Real Estate Brokers in Crisis

Good news for you - legal rulings may reduce expenses tied to buying a home

Ric Edelman: It's Monday, April 15th. On today's show, real estate brokers are in crisis, and that's great news for you. Look, I don't mean to be mean to real estate agents, but the fact is that people buying and selling homes in the US pay the highest commissions in the world. And finally, this just might be coming to an end. 

The National Association of Realtors lost a class action lawsuit last year. I'm sure you heard about it. They got hit with an incredible $1.8 billion verdict, with the jury saying that the industry kept commissions artificially high. And the real estate agent's problem isn't over yet. There are dozens more lawsuits all across the country still pending, and dozens of real estate brokerage firms are defendants, not just the NAR. 

You know the drill. When you buy a house, you pay nothing. Your friendly neighborhood real estate agent tells you that. The commission is paid by the seller, they say. So you as the buyer, you don't care what the commission is. That's a huge mistake, of course, because the seller is just going to increase the price they demand for the house so they can cover the commission that they have to pay their agents. 

And then when you become the seller, because eventually every buyer eventually becomes the seller, you go back to that friendly neighborhood real estate agent, and now they tell you that you, the seller, have to pay the commission. And it's 6%, thank you very much. And if you balk at that high rate, then two things are going to happen.  

First, you're not going to get your house listed in the MLS, the Multiple Listing Service. That's the system that all real estate agents use to list houses for sale. And that's what all real estate agents use when they're looking for houses that their buyers might want to buy. If your house is not in the MLS, you're going to have a much harder time selling your house. It'll take longer. You'll probably get a lower price. That's the first problem.  

The second problem is that the buyer's real estate agent is going to be asking the selling agent how much their commission is going to be. And if they're told that the commission is going to be 4%, then that buyer agent is going to steer their buyer to another house where the commission is 6%, not just 4%. You won't have anybody show up at your open house. Again, it'll take longer for you to sell, and you'll end up selling for a lower price.  

So for decades, home sellers have been forced to agree to pay 6% in commissions. Pretty much every real estate agent in the country has engaged in this anti-competitive collusion. It's virtually a cartel. I've been complaining about this for decades on my prior radio show, and I was successful back in the 90s at stopping the largest real estate brokerage firm in the Washington DC area from increasing its commissions from 6% to 7%. I basically embarrassed the hell out of them on my show, and that forced them to rescind their price increase. But all that did was keep the 6% commission structure where it was.  

So now, finally, we've got this $1.8 billion jury verdict, the head of the National Association of Realtors is out, and home purchases are going to become a little more affordable. Oh, and by the way, that 6% commission is really bogus. It's actually much higher than that, all because of the way they play the game. You see it's an unusual situation that real estate agents have created in the purchase and sale environment of homes. It doesn't work like it does in any other business. 

You know, if you go to buy a car, you know that the car salesman is earning a commission. If you buy stocks, you know that the broker is earning commissions when you buy stocks. When you buy jewelry, you know that that sales rep is earning a commission when you buy that necklace or that watch or that bracelet. 

That's the way it works pretty much everywhere. If you buy a piece of artwork, you know that they're earning a commission when they sell you that art. But later, if you buy a car today and later you sell the car, you're not paying a commission when you sell the car.  

But in the real estate world, it's different. In the real estate world, say you buy a house for a million dollars. You don't pay any commission. Later, you pay the commission when you sell the house. But think about it. Even though they tell you you're going to pay a 6% commission, do the actual arithmetic. If you buy a house for, say, a million dollars, you pay no commission. Later, when you sell that house, let's say the house has doubled in value because you've lived in it for 20 years, and now you pay a 6% commission, you're paying a 6% commission not on the price you paid for the house 20 years ago, but the price that you're selling the house for today. 

So you're not paying 6% on a million, you're paying 6% on two million, which means the commission is not 6% of $1,000,000... or $60,000... the commission is $120,000. In other words, you're not paying a 6% commission, you're paying a 12% commission based on your purchase price of 20 years ago. Nowhere else does this game get played in this way.  

Well, all this nonsense is going to be gone thanks to these landmark lawsuits. The game is going to be over. For real estate agents, a lot of them are going to leave the business, and good riddance to them. The median income of real estate agents is about $56,000. Now, if you consider that the average house that is sold in this country is $412,000... that means the average commission is $12,000. In other words, the average real estate agent only sells about four houses a year, one every three months. Are you seriously trying to tell me that the majority of real estate agents are actually full time, dedicated professionals? Hell no. A lot of them are just part time housewives selling houses for their girlfriends when they're moving out of next door. I know, that sounds horribly sexist, but it's not. Two thirds of all real estate agents are women, and if the average is only selling four houses a year, then they are part time practitioners. Would you hire a part time doctor? A part time lawyer? A part time financial advisor? Why would anybody want to hire a part time real estate agent? If you're a part timer, the only people willing to list their house with you are your friends and family. Nobody else would be dumb enough to do that.  

And let me just tell you how silly this role really is. The National Association of Realtors has 1.6 million members. But there are only 1.4 million houses for sale in the entire country right now. And with two agents per house, one for the seller, one for the buyer, that's 2.8 million sales that occurs. That works out to just less than two transactions per agent per year. No wonder so many of them are part time. And with the commissions getting cut from 6% to 4%, that's a 35% cut in income. Meaning the median pay for real estate agents is gonna fall from $56,000 a year to just $36,000 a year. 

A million agents are going to quit and good riddance to them. The agents who are left, they're going to be the ones who are true professionals, talented, experienced real estate experts who can truly help you find the house of your dreams within your budget when you're buying them and getting you the maximum price when you're selling them. This is what you want it to be like, right? But is it all going to really work out to this degree as much as everybody's hoping? There are massive changes coming. If you ever plan to buy or sell a house, you need to think about this.  

Let's say you want to buy a house. Going forward, your real estate agent is going to tell you that you have to pay them for their services. The seller won't be doing that anymore. With the median price of $412,000... that means you have to come up with $8,250. That's assuming a 2% commission. And you won't be able to finance it. No mortgage lender will finance the cost of the commission. They only finance the value of the house. And this is on top of the $20,000 you need for a down payment. Even if the down payment is just 5%, add in all the other typical closing costs and moving expenses, we've just increased your cash upfront requirements by a huge number, over eight grand. And first-time homebuyers are having enough trouble as it is to afford a house. As the buyer, you're gonna need to convince the seller that they need to reduce the price of their house by the amount of the commission they're no longer having to pay. How well do you think that conversation's gonna go?  

But this creates an opportunity for smart sellers. If you're the seller, you could offer to reimburse the buyer for the commission they have to pay. This could attract buyers who don't have a lot of cash. And besides, you, as the seller, are just going to raise the price of the house to cover the cost anyway, same as you've always done. You might even be able to pad it a little to increase your profit on the sale. The buyer won't know you did it. Again, same as always. In other words, in the long term, we just might not see all that much of a change in the way the real estate game is played. Although it might affect the number of people who are playing it. 

On tomorrow's show, new solutions for people with skin diseases. 

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