When the Asteroid Hits

But before we go there…

If you’re still starting from zero for every strategic problem, then you’re doing it wrong.

Over my ~25 years in the problem solving business, I’ve developed a foolproof process to help a team solve their most complex challenges. You’re probably familiar with it from middle school – it’s roughly the scientific method.

This month, we’re hosting a workshop to deep dive into the process of solving a strategic problem. 

By the end of our workshop, you’ll walk away knowing:

• Why you should spend time upfront defining the problem 

• How to break a problem apart into solvable pieces

• How to quickly turn chaos into order

• How to get decision makers to agree

• How to turn decisions into actions

R.S.V.P. now and hear about some valuable insights to streamline your work and turn chaos into order.

And while you’re at it, go ahead and block your calendar for our workshops – happening (almost) every third Thursday of the month!

The Disruption That’s About to Happen to the Housing Market

The real estate brokerage market is about to be hit by an asteroid.

Just like how an asteroid wiped out the dinosaurs, a recent settlement against The National Association of Realtors (NAR) will change the landscape for buyers, sellers, brokers, and agents. 

In my opinion, the impact will be BIG. I predict the size of the real estate brokerage market could shrink as much as 40%. 

Why? It’s simple. When the rules of information sharing change, economic decisions change. 

The NAR settlement will change how buyer’s agents' commissions are shared, taking that information from public to private. This reduces a seller’s incentive to provide a commission to buyer’s agents. 

We’ve seen it happen in other industries, like used car sales and stockbrokers. In both cases, public platforms made information, once restricted to insiders public. Legacy players, and the chunk of value they held, were erased.

So, BOOM! Asteroid hits. Brokers must evolve or die. 

But First, Context

What was the NAR settlement and the anti-competitive claim behind it? 

Long story short, the NAR has been involved in an ongoing antitrust legal battle over its commission rules. The assertion is that the NAR’s policies restrict competition among real estate brokers. This, they claim, raises prices for buyers and costs for sellers. 

This matters because the NAR has significant control over the real estate industry.

Its regional boards operate Multiple Listing Services (MLS) that serve as public directories for residential property listings. They require that seller and buyer agent commissions be published on MLS. 

It further limits MLS access to NAR members; thus, almost all agents (or Realtors™, as members brand themselves) must join and adhere to its policies to participate in MLS. 

That control is the heart of the problem. Without the NAR there would be no MLS.

Without being a NAR member, agents can’t access MLS. And without MLS, it’s practically impossible to buy or sell a house. 

So, agents do what the NAR tells them and sellers choose agents who are members. 

The Settlement That Changes Everything

Today, most homes for sale are listed on MLS, showing the home’s “list price” and the commission to be paid to the sellers’ and buyer’s brokerages. 

Typically, the total commission is 6% of the agreed-upon price, paid by the seller, and split equally (3% | 3%) between brokerages.

There are a few anticompetitive problems with this: 

• Tying: The key issue in the lawsuits was the practice of “tying.”  The NAR’s rules require that commissions paid to buyers’ agents be set by the seller when the home’s list price is set. As a result, buyer’s agents are paid by the seller at a predetermined rate “tied” to the price rather than to the buyer for whom services were performed. Thus, the buyer’s agent commission influences how the seller sets a price.
  

• Steering: The NAR’s policies require brokers to publish the buyer’s agent commissions to participate in the MLS. Thus, a buyer’s agent can tacitly direct their clients to favor those homes that offer them a high commission. 

• Anti-Competitive Information Protection: The NAR outlines rules that prevent agents from disclosing their commission rates in public, which limits customer knowledge and choices.

Earlier this year, the NAR accepted a settlement, agreeing to pay ~$400 million over the next 4 years to end all the related cases and change affected policies.

The key policy change they’ll make is to remove buyer’s agent commissions from being publicly displayed on MLS. This gives sellers more flexibility in the commissions they set for buyer’s agents – if they continue offering any at all.

Last Month, I Paid Someone Else’s Agent $80,000

That’s a true statement.

So let’s look at how the policy change will affect seller psychology.

