The economics of the US residential real estate industry are in flux amid a flurry of legal action. The most prominent proceedings include class action lawsuits contesting how broker commissions are determined and disclosed, a $418 million settlement of claims that agents have fixed rates in a way that prevents buyers from negotiating them, and an ongoing US Justice Department probe of the National Association of Realtors, the industry’s most influential trade group.
To gauge how the industry is adjusting to the turmoil amid a housing market constrained by high interest rates, Double Take welcomed Adam Contos, who recently retired as CEO of RE/MAX Holdings, a nationwide real estate brokerage.
In Contos’ opinion, the root of the issue stems from a standard practice in the industry, particularly by agents who belong to the powerful National Association of Realtors. These agent agreements essentially force sellers to pay a fixed fee to a buyer’s agent.
While the real estate industry has been historically resistant to change, Contos believes these recent developments may force agents to alter how they do business. However, he predicted they would not eliminate the need for buyers’ agents.
Buyers can transact without their own agents at this point. Nobody is holding a gun to your head saying, ‘You have to have an agent in order to buy a house.’ However, it really helps, because you have access to the contracts, you have somebody negotiating on your behalf … It comes down to when somebody buys a residence for themselves, they are buying a place for their happiness, they are buying a place to live to raise their family, spend their spare time, things like that, and people are emotionally connected to that. But you need somebody who can look out for your fiduciary welfare, which is why a buyer’s agent is ultimately the best.
Adam Contos, former CEO, RE/MAX Holdings
According to Contos, the current quagmire stems from an evolution of industry practice. Sellers’ agents would bring buyers to the table and be compensated by the brokerage that owns the listing if a deal is reached. Originally, buyers themselves rarely had their own agent. But throughout the 1990s and early 2000s, buyers’ agents were gradually established, mostly through litigation.
A system emerged in which buyers did not have a contract or agreement with the agent representing them, because that agent was compensated not by them, but by the seller’s broker. Buyers, the argument goes, ended up with little say in determining what fee they had to pay to their agents.
Contos believes that it is likely that buyers may now look to pocket the funds that traditionally went to their agents. Buyer’s agent fees typically range from 2.5 to 2.8%.
I think there is going to be some change when it comes to that, but ultimately, there is also going to be some negotiation that is built into this on behalf of the buyer who says, ‘Hey, wait a second, if I am responsible for your commission now, and I might get some sort of credit from the seller on this, the listing broker on this, should I keep some of that?’ … 2.5 to 2.8% is what that buyer’s agent is making right now. And I am sure the buyers, some of them would like to put some of that in their pocket. So it is going to be a little bit of a conversation at that point … I think you are going to see the better agents out there who are more able to justify the value that they bring to the buyer are probably going to earn whatever that conversation entails … Will there be pressure downward? Yes. And it is going to be ‘show me the value’ type pressure. (Buyers will say), ‘I am willing to pay you for what you have earned, but you need to justify that to me,’ and they are going to need to put it in writing. … I think the brokerage itself is going to have to figure out a new way to justify its value also and monetize that either through some sort of additional service or other ancillary business model.
Adam Contos
From Contos’ perspective, these changes will lead to fewer buyers’ agents who simply dabble in the market, and thus struggle to justify their fee to the buyer.
The industry is truly run by about 10% of the agents. About 10% of the agents do probably 90% of the business … ultimately, look for really, really good agents. I think those businesses are going to thrive because people are going to be picking those agents to do the business for them because they are better at it … we have all met those people. We are all related to one or two folks that are part-time real estate agents. I think that is where we are going to see the industry change, we are going to see that side, that bottom 90% starting to filter out.
Adam Contos
Contos believes online portals used to access listings could improve their arrangements with agents, who pay premiums to the portals for lead generation.
These agents pay a ton of money. A lot of times, it is like 30 or 40% of the commission that that agent is going to get goes back to the portal to pay for this lead or this referral. So because they are cultivating this into an actual buyer or seller, they can charge a lot more than just selling a lead off the internet. So ultimately what you are going to see is they are going to do a better job of securing their agreement with the agent.
Adam Contos
To hear more, subscribe to “Double Take” on your podcast app of choice or view the Realtors’ Reality episode page to listen in your browser.
Authors
Jack Encarnacao
Research analyst, investigative, Specialist Research team
Raphael J. Lewis
Head of specialist research
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