20 Apr Impact of Wars on Real Estate Markets

Impact of Wars on Real Estate Markets

They say Real Estate is the most primitive industry yet this new Settlement is only taking us further by repeating poor environments of the past.

What is going on everyone!  Are you ready to put on your Baby Tees, Bike Shorts and Bucket Hats? Because that is where this recent settlement is taking us and I will explain better further on. 

Real quick, thank you so much for tuning in again to our second trending blog!  Don’t forget to check out our first blog on War & Real Estate to prepare yourself for WWIII 

Anyways, let’s get started with the reason you clicked on this article, which was due to all the trending and Clickbait headlines that have been reproduced by starving media companies who are desperate for any form of views and clicks as their industry dramatically declines. 

Let’s dive into the buzz around the NAR antitrust settlement.

The Billion Dollar Antitrust Allegations: A Closer Look

So, in October 2023, out in Missouri, a jury decided that NAR, alongside giants like Keller Williams and HomeServices of America, did something they’ve been doing forever—requiring listing brokers to offer compensation to buyers’ brokers. But this time, they got slapped with a lawsuit claiming this practice was anti-competitive and actually lowered the quality of real estate services.

Now, these allegations led to a hefty penalty of $1.78 billion in damages. That’s billion with a ‘B’, folks! It sounds pretty grim, right? But here’s where it gets interesting. On March 15, 2024, NAR proposed a settlement of $418 million over four years to put an end to this saga. They’re not admitting any wrongdoing, mind you. They maintain that commissions were always up for negotiation and that if the market demands a shift, they’re ready to adapt.

NAR is aiming to start rolling with these changes way before the official approval, which isn’t expected until December 2024 but they believe staying proactive rather than reactive is the best way to tackle the issue head-on without causing any interference in the industry.

So if Shark Tank’s Mark Cuban & Renowned Speaker Brian Tracy can be cited as saying to “Never Settle” .. why did the National Association of Realtors feel this was the best move on the Chess Board? [image]

Settlement Dynamics: Analyzing the Decision to Settle

Now, it might seem like settling is waving a white flag, but hold up—it’s not what it looks like. Settling is a common move in the legal playbook. Did you know that about 95% of civil cases end in settlements at some stage? It’s a strategic choice, not an admission of guilt.

One of the most known examples for this is the $3M Coffee case from McDonalds. What started as a request for $20,000 quickly turned into $2.9M; which is why McDonald’s quickly settled for $600,000 to avoid a long battle over a controversial yet non-unanimous case.

This lawsuit making headlines is only  based in Missouri, but the settlement offers National release of Liability, for Realtors across the entire country. This nationwide proposal is to ensure similar cases do not rise in other states causing more financial harm to other Realtors in the country.

Aside from coming to a settlement agreement, the NAR only had two other options to consider when moving forward:

Option 2) Appeal the Ruling: this option was not an easy one to consider since the estimate for winning the case came back at $5.6 Billion dollars. Pocket change for some, but not something the NAR could calculate as intelligent given their profit is under $30M per year which would take 200 years to equal the proposed legal costs. 

An appeal would also allow 48 other states to begin suing local associations over the same subject, referred to publicly as “Copycat Cases” and lead to much more than the $5B they were already looking to avoid. 

Lastly, an appeal would also force NAR to raise the dues of its over a million members, at a moment when many have seen their sales plummet dramatically. 

Option 3) Bankruptcy: this would allow the NAR to freeze assets and credit or debt taken on in order to appeal the case, but obviously this would be foreseen as a non-honorable practice going against the ethics and values that Realtors stand for.

Choosing to settle now was about cutting losses, staying nimble, and protecting members from even heftier financial hits.

 It’s a move that says, “We’re here to fix things, not fight over them.”

Now, let’s talk about who’s really feeling the heat from this settlement.

Will REALTORS® be hit the hardest?

First up, our veterans, the folks who’ve given their all for us—they’re getting a raw deal here. Under the new settlement terms, V.A. Loans won’t cover commissions. That’s right, over 21 million veterans could find themselves without the needed support when buying a home. That’s why NAR’s President didn’t waste a minute before sending a formal plea to the Department of Veterans Affairs, looking out for those who’ve looked out for us.