My husband and I are real estate investors who develop residential properties in central Austin.  In fact, I moonlight as a real estate agent to list our properties on MLS. I am a NAR member and a “Realtor™.” 

The single biggest line item in our development budget after the land value is real estate commission. As the seller, we decide the amount to offer the buyer's agent.

The reality is that 3% is the industry standard and what’s offered by our competition. We’ve discussed lowering it, but are not willing to risk agents steering buyers away from our listings. 

For the last property we sold, we paid the buyer’s agent close to $80,000 for doing nothing for us. I’m sure they provided value to their buyer. But…

Why should I pay for a service provided to someone else?

I don’t think I'm the only seller asking this question.  

There’s a belief circulating among agents that buyer commissions will be a negotiable part of a transaction. Meaning that a buyer could ask a seller to pay their agent’s commission, much like how closing costs and title fees can be negotiated today.

I don’t buy it.

Sellers pay title fees for a good reason. Title companies (or attorneys in some states) review ownership records and allow sellers to confirm that they have undisputed ownership of what they’re selling. 

The seller has no stake in the buyer’s agent’s work. In fact, if the buyer’s agent was working in the seller's favor, it would breach the agent's fiduciary relationship with the buyer. 

I believe that once the buyer’s agent commission isn’t shown publicly, sellers will have no incentive to compensate buyers' agents. It’s simple game theory – if the other players don’t know if there’s a reward, it’s no longer advantageous to offer one.

And so, after the asteroid hits and its dust blocks the sun, the maladapted will begin to die.

Predictions for the Real Estate Brokerage Industry

This disruption has advantages on a small scale for individual sellers and buyers. Lowering the total commissions increases net cash to sellers. It’s feasible that the market could pass some of the value back to buyers in the form of lower prices, too.  

But for the real estate industry at large, this has huge implications. As a student of disruption, I’ve made a few predictions: 

1. Brokers will be the biggest losers, with a market collapse of up to 40%.

2. Real estate platforms, like Zillow.com, will win when buyers turn to them over agents.

3. Buyers’ agents will productize to survive.

4. Agents will leave the business and brokerages will consolidate.

5. Private equity opportunities will emerge as the ecosystem finds economies of scale.

Let’s break it down. 

1. Brokers Are the Big Losers

Brokerages will experience significant revenue erosion as buyers' agents' commissions compress. It’s straightforward math.

I believe this could be as much as 40% of the $225B real estate brokerage market. 

Here’s my thinking:

Today, buyer’s agents typically receive half of the total commission of a sale. If we assume sellers stop paying buyer’s agents, but half of buyers decide to pay their agents half of the commission they receive today, the brokerage industry could lose ~$90B in value.

This will have significant implications for the industry at large.

2. Real Estate Platforms Are the Big Winners

Buyers already rely on digital platforms like Zillow.com and Realtor.com for research, listing search, and service recommendations. Their free and low-cost services are well-positioned to catch buyers unwilling to cover their agent costs. 

We’ve seen this play out in other industries before. 

Coffee’s for closers.

Do you have a stockbroker? Of course not. I’ve seen the movies though, where someone had to pick up a phone, call a human, and rely on this human for stock advice and trades.

The belief was that they had information you did not, information you needed to make wise decisions. Then, boom! Twenty-five years ago, online platforms like Schwab and E*Trade democratized access to analyst research and exchanges.

And stockbrokers perished overnight.

Let’s look at a more recent example: used car aggregators.

Once upon a time, buying a used car meant searching classified ads or haggling at a used car lot. Information about the vehicle was restricted and negotiation was wildly variable.

Then along came Carfax, giving you the VIN’s crash history. Then Carmax aggregated thousands of cars and put information online and available before visits to its massive lots. 

Recently, Carvana took the process entirely online. What used to be visiting the dealership to find a used car evolved into buying a car with just a click – you can even have it delivered.

By last year, more than 95% of used car searches started online. Again, once access to information changed, the used car salesman wasn’t needed. 

Zillow.com already provides real-time data about listings, comps, market statistics, photos, and more. Discount brokerages like Redfin and Rex take it a step further by arranging showings with salaried agents that don’t need commissions. 

