Time for change
The real estate industry is long overdue for change as the traditional model for buying and selling homes has felt dated, inefficient and expensive for consumers. With the existing model, home listings are all funneled through a single conglomerate known as the Multiple Listing Service (MLS) where real estate brokers and agents facilitate most of the process, and therefore the power to set fees and access listings sits largely with them, rather than those directly involved in the transaction. We are starting to witness a shift in real estate transactions, aided by new options and tech that improves transparency and ultimately benefits consumers by giving them more control over the process.
As consumers become more familiar with new options and their advantages such as services from online discount brokerages and iBuyers, more will increasingly shift to these new companies who are more consumer-driven and tech forward. This migration will be similar to what we’ve already observed where digital and “customer-first” focus has disrupted industries, like how AirBnB is changing the hospitality sector and Uber and Lyft are changing the taxi industry to be more consumer-oriented.
Out with the old guard
The existing standard model for real estate transactions involves the seller paying a commission of around 6%, which is split 3% to the buyer’s agent and 3% to the seller’s agent. In this model, the buyer does not pay any commission directly, which means the seller takes a direct hit on profits. However, the commission indirectly impacts the buyer because the commission for both agents is essentially built-in to the price of the home, which ultimately costs the buyer more.
Listing properties onto a regional database known as the MLS is another mainstay of the existing real estate model. The National Association of Realtors (NAR) defines MLSs as “private databases that are created, maintained and paid for by real estate professionals to help their clients buy and sell property.” MLSs are controlled by local NAR associations who also set the guideline around the commission structure using a 1996 NAR rule referred to as the “Buyer Broker Commission Rule” and agents must abide by the “Buyer Broker Rule” in order to publish listings on local MLSs. This model, however, is currently under legal scrutiny by the government and being challenged by forward-thinking consumers and companies alike.
Prominent Lawsuits Take Aim at Commission Structures
A major class-action lawsuit against The National Association of Realtors (NAR) and four large real estate brokerages (Realogy, HomeServices of America, RE/MAX and Keller Williams) could significantly change the real estate industry by potentially ending the current use of MLS and commission splits.
The suit alleges that the defendants have conspired to require home sellers to pay the fee for the buyer’s broker “that would be borne by the buyer in a competitive market,” as the docket uploaded by Courthouse News Service states. By “making the market” at 3%, NAR and major brokerages have effectively eliminated competition.
The suit also alleges sellers pay an inflated amount in commissions because the nature of having the seller set the buyer’s broker’s fee means that brokers representing buyers will first try to show homes that have higher fees. Instead, if buyers paid their own brokers’ fees, their brokers would compete on cost to gain clients, which could lower fees.
A second, nearly identical lawsuit has also cropped up recently, as HousingWire reports, and these cases appear to have serious weight behind them.
If the plaintiffs win, traditional commission structures and the use of MLSs could fall apart. Just the public attention from the cases alone should cause consumers to realize the inflexibilities of the current model, which was born before the internet when brokers had to physically congregate at the offices of their local associations to share information about properties for sale. Real estate is close to a tipping point where a majority of homeowners may soon choose alternatives ranging from flat-fee brokers to the use of discount agents that offer more streamlined services online.
Technology Is Making MLS and Traditional Commission Structures Less Relevant
In addition to court cases applying legal pressure on the use of MLSs and pre-defined commission structures, technology is also changing the industry by providing consumers with more options for buying and selling homes. In 2018, real estate technology received an estimated $14 billion in investments, according to Moderne Ventures, as reported in Crain’s Chicago Business. In comparison, the sector only recorded $2 billion in investment in 2016.
Examples of real estate technology run the gamut from information-driven services to companies that facilitate financing. For example, websites like Zillow and Trulia have risen to prominence by providing real estate listings and first-party data in areas such as home prices, making it easier for individuals to conduct more of the real estate transaction process on their own.
Zillow has also expanded into the category of iBuyers which are companies that offer to buy your home for cash instantly and eliminates the need to go through the typical lengthy process of having showings and finding a qualified buyer. These instant offers may not get sellers the highest offers for their homes but they do make the home selling process significantly more efficient.
Other advances in real estate technology include companies like Perch, which help solve the problem of trying to buy a new home before you sell your current one. Perch does so by offering a guaranteed sales price on a consumer’s current home while backing their purchase of a new one without contingencies. Companies like Perch and Offerpad have created a new “trade-in” category within real estate by capitalizing on the power of “big data” of past home sales.
Another company leveraging big data and machine learning is So Cal real estate startup Sold.com (a HomeBay partner) that deploys machine learning to match sellers with the best method for selling their home—ranging from the use of a traditional agent to flat-fee platforms—based on the seller’s unique circumstances.
There are also a growing number of agents and brokerages offering full and limited services at a fixed fee. Flat fees tend be more representative of the work that goes into selling a home and often delivers significant savings to sellers. For example, selling a $1 million dollar home isn’t necessarily twice as hard as selling a $500,000 home, but with a percentage-based commission service, the seller with the $1 million dollar home will pay twice as much in commission. A flat fee model, however, keeps costs down even when home prices rise, allowing sellers to keep more profit.
Digital brokerages like Home Bay also combine the use of technology with the flat-fee model. Online tools make interactions between agents and clients more efficient, which saves time for both consumers and for Home Bay, which ultimately translates to lower fees for clients. For example, scheduling home showings that typically involves no less than three parties (owner, potential buyer, buyer’s agent) and a lot of emails, texts and calls can simply be done online at Homebay.com, where the buyer & agent see available time options, requests times and seller confirms with just a few clicks.
The Future for the New Guard Is Wide Open
While real estate technology offers significant potential to shift the market towards lower fees and evolve it into more consumer-focused industry, this transition is still very nascent. Even Redfin, a digital brokerage considered to be an industry giant in real estate technology, had less than 1% market share of homes sold in the US in 2018. And Redfin is still, beyond online tools and discounted fees, largely a real estate company that operates very “traditionally”.
Traditional transactions continue to be prevalent while consumers learn about and slowly test into new home selling options. And though the market could find new ways to evolve, the current majority of traditional agents could still survive through adaptation by adopting lower fees and more technology to remain relevant and hang on to market share. The pending class-action lawsuit against NAR and prominent real estate brokerage could, in fact, speed up the pace of their adaptation, which would still be a win for consumers.
Similar to many other industries that have recently experienced seismic shifts, the real estate market needs to change for the benefit of consumers. The days of monopolizing listings and commissions will soon sunset and companies that offer more transparency, efficiency and reasonable fees will ultimately win consumers’ trust and their business.
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