Then there are the consumers. Yep, regular folks like you and your neighbor, who might now need to navigate through some extra paperwork even just to peek at properties. It’s a new story, that is far less romantic, where everyone needs to understand all potential costs upfront; making first dates/tours pretty awkward now. This level of transparency might be daunting for some, but it ensures no one steps into a deal without seeing the full picture.

And what about our REALTORS®? They’re in for some big changes. They can’t just say “working with me is free” anymore, which seemed to be a catchphrase in the industry. They need to be upfront about getting paid and adjust to a whole new set of sales contracts and disclosures. Plus, if they can’t prove their value, they might just walk away with nothing. That’s a tough pill to swallow for professionals used to a certain way of doing things.

Lastly, let’s not forget the 500 Missouri home sellers who kicked off this lawsuit. After the attorneys collect their fees, these folks are looking at a whopping payout of $13.00 USD each. 

Who’s not feeling the sting at all? Commercial brokers and leasing agents will be conducting business as usual.

Clearing Up the Settlement Confusion

Alright, team, let’s set the record straight on some of the biggest myths swirling around this settlement. 

Realtors Engage in Price-Fixing – MYTH! Folks, there’s never been a secret cabal of Realtors scheming to set prices. Real price fixing requires routine arrangements where information not public to the industry is shared, such as the occurrence with The Great Electrical Equipment Conspiracy in 1961.

The compensation paid by a listing broker to a cooperating broker in respect to any listing is established by the listing broker and is not fixed, controlled, recommended, or maintained by any persons other than the listing broker’s observation of what that local market requires.

The Lawsuit Targeted All Realtors – MYTH! This lawsuit came out of Missouri, aiming to address specific policies, not to put a target on the back of every Realtor in the country. The settlement actually provides nationwide protection to prevent this from turning into an endless cycle of legal battles.

Sellers Always Paid for Buyer’s Real Estate Agent – MYTH! Almost never did a seller directly pay a buyer’s agent before this whole thing. That’s like saying you pay the salesperson out of your own pocket when you buy a car—it just doesn’t work that way.

Realtors Always Charge 6% Commission – MYTH! There’s no set rate in real estate. Just like any service, Discount Companies, like the online brokerage Redfin who are not REALTORS® and avoid fees involved with association, have always been around. The reason you do not see Agents competing with these companies is because very often the companies, like Redfin, are solely running on extreme amounts of debt since their business model is not profitable even when receiving $1 Billion Dollars in Revenue. 

Also rarely considered is the fact that the average Redfin Agent takes on three times as much business as the traditional agent with the same amount of hours available to work, if not less since they are salaried. Basically the trade off of a 50% discount in commission is 67% less attention from a lesser paid agent, the results speak for themselves. 

If a company receiving $1 Billion in revenue cannot find a way to be profitable and still has to layoff over 10% of its employees after a Real Estate boom, it is unrealistic to expect your local one person Realtor, who does not have access to streams of credit,  will be able to make a living copying the same structure. 

Real Estate Commissions Were Never Negotiable Before 2024 – MYTH! Don’t let anyone fool you; negotiating commission has always been an option. Even President Biden got it twisted in a speech [in Las Vegas, 5:23], but hey, everyone makes mistakes, right?

Pricing Houses Will Now Drop – MYTH! Everyone looking to sell isn’t suddenly going to drop their prices just because of this settlement. If anything, sellers are going to be more motivated to maximize their return, especially if they feel they’re getting less service.

Agents Representing Buyers Push for Higher Prices – MYTH! It’s a common myth, but when you look at the numbers, the game just doesn’t add up. An agent building their business on referrals isn’t looking to milk every sale dry. They’re in it for the long haul, aiming to get the best deal for their clients to ensure happy customers and more referrals. 

I know this must sound cliche at best if not biased so let’s break down the math and reality behind why it doesn’t make sense for an agent to push for a higher price just to bump up their commission.

Typically, a real estate agent might earn around 3% on the transaction. So, if they’re dealing with a $650,000 home, their commission would be $19,500. Now, if an agent were to push that sale price up by an extra $50,000, the new sale price would be $700,000. At the same 3% commission rate, the agent’s take would now be $21,000.

The difference made by pushing the price up? That’s $21,000 minus $19,500, which equals $1,500. 

That’s all they stand to gain from a $50,000 price bump. Now, let’s put that $1,500 into perspective. It might sound nice, but it’s only 7.7% of their original commission ($1,500 out of $19,500). For an easier visual, that’s like adding an offensively small tip on top of a large bill.

