The conspiring events – softer market, fewer and less-experienced agents, and lower commissions – are all leading us to the same place:
The destruction of the traditional model of residential real estate sales will be triumphed by the unknowing, but it will be the worst thing to ever happen for consumers because agents will be so tempted to tilt the table.
The only savior will be the company that brings home auctions to the masses.
People are asking about the NAR lawsuits – hat tip to Susie, Gerry, and Carl!
The lawsuit that began this week contends that realtors force sellers to pay a commission to the buyer’s agent. Two defendants, ReMax and Anywhere (Coldwell Banker, Sotheby’s, etc.) have already come to settlement agreements, though they haven’t been approved by the judge yet. The other two brokerages, Keller Williams and Berkshire Hathaway, plus the National Association of Realtors are the remaining defendants. Their attorney started the proceedings by declaring that the plaintiffs have the burden of proof, and the defense may not call a witness. It is that type of arrogance that got them into this mess!
A summary:
In their trial brief, the plaintiffs in the suit allege that NAR’s Participation Rule, which they refer to as the Mandatory Offer of Compensation Rule, is “a market-shaping and distorting rule” that stifles innovation and competition.
“The Rule requires every home seller to offer payment to the broker representing their adversary, the buyer, even though the buyer’s broker is retained by and owes a fiduciary obligation to the buyer (who may be told, falsely, that the services of the buyer broker are “free”),” the brief said.
They argue that the current practice of the seller’s agent splitting their commission with the buyer’s agent, who typically negotiates for a lower selling price for their client, works against the seller’s interest and only exists due to the alleged anticompetitive rules. The plaintiffs also note that the NAR rule in question requires a blanket offer of compensation for the buyer’s broker regardless of their experience or the level of service they provide the buyers with, and that the compensation offer was only visible to the buyer’s agent and not their clients, until very recently.
“This artificial and severed market structure created by Defendants’ conduct deters price-cutting competition and innovation, resulting in inflated commissions,” the brief states. “The Mandatory NAR Rules impede the ability of a free market to function in the residential real estate industry, and the plain purpose and/or effect of the Rules is to raise, inflate, or stabilize commission rates.”
In the brief, the plaintiffs claim that the other defendants in the suit colluded with NAR to enforce this and other NAR and MLS policies.
“The Corporate Defendants compel compliance in multiple ways, including by requiring their franchisees, subsidiaries, brokers, and agents become members of NAR; writing the NAR Rules into their own corporate documents; and requiring that their franchisees, subsidiaries, brokers, and agents become members of and participants in the Subject MLSs — entities that compel NAR membership and adopt the mandatory NAR Rules,” the brief reads.
The brief notes that Craig Schulman, the director of Berkeley Research Group and professor of economic data analytics at Texas A&M University, will be an expert witness for the plaintiffs at trial. In studying transaction data from NAR and other parties, the brief states the Schulman has concluded that “(a) the NAR Rules have anticompetitive effects; (b) the NAR Rules caused a seller to pay his adversary (buyer broker) and that, but for the conspiracy, a seller would not pay the buyer broker; and (c) all class members were impacted.”
The brief also notes that Schulman will testify that NAR’s rules have stabilized commission rates at an “anticompetitive level,” noting that commissions have remained at 6% for several years.
Unfortunately, none of the reality of what happens on the street will get introduced during the trial. Instead, it will be ivory-tower guys hoping to persuade the judge and jury (one of which has to breast-feed her infant every 1.5 hours) that the whole commission thing is out of control and someone is to blame.
But the defendants have a good point:
NAR also argued that the plaintiffs do not have the ability to sue for damages —which some believe could reach as much as $4 billion in this case — because under federal and Missouri antitrust law, only “direct purchasers” can be allowed to sue and the plaintiffs have not bought anything directly from NAR or the other defendants.
“And, according to those same Model Rules and listing agreements, Plaintiffs did not directly pay cooperating agents, NAR, or the other Defendants; sellers only directly pay their listing agents and only directly receive services from their own agents,” the brief states. “Therefore, at best, Plaintiffs might claim that they paid their listing agents (who are not parties to this case) who, only then, paid Defendants. But such an indirect claim is prohibited by Supreme Court case law.”
