Just when real estate agents thought the worst was behind them, the Department of Justice (DOJ) is considering further changes to their commission structures.
A groundbreaking $418 million legal agreement, negotiated in March after a DOJ lawsuit, goes into effect on Aug. 17. As part of the settlement, it will now be easier for homebuyers to negotiate fees with agents instead of being hitched to the traditional 5% to 6% commission structure—among the highest in the world.
The result could be buyers deciding to forgo agents entirely, driving down commissions and forcing intermediaries out of the industry. After much speculation, the government is deciding whether the March agreement goes far enough, and if they should push for a further change to the costs associated with buying and selling a home.
According to the Wall Street Journal, the DOJ has been involved in two industry lawsuits. It also sent a formal letter to the California Association of Realtors inquiring about legal forms agents use during home sales and asking real estate companies about their listing protocols.
The DOJ Wants to Cut Out Workarounds
The DOJ is particularly concerned about workarounds agents might employ to circumvent the March settlement, which receives its final approval from a federal judge in November. The intervening months will allow the DOJ to reconsider whether the settlement goes far enough in reducing commissions.
Under the current settlement, analysts predict that changes could lead to a 30% reduction in the $100 billion that Americans pay in real estate commissions every year—with the buyer’s agent’s 2.5% to 3% being reduced.
Consumer advocates fear that influential buyer’s agents might steer their clients to properties where they are receiving a commission and away from homes where they are not or warn sellers that their listings might not receive the same traffic from buyers if their agents are not compensated. Also, while there might not be a formal agreement to compensate buyer agents, other types of compensation tactics could be used.
“NAR—and I personally—oppose any attempts to circumvent the settlement,” National Association of Realtors president Kevin Sears said in a letter to members. “We expect the DOJ to continue making inquiries into industry practices.”
On the other hand, the Consumer Federation had contacted the DOJ about an early draft of proposed changes to the California Realtor Association forms that they felt warranted concern.
“I am not optimistic that the state associations are going to come out with any form that is fair to consumers,” Stephen Brobeck, a senior fellow at the Consumer Federation of America, told the Wall Street Journal.
As a sign of what could portend nationwide, the DOJ opposed a different settlement in a lawsuit against a Massachusetts MLS, stating that it didn’t go as far as the government agency would have liked.
Tipping the Scales
The DOJ has a long history of investigating and intervening in the residential real estate business, with lawsuits brought under both Democratic and Republican governments. The final decision is up to the judge, but it’s thought that the DOJ’s opinion could tilt the scales.
“It sort of changes the perspective of the judge’s ruling on the settlement agreements that have been reached in the case,” Chuck Cain, senior vice president of the national agency division at FNF Family of Companies and a real estate attorney, told HousingWire in April. “Prior to the Court of Appeals decision, he may have just accepted everything, but now, with the DOJ in the mix, he may decide to delay approval to wait and see what happens with the DOJ.”
“The one thing I think it [the DOJ] may object to is the amount of the civil remedy,” Cain added. “They may want the actual amount to be higher [than the currently proposed $418 million] to send a message.”
What Is the DOJ’s Endgame?
“The DOJ fervently wants NAR to issue a rule that prohibits any coupling of commission paid by a seller to its listing broker and any commission that might be sought by a buyer’s broker for procuring the buyer,” Frances Riley, a real estate attorney at Saul Ewing LLP, told HousingWire. “NAR’s settlement of the class actions did not achieve this goal; thus, there will be further investigation by DOJ of NAR and likely litigation.”
What Does This Litigation Mean for Real Estate Investors?
With all these changes afoot, there are a lot of implications for real estate investors. Here’s a look at a few of them.
Less in commissions could mean more profits
For real estate investors looking to cut transaction costs for buying and selling real estate, the less they have to pay to agents, the more they get to keep, so it can only be good news. However, in reality, agents’ commissions have always been negotiable. For full-time investors who bring agents ongoing deals, low fee structures are often a customary move, which agents are happy to agree to because of regular business.
Prices could drop, but out-of-pocket expenses could increase
A change in agenting structures could drop home prices. However, if buyers have to pay agents out of pocket, closing costs could increase. In an ideal world, the two would cancel one another out. However, there are too many variables, such as supply and demand, to expect this to happen.
Investor/agents might have to recalibrate their businesses
For investors who double as agents and represent other buyers and sellers, the news could be bittersweet, depending on how much of their business comes from agenting versus investing. However, many buyers cannot afford to pay an agent after forking out money for a down payment and other closing costs.
Motivated sellers offer buyers concessions to help them get over the finish line when buying a home. It remains to be seen exactly how much the workarounds will be affected by the DOJ’s modifications to the settlement.
For most investors, volume and getting deals closed is more important than trying to stack profit onto each transaction. Agents who also invest will still have access to the MLS and, if they flip houses, can still make money from the sale, forgoing their agent’s fee and possibly sweetening the deal for a buyer’s agent.
Final Thoughts
Real estate agents are unlikely to get much sympathy from the public about making less in commissions. In an election year, public sentiment goes a long way, and while the DOJ is supposed to be politically impartial, it is still a government agency that can make a tremendous difference in an overheated, largely unaffordable housing market.
On the flip side, while streaming real estate shows such as Netflix’s Owning Manhattan portray agents of luxury listings making six-figure commissions, the reality is that it is not representative of most agents’ income. With prices and interest rates high and inventory low, many agents are struggling to scrape by and need every commission check. Many are dropping out and seeking other forms of employment. News of another potential hit to their incomes by the DOJ is likely to continue the trend.
On a macro level, social media use could see more owners forgoing agents and commissions to sell their homes, especially if they no longer have to pay buyer’s agents. Investors are likely to be pleased with the news of having to pay less in commissions, especially if they do not generate their own leads and are MLS-reliant.
However, in a tight market, many still rely on a switched-on buyer’s agent with a network of cultivated contacts to bring them deals they may not otherwise have. They may view their commission as the price of doing business.
Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