But here’s the perspective people don’t see when they have never worked in sales: the real cost of pushing for that higher price might be a lost future client. If the buyer finds out later they overpaid or feels the push during the buying process, they’re not going to refer this agent to friends or family. Worse yet, they might leave a bad review.

If an agent loses even one referral, that’s a potential $19,500 or more, gone. And in real estate, one happy client can lead to several transactions over the years. The potential lifetime value of a client, and their network, can exceed hundreds of thousands of dollars in commissions over an agent’s career.

So, does it make sense to risk long-term relationships and potential future earnings for a quick $1,500? Not really. Smart Buyer agents know that the real money is in trust, repeat business, and referrals, not squeezing every last dollar out of a single deal.

Which makes you wonder, how did Real Estate work before Buyer Agents existed? 

Flashback to the 90s: The Dawn of Buyer Representation

It was during this era that buyer representation really took root, and here’s how it all went down, and why it’s still super relevant today. 

Back in the day, real estate was mostly a one-sided game. Agents represented sellers and, well, buyers were kinda left to fend for themselves. This setup often led buyers to feel like they were second fiddle, with their interests taking a back seat to the seller’s. Imagine walking into a deal, and the person helping you is also helping the other side. Sounds a bit off, right? [developer image]

Enter the concept of buyer representation. This was a game-changer. For the first time, buyers had someone in their corner, someone to fight for their interests and ensure they weren’t getting the short end of the stick. It was about leveling the playing field, making sure everyone had a fair shot.

Fast Forward to the past few years, and it feels as if there is interest from consumers [and a few opportunistic attorneys] to remove the representation that has been working against them for the past 30 years. 

It was alleged in 2020, that since buyers’ agents could filter MLS listings by the amount of commission offered, that the feature enabled licensees to engage in unlawful activities such as selectively providing buyers with listings offering higher commissions, while steering them away from properties offering lower compensation. This caused for the Filter for Compensation to be removed immediately by Realtor boards across the country. 

In 2021, hundreds of multiple listing services (MLSs) were required by the National

Association of Realtors (NAR) to allow MLS participants to publish the compensation offered to

buyer agents on all home listings (source: CFA). This permission gave both participating brokerages and portals, such as Zillow and Realtor.com, the opportunity to publish commissions offered by listing brokers to buyer brokers.

Why was this information made public? 

Some critics thought that, if information about commissions were available to home buyers, buyer agents would be more cautious about letting the size of their compensation affect their recommendations to buyers.

Now in 2024 we are being asked to remove it from all sites all over again. It is a bit of a back and forth but we will assume they are going through trial and error to figure out what exactly defines a win for homeowners besides the $13 earned during this settlement. 

How the Settlement Reshapes Business for Residential Realtors

Many Brokers may limit representation & liability in order to offer lower rates.

Qualified Brokers will be unable to engage in any activity without a signed form accepting terms of payment. 

Many Brokers will be forced to ask Buyer’s to accept Homes where commission is offered or accept an additional fee that must be met in order to compensate for representation. 

Even though Compensation on the MLS is banned, we can foresee that when compensation is offered it will be advertised on other marketing platforms.

Realtors will likely begin using Property Websites to offer Compensation

Phone calls will likely begin with Compensation Conversation

Offers will begin to be written with compensation on top of the offer price  (source: Brandon Mulrenin), a practice already seen in the Off Market Residential Investment space as well as Commercial Sector.

Seller’s will begin to advertise Closing Costs they are willing to pay for the buyer, which may be used to cover commission for Buyer’s Representative. The FHA has already made a public statement that the compensation of commissions by the seller will not limit the amount of credit a Buyer can obtain during their purchase. 

Seller Representative’s will begin to exclude commission for Buyer’s agent upfront and it becomes a variable with every single incoming offer. (source: Brandon Mulrenin)

In Conclusion 

Most of the changes seen above will be a slow progression seen over time and not completely adopted starting the moment we are mandated by the new settlement guidelines. We believe consumers looking to save money will continue to explore avenues where savings begin to increase risk. This will allow a few startups will jump into this new opportunity and attempt to shock the industry as past businesses have before. As far as consumers in the higher end or unaffordable market, we believe wherever the mistakes can cost you more than the profit, it will always make sense to outsource.