Home sellers pay the full commission to the listing brokerage. It is the listing agent who declares in the original listing agreement of how much of the full commission they are willing to pay the buyer’s agent. None of this will be discussed during this trial, but it’s the most important part!
The plaintiffs should be suing the individual listing agents – good luck with that!
In the end, the defendants might be found guilty, and they will appeal for years – the American way! Or it’s more likely that they will settle in the next couple of weeks because the ReMax and Anywhere settlements were only $55 million and $85 million, which is pennies.
Part of the settlement package will be that the MLS will no longer be obligated to display ANY commission to be paid to the buyer’s agent. It will cause two things to happen:
Kayla is faced with this dilemma in New York City. Did you know that 2/3’s of the population in Manhattan are renters? It’s a big business! But the listing agents don’t offer a tenant-agent commission, which means Kayla has to get paid by her tenants upon finding them new home to rent.
The results:
The idea that home buyers will hire and pay their own buyer-agents is a great idea…..in theory.
The reality is that buyers will go direct to the listing agents when they see an interesting new home for sale. Those listing agents will be advertising to those buyers directly, and flat-out encourage them to get a better deal by going through them.
The buyer-agent is a dead man walking.
Home flipping is all the rage, and it complicates the demand for old houses and fixers because there are more flippers than buyers pursuing them.
Agents get calls, texts, and emails every day from flippers begging to buy their listings. They offer to have the listing agent represent them on the purchase, and then be the listing agent when they sell it – boom, three commissions!
Long-time homeowners get inundated with mailers to sell their home for cash, with no commissions, no fees, no repairs, no banks, no nothing – and close any time.
Those who are the most susceptible are the out-of-town heirs who roll in with zestimate in hand and an urge to grab quick cash.
But how much do the flippers pay?
Our listing in downtown Carlsbad – a house built in 1958 and had not sold in nearly 50 years – was a perfect candidate. I started getting solicitations the day it hit the open market and they came by the open houses too. “Jim, Jim, come on you can represent me and we’ll buy it right now!”
We received six offers, and FOUR were from flippers.
The list price was $995,000, and their offers were $800,000, $800,000, $825,000, and $866,500.
Someone called the Carlsbad Police and reported a possible murder, and later a flipper called me and said they have access to the title records and an easement runs right through the middle of the house so nobody is going to buy it – except him.
Thankfully we had two offers over $1,000,000 from owner-occupiers that were more attractive, and we made the deal with one of them.
The worst part of selling to a flipper is that once they tie you up and get into escrow, then they really go to work on you. Even if you thought their price already reflected a proper discount for condition, they will want more concessions later.
But for those antsy homeowners who just want to rid themselves of a headache and get their hands on some fast cash, it is a viable alternative!
Get Good Help!
April felt busy though we had no new listings (the La Costa Valley listing hit on March 31st). Thankfully, there are more to come:
A great quote about higher-end listings from this free WSJ article:
Tomer Fridman, a luxury agent with Compass said the prices on some of the homes were exorbitant in the first place, so the reductions represent a long-overdue correction. “When you do a price adjustment at this level, that seller has to make it impactful,” he said. “You have to show you mean business.”
Once a home is for sale but not selling, how do you know what to do? Just dump on price? Lower in small increments and risk irritating buyers? Isn’t there a guide somewhere?
Both buyers and sellers can apply my List-Price-Accuracy Gauge:
Once on the open market, if you are……
It’s nothing personal, it’s just a simple guide to know how close you are to selling.
The serious buyers rush out the first week to take a look, but after that it’s crickets, with only an occasional visitor. It is tough for sellers to cope, or make adjustments. But once the initial urgency has expired, you have to do something – don’t just sit there.
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How quickly should sellers make adjustments? The DOM clock is ticking!
0-14 days on market – Hot property, sellers have max negotiating power.
15-30 days on market – Buyers get suspicious, want to pay under list.
