Real Estate Agents have a Tough Gig. To Survive, work with Investors.

Welcome to A Skeptical Dude’s Take on Real Estate: a frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Coming at you live from Nashville, TN.

Today’s fuel is an ultra concentrated organic mushroom “coffee.” It’s actually good. Nice alternative, and I find I’m not missing the coffee….but ask me in 2 hours.

Today We’re Talkin:

• -The Weekly 3 - News and Data.
• -Lawsuits! Changes Coming to the Real Estate Agent - Client Relationship
• -Investor Agents - The Big Difference
• -Target - Why Aren’t Property Inspections Made Public?
• -The Skeptics Take.

The Weekly 3: News and Data to Keep You Informed

1. -Big Nashville Development at Rivergate Mall. Existing will be razed w/ 17,000 sq. ft. of retail or restaurant space, 4 story/120 room hotel & several 5 story/340 residential unit structures replacing it (NashUrbanPlanet).
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3. -“Inflation Feels Back on Track,” after a tough start to the year, economist Mark Zandi.
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5. -Book Recommendation: Real Estate by the Numbers: A Complete Reference Guide to Deal Analysis. Highly recommend, great for learning how to analyze deals.

Today’s Interest Rate: 6.99%

(👇 .21%!, from this time last week, 30-yr mortgage)

Ok so I’m going to phone in the interest rate and inflation talk for this week. I like talking about the horse race but everyone is talking about it so it’s a tired topic this week. But here is the BLUF:

Interest Rates

• Mortgage interest rates are down again today and down .5% in 2 weeks. That’s big. If you are looking for real estate get your lender to re-lock your rate. It’s a significant difference. Big Deal.
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• Federal Reserve Chair Jerome Powell said, while in Amsterdam, this week that inflation is falling more slowly than expected, which will keep interest rate cuts on hold. Read, we aren’t cutting rates till inflation decreases markedly. And speaking of Amsterdam; fun fact, there are more bikes there than people. And drugs are legal. Explains why they have to dredge the canals every year. Too funny.
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• My Prediction on Rates - I am still of the opinion that the Fed will cut rates in 2024, most likely twice, by .25% each. Inflation is not yet trending down to the Fed’s 2% target, this is true. But this too shall pass. Fed policy is still restrictive.

Inflation

• Inflation Results were mixed today and Tuesday: one day up (producer prices) one day down (consumer prices). Inflation is holding, so it’s a wash. Of this, Powellsaid “What that has told us is that we'll need to be patient and let restrictive policy do its work."
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• One important detail, Housing and gas prices contributed more than 70% of April's monthly increase. The shelter portion jumped 5.5% and gas prices gained 2.8% compared with March. I can confirm that home prices, cost of home ownership (like property insurance) and rental prices are not ebbing.

Real Estate Agents Lawsuits: Some Major Changes Coming

Let’s look at a featured issue of the week. The so called “Real Estate Commission Lawsuits” and the forthcoming industry changes.

This summer, legal changes to the real estate agent - client relationship will take effect and should shake things up a bit, including how and how much homebuyers pay for commissions. Some in the industry are poo-pooing this decision.

I think this is a big f&$king deal.

Brief History

Beginning last year and over the course of the last few months, federal courts/juries ruled that the National Association of Realtors (NAR) and several large brokerages had conspired to artificially inflate the commissions paid to real estate agents. NAR had been ordered to pay $1.8 billion in damages to home sellers, but settled to pay $418 million in damages and change some of their longstanding rules. The head of the NAR has since resigned and most large brokerages who were also sued have agreed to manymultimillion-dollar settlements. The changes take effect this summer.

The crux of the lawsuits is that sellers thought they were compelled to pay a commission to not only their agent but also the agent of the buyers and that this was not negotiable or was negotiated without their consent. This commission split was included in the seller’s listing agreement and contract with their agent.

No more.

