Is It the End of Traditional Real Estate?

Is It the End of Traditional Real Estate?

The end of traditional real estate may be upon us. Not just the end of a company but the entire industry.

Remember the breakup of AT&T in the ‘80s? It changed the communication industry forever.

The lawsuit that may be the end of traditional real estate

A few weeks ago, two of America’s most feared (and successful) plaintiff law firms filed a class action lawsuit against the nation’s largest MLS (multiple listing service) systems (including ours in Phoenix).

In case you don’t know, the Multiple Listing Service is the primary database used by buyers’ agents to get information on homes for sale and to know how much they’ll be paid if they sell one of those properties.

The gist of the lawsuit is that home sellers pay double commissions because the MLSs require them to compensate buyer agents. It’s true that every MLS requires listing agents to make a “non-negotiable” offer of compensation (typically 3%) to buyer agents.

This means home sellers often pay their listing agent 3% and then pay another 3% to a buyer agent. I criticized this practice a month ago (before the lawsuit) in my newspaper article, “Industry Gone Astray.”

I argued that it’s ridiculous for sellers to pay a buyer agent whose job is helping the buyer negotiate down the seller’s price, and then protecting the buyer’s interests (not the sellers) through closing.  

Why this lawsuit is important

The lawsuit alleges:

  • The MLS is an essential tool agents must use to sell their listed properties (true).
  • Agents cannot participate in MLS without offering buyer agent compensation (true).
  • Buyer agents expect to receive 3% and may boycott homes that offer less (true).
  • This results in home sellers paying both buyer agent and listing agent commissions (true).

Damages? Kaboom!

This class action lawsuit is on behalf of every home seller in America who paid a real estate commission since March 6, 2015. That’s at least 2 million transactions. Figure an average buyer agent commission of $9,000 ($300,000 home X 3%). Since antitrust judgements award treble damages, that’s $27,000 per sale X 2,000,000 sales = $54 billion in damages!

This judgement would bankrupt every MLS in the country. Even if the plaintiffs lower the damage award to save the MLSs, they would die anyway. Why? Because the verdict would prohibit MLS systems from requiring listing agents (and sellers) to offer buyer agent compensation. That is what keeps them alive. There are many other places to get info on homes.

Result of the lawsuit

Here’s the likely domino effect:

  • Sellers will pay their list agent and buyers will have to pay their buyer agent.
  • Buyers will forgo using buyer agents and look at homes directly with list agents.
  • Agents will drop their MLS memberships because it’s expensive and they won’t need it.
  • Thousands of buyer agents will starve out of the business.
  • Real estate firms with lots of buyer agents will go out of business.

Car buyers shop directly with car dealers. Travelers now shop direct too, no longer willing to pay travel agents.

If this lawsuit is successful, I predict that’s what will happen in real estate.

The end of traditional real estate?

Not really. It will be bad for buyer agents and good for list agents. Home sellers will save on commission and homebuyers will have to pay for representation if they want it (they won’t).

Advice to my fellow Realtors

Take this seriously. Capitalize on the opportunity rather than fearing the downside. Become an Uber in an industry about to be Uberized.

“Status quo, you know, is Latin for, ‘the mess we’re in.'”–Ronald Reagan

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You may also enjoy ‘Real Estate Industry Gone Astray.’

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