Digital solutions and self-service options on these platforms could provide buyers with learning, premounted forms and contracts, increased control, and convenience during transactions that agents provide today, but at a fraction of the cost of an agent.

3. Buyer’s Agents Will Productize

Buyer’s agents DO add value. And buyers will continue to seek agents to help them, for many reasons:

• Complex Transactions: Real estate transactions have financial and legal complexities. Many buyers, particularly those less experienced, seek an agent to negotiate and navigate the process.

• Local Market Expertise: Local markets are unique, and many agents can personally guide a client better than online platforms.

• Personal Convenience: Buying a home is time-intensive. It requires setting up showings and sometimes difficult discussions with agents and sellers. Many buyers will prefer having a trusted professional to organize and guide their search.

• Regulatory Assistance: Some transactions have legal and regulatory requirements that experienced brokers can navigate efficiently.

Although they provide great value, buyer’s agents face significant risk in their compensation.  Agents are paid after transactions close. Buyer’s agents may show homes for months before submitting contracts, and then wait up to 90 days for a transaction to close.

Deals can fall through, and some buyers never make an offer.

Brokerages always recommend agents request buyers sign agreements that mitigate these risks. These agreements contractually obligate buyers to pay agents if they purchase a home in a certain period of time or make up the difference if a seller's contract does not meet a pre-agreed percentage of the purchase price.

But the reality is that most buyers don’t sign these agreements. 

The NAR settlement creates an opportunity for brokerages – they can improve their business model by turning a service into a product. Simply stated, this means brokers can define the services they offer and set a price that generates profit. 

Productized services would allow agents to share their services and prices upfront. Buyers, now informed, could select the services they need at a known cost. 

As a bonus, agents could ask for payment before providing services, making cash flow predictable and bringing it forward by months.

(Spoiler alert: I’m building a guide for agents to productize their offering, slated for the next issue.)

4. Agents Will Drop Out; Brokerages Will Consolidate

Despite the big names, the brokerage market is actually quite fragmented.

Many local brokerages and agents that rely on buyer transactions may not be in a financial position or have the business acumen to survive the shift. Some will sell to larger brokerages and others will simply close up shop.

Conversely, brokerages and agents with strong listing portfolios are in a highly advantaged position: they could take more of the market. 

For example, brokers could win competitive listings by including buyer services at no cost. They could hold significantly more open houses and showings with unrepresented buyers to generate leads for their productized services.

The settlement also makes it easier for new entrants by removing the obligation of traditional commission structures. New teams can differentiate with new business models and gain share quickly if their offering finds an unmet need.

5. New Private Equity Opportunities Will Emerge

When industries consolidate, private equity swoops in.

Picture each step in buying a house: from the moment you think of buying a house all the way to the day you completely move in and settle.

It’s not just real estate agents that are part of this value chain.

You also have appraisers, mortgage brokers, home inspectors, contractors, foundation repair, and other experts. These are typically small businesses, mom & pop operations. 

It’s the buyer’s agent who coordinates these services. It’s a real value that they add to the buying process. 

Let’s take the home inspector as an example.

During the option period, the buyer’s agent contacts them to review the property. They provide the buyers with a detailed report that shares the home’s condition. Buyers can use this report to negotiate the cost of repairs or reduce the price of the property.

But with fewer buyer’s agents, there will be fewer referrals. Less sophisticated providers will struggle and seek an exit.

Enter private equity.

Like they’ve done with other home services industries (think plumbing, pool maintenance, and extermination), they’ll start their roll-ups in search of scale.

And I’ll stop there because they have the money to pay me for a market assessment. 

What’s Next for the Housing Industry?

Adapt or get left behind. That’s the name of the game now.

Stay tuned…

Growth happens in the aftermath of every disruption.

In the next issue, I’m assessing ways brokerages can change their business and pricing models to survive. I believe there is a great opportunity for brokers willing to embrace transformation.

Remember, the path to success is paved with continuous learning and embracing fresh perspectives.

Let's stay connected, share ideas, and elevate your consulting business.

Stay curious, friends.

TheConsult.co brought to you by Keenan Reid Strategies

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