Now it will be incumbent on, and made explicit to, the seller that they can decide what to offer if anything to the agent of the buyer. The result is likely to mean that buyers instead will pay the commission to their buyers agent, and the sellers to their agent. Both can also be negotiated. Some buyers may even choose not to have an agent at all, if they feel confident enough. Zillow and Redfin have made it pretty easy to search for listings and buyers could contact the seller’s agent directly if they choose. I also believe that sellers will be more apt to negotiate with their agent as well, although less so.

Additionally, the justice department is now looking at title insurance, which homebuyers are forced to pay at closing as a part of the transaction, even though the insurance is actually to protect the lender and not the homeowner. Crazy. I predict that if lenders are required to pay for this insurance the price will fall considerably because economies of scale will allow them to purchase multiple policies at a much cheaper rate and individual homebuyers. Title companies could also try to take this on and save buyers $ as a client benefit.

Commissions are $100 Billion per Year

Real estate transactions costs have long been under scrutiny in the US market. Real estate commissions total more than $100 billion annually. 😳 And in the US homebuyers/sellers pay a larger % in commissions than folks in most other countries. For instance, in Austria buyers (normally) pay a 3% commission and sellers rarely pay anything. In Australia it’s more like 2.5%, depending on region. And in Britain it’s closer to 1.3%. Compare this with 5-6% (usually 6%) in the US. Higher real estate transaction costs mean higher home prices, as this cost is simply built into the price of the home. An average home costs $5,000 - $15,000 more than it would have without these higher commissions.

Steering

There is also the “practice” of steering, which was a primary issue in the lawsuits. Essentially, most MLS listing markets (which are pretty much controlled by the NAR) require that the commission paid to any buyer agent be listed on the property listing. This, on its face, seems like a good idea. It seems to provide transparency to the buyer’s agent that they will be paid, and how much, for their work. The unfortunate result of this is that unscrupulous agents were incentivized to send property listings with higher commissions to their buyer clients, in a way steering them to certain properties based on their commission % not because the property was best for their client. As the late Charlie Munger was fond of saying, “show me the incentive and I’ll show you the result.” The result was a perverse incentive to steer clients, nefarious or not.

What’s Likely to Change?

• A more informed Buyer. Buyer’s will be forced to have a conversation with their agents about commissions and have an agreement in writing before they step foot in a property. This will likely lead to a more informed buyer about how real estate transactions work and what obligations they have to their agent, and vice versa. They also will be more aware that they can and should negotiate the commission % with their agent.
• Less Special Interest Influence in Politics. Many large brokers required their agents join NAR. No longer. As a result, NAR membership will likely decrease, with agents not being compelled to join the organization. NAR has been an extremely powerful lobbying group in Washington. I know, I worked there. They donate more $ to politicians than pretty much any trade organization. If as a result of these lawsuits, agents decide not to join the NAR, which gives them the fancy title of “Realtor,” it will reduce the NAR’s influence over politicians and housing policy. Good.
• Is a Buyer Agent Necessary? Some buyers might even skip working with an agententirely and try searching for properties on their own. Many will not, since this is a major purchase and most homebuyers need to be educated or are frankly afraid of screwing something up. But, perhaps title companies take on more responsibility and, with a lawyer on staff, could subsume some of the agent’s typical responsibilities so that buyers can confidently close on a home without a buyer agent. I think this does happen, albeit slowly and only for savvy buyers.
• New Pricing Structures. Why is commission always a % of the property? What exactly is included for that cost? What if I don’t need you to look for properties for me? We all have Zillow. What about offering a flat fee for service or a variety of a la cart services? I predict new tiered pricing structures will appear based on what a client needs. Some need more white glove services like analyzing a property’s value and design advice for a renovation. While others just want the transaction handled and the home to be legally sold to them (which the title company mostly handles anyway). I welcome this new bold world of varying pricing structures. Any agent that is afraid of competition is likely bad at their job.
• NAR and MLSs Now Have Competition. Sick of the NAR’s practices, and wanting to provide an alternative, two prominent agents have crested a competing trade association with NAR, the American Real Estate Association. The AREA will grant members access to an alternative of the NAR’s MLS called the National Listing Service, which includes a database of listings nationwide. Currently each area/state has a separate privately owned MLS that is member only. I’m excited to see what happens with this AREA marketplace. It’s not yet totally nationwide, but is expanding. I like choice. Monopolies are not good for consumers.

