,000, minus the seller’s other transaction costs.

Net listings tend to be unpopular with the Department of Real Estate (DRE) and consumer protection organizations, and have been outlawed in some states, but not California.

Net listings are particularly prone to claims from buyers and sellers that the broker has been involved in misrepresentations and unfair dealings. These claims are generally based on an improper valuation of the property at the time of the listing or a failure to disclose the fee received by the broker when the property sells.

If the seller thinks the broker’s fee is excessive, the seller is likely to complain they were improperly advised about the property’s fair market value (FMV) when employing the broker.

Thus, net listings are used sparingly, if at all. If a net listing is used, sale documentation is to include complete disclosures stating:

  • the property’s value;
  • the price paid by a buyer; and
  • the resulting fee amount.
Link to Article

Non-Exclusive Representation

One more blog post about the coming changes to the realtor environment.

Regardless of how the commission lawsuits are resolved, there will be a push – and possibly a mandate – for buyers to pay their agent directly. Agents will want buyers to sign an agreement to that effect.

Above is a copy of the verbiage on page one of the standard agreement.

If a buyer agrees and signs this form, and then finds a home on his own, he can ‘cancel this agreement by giving written notice to the other’. But only as long as THE BOXES CIRCLED IN RED AREN’T CHECKED.

Will buyers read the agreement before signing, and be reluctant to check the two boxes?

Otherwise the form is reasonable, with the agent being covered for any properties they recommend to the buyer with analysis (paragraph B1).

All that matters is whether the agent will insist on the two red-circled boxes being checked. I think a buyer will pause at agreeing to exclusive representation, but non-exclusive should be acceptable.

I doubt that I’ll use the form at all, unless Compass requires it. Why bother if you can cancel any time?

Happy Thanksgiving!

NAR Settlement Is The Answer

Hopefully NAR is busy in settlement talks right now, because they just don’t seem to get it, or they have trouble putting it on paper. These are their latest explanations:

However, there might be hope for settling the case:

Regarding the possibility of a settlement in the case, Katie Johnson, NAR’s chief legal officer said, “For NAR, settlement has always been an option.”

If NAR were to settle it would look for two outcomes, according to Johnson:

1. That homebuyers will continue to be able to access and afford buyer representation, and

2. That all liability from the suit’s claims is eliminated for NAR’s members, associations and MLSs.

“Settlements are always an option if we can achieve those objectives,” Johnson said.

Lesley Muchow, the NAR Deputy General Counsel & Vice President of Legal Affairs and Antitrust Compliance also advised agents to stress that commissions are negotiable. In that vein, she urged NAR members to leave compensation fields blank on forms rather than pre-filling them out — a phenomenon multiple plaintiffs emphasized in their testimony during the Sitzer | Burnett trial.

“Those are conversations you need to have with the consumer,” Muchow said.

“There’s no set amount. Sellers can decide and it’s on the Realtor to educate the seller as to why they might want to elect to make an offer of compensation and how that will work to their benefit in the transaction.”

“A Realtor should never suggest to a seller that if they do not make a certain amount of an offer of compensation that other Realtors will steer buyers away from their property,” she added.

Johnson ended by stressing that NAR’s current legal situation represents an opportunity.

“An opportunity to differentiate yourself from others – from your competitors and colleagues in your area – and an opportunity to improve your practices. An opportunity to think creatively and do things differently, using this delta, this point in time, as a launch pad for innovation.”

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