30+ days on market – The jig is up, and buyers expect deep discounts.
After being unsold for two weeks, sellers will suspect that something is wrong. But it is natural to resist changing the price and instead blame everything else.
Sellers, and agents, need to shake that off and act quickly to keep the urgency higher. The first price reduction should be for at least 5% and happen in the first 15-30 days for maximum effectiveness. If the home doesn’t sell in the next two weeks, then another 5% is in order, and by then the fluff is eliminated.
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Where do sellers go wrong? They don’t properly price in the negatives.
Typically sellers just pick apart the comps to convince themselves why their home is the best around, and then settle on a list price that will show everyone who’s the boss. If you don’t have any negatives, then you probably will get your price! But typically sellers are forced to come to grips with the negatives of their house, and adjust accordingly.
Do sellers have to lower their price? No, not neccesarily.
There are other alternatives:
1. Make your house easier to show. Listing agents who insist on buyers jumping several hurdles just to see the home aren’t realistic about today’s market conditions. Make the home easy to see!
2. Fix the problems. New carpet and paint is the best thing you can do: 1) it looks clean, 2) it smells new, 3) you have to clean out your house to install it, and 4) you are managing a business transaction now – it is the logical solution. Utilize staging too.
3. Improve the Internet presence. Have at least a 12-25 hi-res photos and a simple youtube tour.
4. Wait for the market to catch up. If unsold for 60+ days, cancel and try again later – probably next year.
5. Reset the Days-on-Market stat. As long as the MLS allows agents to refresh their listings, then it’s in the best interest of the seller to reset the DOM. It is a gimmick, and instead sellers should concentrate on creating real value for buyers – that’s what will cause them to pay more.
The longer it takes to sell, the more discount the buyers will be expecting – usually about a 1% off for each week on the market. When other homes are flying off the market, the buyers’ obvious conclusion is that your price is wrong, and they load up the lowball offers.
Even if you complete one or all of the five ideas above, don’t be surprised if you need to lower the price too. Keep it attractive!
There will be one overwhelming factor in selling real estate this year:
They are coming into every situation with that mindset. Whether it’s online or in person, they will be looking for ANY reason to NOT buy this house. If they can’t find one, they will at least be doing the mental math on how much money they will have to pay to customize it to their tastes……and they will want someone else to pay for it.
It’s a 180-degree change from the frenzy era when buyers just wanted to win a house. Nothing mattered during the frenzy – bad floor plans, bad locations, bad improvements, bad agents, and bad prices didn’t stop buyers from paying insane amounts OVER the asking price. And what’s worse – those are now the comps!
Will sellers adjust?
Will listing agents adjust?
Here’s the first thought to go through their mind:
Let’s add a little extra to the list price to compensate. We can always come down later!
Oh, great.
How is it playing out so far? These are NSDCC sales from the last 30 days:
These are starter homes and mid-rangers for the area – not the high-end where it’s more challenging.
It will be easy for sellers to shrug it off, and mentally prepare to sell for 2% to 4% under their list price…..because they already added it on top! But 31% of the recent sales closed for a double-digit percentage below their list price.
Get Good Help!
Just a quick reminder of the constant grift in real estate.
Why does it matter? Because too many people – both buyers and sellers – are relying too much on these to be their accurate value estimators. People are moving too fast, they don’t want to spend much if any time investigating, and it’s too hard to get good help. Everyone just wants to grab and go!
The second set says they are based on recent home sales? How can it fluctuate 20% in one day? These revised real estate values aren’t a result of an algorithm; they are purely derived from the list price.
You are being manipulated by the Corporate Warlords – watch yourself!
I had another 80+ people attend my open house on Sunday, and a total of more than 200 people for the weekend. Virtually everyone who came was older, and the overwhelming message was that the buyer pool for one-story homes is large and they are hungry for product.
We have received one full-price cash offer so far, and there should be 2-3 more coming in today.
This smaller tract was built by Davidson in 1996, and sold in the $300,000s originally. Only 12 of the 82 homes are the one-story floor plan – which is typical (some newer tracts don’t have ANY one-story plans). Of the 82 homes, 57 of them, or 70% were purchased for less than $1,000,000.
