It’s been a busy few weeks in the world of real estate. Buyers are calling to ask when interest rates are rising, so they know how to time the trigger on a prospective loan. Sellers are calling to ask ask when to put their property on the market. I’m calling my favorite fortune teller to make an appointment to read her crystal ball so I can come up with the answers.
We’re all busy.
One of the items that has been at the forefront of our minds is the lawsuit involving the National Association of Realtors (NAR). There’s been a lot of misinformation distributed in the news, probably because it’s a very technical issue that only listing agents can really understand.
Let me break this down in a way you will understand so you can come to your own conclusions on the ramifications. Commissions between the seller and their agent will be negotiated between them. The commissions between the buyer and their agent will be negotiated between them, separately from the seller and the seller’s agent.
Agents that represent sellers are the rockstars of our business because we always get paid. Buyer’s agents could be one of 15 agents submitting an offer, cutting down their odds. When a listing agent signs the listing agreement with the seller, they negotiate the gross commission (buyer and seller) due from the seller and then decide what portion will remain with the listing broker and what portion is assigned to the buyer’s broker. The buyer’s agent plays no role in those discussions but is obligated to accept the decision. That obligation stems from a clause in the agreement that allows the buyer’s agent access to the MLS. Access to the MLS is crucial to our business in that we can’t function without it. The NAR has locked us all into this format of negotiation that locks the buyer’s agent’s commission without any input from the buyer’s agent.
On the face of it, this isn’t fair to the buyer’s agent. But NAR took a very self-righteous attitude and found out the hard way it had no standing. It has cost the organization $481M plus a restructuring of the entire commission process. When I sign a listing agreement with my seller, only my commission will be negotiated. Any agent bringing in a buyer should already have negotiated their commission between themselves.
“The $418 million agreement will make it easier for home buyers to negotiate fees with their own agents and could lead more buyers to forgo using agents altogether, which has the potential to drive down commission rates and force hundreds of thousands of agents out of the industry.” —- WSJ March 16th
Now that you understand the basics, allow me to summarize the predicted effect it will have in the real estate market.
- Reduced commission payables will permit sellers to be more negotiable on the price, resulting in reduced prices.
- Reduced commission payables will allow listing agents to push their commissions up to 3% from the standard 2.5%, as a benefit to listing agents.
- Buyer’s agents will find their negotiations to be much tougher, and buyers will be able to play multiple agents off against each other, refuse to sign any exclusive agreement, and place the buyer’s agent in weak positions This all stems from the new realization that they’re paying for the agent’s commission.
- Overall, the total commissions paid out will be lower, prices will be reduced and units being sold will be increased.
These dynamic changes in the commission negotiation process will be huge in our industry. More agents will fight to be listing agents, more agents will leave the business, and the broker’s margins will continue to shrink. COMP and HOUS may not be the best place for your investment dollars.
You’re going to see a lot of new players, and from the inside, I’m going to see a lot of chaos in the real estate business. I’ll bet it will take three or four years before this dust settles.
How about a lighter topic? I’ve got one.
A month ago, a client of mine asked me to do some analysis on junior and full penthouses on the west side of town. He was deciding whether to make the decision to purchase a penthouse on the Wilshire Corridor that is off-market. So, I pulled down the data.
Did you know …
- 30 units were reported sold in Westwood and Century with a minimum square footage of 4,000 SqFt.
- The average size was 5,135 SqFt.
- The average listing price was $11,192,690.
- The average selling price was $9,686,719.
- This represents a 13% reduction, on average, in the listing price to the final selling price, as opposed to a general average of 4.5% to 5% on the general market.
- The average HOA monthly dues are $5,088.26.
- The smallest unit was Unit 11N in the Beverly West.
- The largest unit was Unit PH40 in The Century, listed at $35M and closed for $21.6M.
All I can think about is the combination of the HOA dues and the 1.2% property taxes.
Real estate keeps moving along. When certain changes take place in their lives, people find themselves as a seller or a buyer today when they weren’t yesterday:
- They’re moving for work.
- They’re going to have a baby.
- They’re going to get divorced.
- They are going to inherit substantial money.
- They’re getting married and combining two households.
We are going to see three rate reductions this year, if I read the Federal Reserve tea leaves correctly. Today’s Fed meeting confirmed that.
If you’re even beginning to think about buying or selling, call me. We need to strategize, discuss timing, and talk about goals. These are huge numbers in this part of the country, so it commands a lot of thought and preparation.
Stay positive and test negative.
