Real Estate | Nov 6, 2023
If you have a real estate agent in your life, check in on them.
Last week, a landmark ruling in federal court threatened to upend business as usual for brokers everywhere. The judgment itself was big enough: at least $1.8 billion in damages awarded to a group of home sellers who accused major players, including the powerful National Association of Realtors, of engaging in a conspiracy to fix prices. In the wake of the devastating ruling, NAR CEO Bob Goldberg resigned.
But the implications of the class-action lawsuit will have ripple effects throughout the home industry, far beyond what happens to NAR leadership. Many have called it the biggest shakeup to the status quo in a century. “Make no mistake—this is a sea change,” says Jonathan Miller, a New York–based real estate appraisal expert and industry consultant. “This will inevitably lead to a new way of thinking.”
The end of an era for agents
A little background. Among many little-understood wrinkles of the real estate industry is something called the “cooperative compensation rule.” Simply put, it means that sell-side agents—the broker representing the home seller—are often compelled, by the rules of the NAR and other organizations, to split their 5 to 6 percent commission with the buy-side agent, the broker representing the home buyer.
To plug in some real numbers: If you sell your home for $1 million, somewhere around $60,000 would typically go to your broker, who would in turn pass $30,000 of that fee to the agent representing the person who bought your home.
The ostensible purpose behind this arrangement is to encourage collaboration between agents. Proponents of the rule argue that it provides an incentive for agents to represent home buyers, who otherwise would be left without an advocate.
However, critics have long argued that the practice is fundamentally problematic. For one, it creates a deal structure where both buy-side and sell-side agents are paid a percentage of the closing price, meaning that both are invested in the price of a home going up. For another, the arrangement is not always transparent: Home buyers are often unaware of how their brokers are compensated.
The net effect, say critics, is that home prices are artificially inflated to accommodate the practice. A homeowner sitting on a house worth $1 million will ask for $1,060,000 (or more) to account for the fees they’ll ultimately have to pay out—in other words, the buyers pick up the tab. In a soft market, home sellers will lower their prices and eat the 6 percent. In either case, a significant portion of a home price goes toward agents—according to some estimates, Americans spend up to $100 billion per year purely on real estate commissions.
Last week’s judgment potentially established a new paradigm, one in which buy-side and sell-side agents will stop splitting commissions for fear of being sued. It’s very early; the case will have to stand up to the appeals process, and several similar suits are working their way through the court system. But if the ruling holds up, it will mean that buyer’s agents will have to find a new way to be compensated for their work. And while experts are cautioning that the overall effect is not yet clear, the general consensus is that there will be at least some downward pressure on both home prices and commissions.
“No one has their arms fully around it, but the assumption is that it will take a bite out of commissions especially,” says Miller. The impact on overall housing prices, he adds, is slightly foggier—mainly because the far bigger issue is low inventory due to higher mortgage rates. But, he says, “it probably means lower prices, with potential for deeper impact with a more liquid market.”
An upside for designers?
Whatever happens, there will likely be downstream effects for designers, who can have an occasionally complicated relationship with real estate agents. On the one hand, establishing relationships with brokers is a time-honored method for designers to connect with potential clients, especially when they’re first breaking into a new market. “There is a real mutual benefit in terms of referrals,” says Connecticut-based designer Mandy Riggar, who moved her firm from Portland, Oregon, a few years back. “They’ll pass my name along to people who just bought a home, and then when it’s time for the clients to move on, I can return the favor.”
On the other hand, the more that a client spends on purchasing a home—or selling one and moving into a new space—the less that’s left over for furniture and fabric. It’s a recipe for a relationship with the potential for friction.
Some, like Heather Garrett, have been on both sides of the fence. The North Carolina–based designer got her real estate license in 2017, partially as a way to help her design clients navigate the complications of the home buying (and selling) process. She has seen the complexity firsthand.
“When working as an agent representing a home buyer, I’ve been asked by the seller’s agent to mute my discussion with clients about how much it’s likely going to cost to improve a property—the other agent is like, ‘Don’t talk about it, because we need to get the commissions up,’” she says.
“It’s like the architect or the contractor,” says California and Georgia–based designer Kelly Finley of Joy Street Design, who says she has gotten great leads from real estate agents but acknowledges the quirks of the relationship. “We’re all on the same team, but we’re all looking at the same budget and trying to figure out who gets which slice of the pie.”
If real estate agents’ total slice of that pie goes from 6 percent to 3 percent, there’s potential for some of the newly freed-up cash to be spent on design. If it comes to pass, designers will likely rejoice. “People will spend so much on something they don’t actually interact with,” says Catasha Singleton of Texas-based firm ModChic Interiors. “It’s a ton of money spent on curb appeal, the way the house looks from the street. But you’re not waking up in your home’s exterior.”
The situation is dynamic, and it’s hard to predict what the ripple effects will be. It’s possible that the result is simply that smaller commissions will push buyers to set their sights on another bedroom or another acre of backyard space. (“I think ultimately what will happen is people will go for more house,” says Finley.)
But there’s reason to be cautiously optimistic that bad news for real estate professionals will end up being good news for designers. “If after the whole transaction is over, the client walks away with 2 or 3 percent more, then yes, there’s more on the other side for designers,” says Garrett. “This is going to open up the market, and fees are going to be negotiated and reduced. … I think it’s probably healthy.”
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