I sure get the feeling that there are boomers occupying most of the newer tract homes in North San Diego County’s coastal region, and they aren’t going anywhere – unless they can buy a single-story home.
The most interesting part is that my listing will be the third sale of this floor plan in 2022, in a neighborhood where there hasn’t been a sale of this model since June, 2018. It could be another few years before the next one sells, because those who have a single-story home tend to hang onto them.
The doomers want to blame higher rates for the slowdown in sales, but unless we get a flood of one-story homes for sale, the inventory will probably keep shrinking – and be mostly made up of the two-story homes where boomers have gotten lucky and snagged one of the few single-story homes coming to market, or where they gave up and left town. It makes it tough on those buyers who are coming here to retire!
Are you waiting to buy a home until you can get a sizable discount?
Is it because you know a guy who will give you a deal on any home improvements needed; you’ve got your eye on some new appliances down at the scratch-and-dent outlet; and you were thinking about going through Redfin until you heard they are cancelling their rebates? You want a deal on everything!
Well, here you go!
These late-1990s tract homes in SE Carlsbad and in the Encinitas school district are priced LOW. The pending listing on Corte Clarita should close at $2,300,000+ because it had already gone pending once in mid-August but came back on market – then the agent refreshed the listing once he found a second buyer a couple of weeks later. He told me there was no big discount happening there:
You know that my listing is going to be closing for $2,250,000 nearby, plus this one should be over $2,300,000…..so these actives are 10% to 20% under. It looks like the market is crashing….is there a catch?
Look at their locations:
The first three are on the corner of Calle Acervo, and the fourth is next door, but hey, La Costa Canyon High School is walking distance! But you have the traffic from high-school drivers too, and you know it will be a madhouse during football games. A deal is a deal though, and you can save hundreds of thousands compared to the remodeled home with larger canyon lot (in purple at bottom).
Or save millions here! This house is listed for $32,500,000, or go down the street and buy this home that was newly priced today for only $4,900,000! Both are oceanfront La Jolla!
https://www.compass.com/app/listing/5650-dolphin-place-la-jolla-ca-92037/1136258851857198681
The difference? This house is 1,167sf on a 2,982sf lot….at least for now. But it’s 85% cheaper! And the more-expensive one RAISED their price from $25,000,000.
My point? The low comps won’t suck down the expectations of future sellers of superior homes – it’s too easy for them to ignore/explain away the low comps, and will only consider pricing theirs like the other superior sales nearby – which there will be some.
Oh, what about a foreclosure? Well, they are starting to spike:
Or are you going to wait until you can rub my sizable nose in it?
Hey, I wish prices were lower, and if they crashed it would only mean more opportunity for buyers, and hopefully more volume, which is what I want. I’m not trying to coax buyers into paying too much – I’m showing you where the deals are today, if you don’t mind an inferior home or location.
I just hoping that the coming standoff only lasts a couple of years, instead of 5-10.
Chris asked how the current environment compares to the 2008 downturn.
In the summer of 2008, there were only 601 NSDCC sales between June 1st and August 31st, in spite of there being 1,348 listings that summer. For the next two years, the number of listings far exceeded the number of sales, and in the 2008-2010 period there were twice as many listings as sales. The 2010 ratio was the worst at 2.3 to 1.
This summer we only had 825 listings, and 504 sales, which is a 1.6 to 1 ratio!
The 2022 sales were 16% lower than the previous record in 2008, but there were 39% fewer listings!
We’ve never had so few listings to consider. Now that the Fed is making it so obvious that they intend to cause a recession, more potential sellers – who tend to casually read the headlines only – will delay their decision to move. Does anybody HAVE to move in 2023? Every potential seller will give it a second or third thought if they believe it will cost them several hundreds of thousands of dollars.
The NSDCC inventory next year will be the lowest ever – even Ray Charles can see that coming.
Are you looking for an experienced agent to help you buy or sell a home?
Contact Jim the Realtor!
CA DRE #01527365, CA DRE #00873197