My Thoughts on Agents:

IMO, and I hate to say it, most agents suck. They just do. Most are young, and inexperienced (not their fault) and it’s a career with a low barrier to entry; you normally just have to have a high school degree and pass a basic real estate test. Did you know there are roughly 625,000 more Realtors than actual homes listed for sale? Some of this is our low inventory/housing shortage problem for sure. But some is also that we just don’t need as many real estate agents in 2024, I’m sorry to say.

At the same time I feel for agents, especially new / young ones. It's a tough business and not at all like the TV shows make it out to be. Agents are independent contractors, not employees of the brokerages, and their overhead is not insignificant: Agents are responsible for:

• Fees, Fees and more Fees. Agents pay a membership fee to their brokerage each month, the area MLS so they can list and view property, SentriLock so they can access house keys in lock boxes, and much more…
• Paying a large part of their commission to the brokerage they work for, ie the REMAX or Compasses of the world. This can be 50%+ for every payday and can be even higher if they are a part of a real estate team;
• Their own health insurance, as a 1099 employee;
• Marketing listings, advertising their services, gas, education, software, car, wooing clients etc… You can see how the costs of being an agent get significant real quick.

So, one can understand that the incentives for agents are, well, transactional. They just want to “take home cold hard cash via commission…,” ala Wolf of Wallstreet, and move on to the next transaction. They have to, they have bills to pay. So it’s hard to blame them, that’s how the incentives are structured.

Investor Buyers: A Key Difference

Agents who represent investor-buyer clients will be heavily heavily insulated from any changes in these lawsuits in terms of commission %. If anything they may even charge more. This is because investors normally require a variety of specialized services, assistance and expert advice that the typical homebuyer does not. Why? Well, unlike a homebuyer, an investor treats a property as a business, which must provide a given return on their capital. So buyer agents become de facto advisors, or consiglieres to their clients (* Important note: its not legal to give financial advice to anyone unless you are a certified professional like a financial planner, CPA etc… just like you can’t give legal advice unless you’re a lawyer). But agents do have a fiduciary responsibility to put their clients interests first even before their own. And finding and providing a recommendation/advice is part of the job.

Additionally, investor buyers normally require:

• Multiple recommendations for lenders, especially ones that that provide different loan products than the typical homebuyer needs, like DSCR, STR property loans, construction loans etc…, and when we talk commercial property the requirements are much different (I’m leaving commercial pretty much out of this discussion, much different).
• Recommendations for contractors, subcontractors, engineers, soil testers, surveyors, environmental assessors etc…these adept industry professionals are highly coveted. An investor-agent needs an A+ rolodex for their clients.
• Supplier recommendations. Where is the best countertop, dumpster, tree, stone etc…supplier? Where can I get a deal?! For example, an appliance store that sells new scratch and dent appliances for 30-50% off, is a goldmine. An investor agent needs to know these things.
• Hard-nose negotiating and a lot more of it. Investors have a much more hard and fast number they can pay for the property. Any more and the numbers / analysis break down. Agents are expected to prove their value by negotiating to that price and if not, the deal doesn’t work and the investor moves on. Typical homebuyers normally have more wiggle room since there is a sizable emotional aspect to the purchase that investors do not have. This is not to say homebuyers don’t care about getting a good deal, far from it, but for investors it’s much more stringent. This means that an investor agent may have to put 10, 20, 40 offers on the table to get one accepted, after hard negotiating. A typical homebuyer agent does not have to go through so many contract negotiations, ie less work.
• Help analyzing / underwriting the deal. Not just what it’s worth on the purchase side, and thus what they may want to offer, but also underwriting its value after potential renovations (the After Repair Value), and for what expected rents will be (before and after renovations). Do you know how to calculate ROI, IRR, ARR, NOI, MOO (kidding, thats not a real one…or is it)? 😊 Your investor may need you to assist with this and at the very least feed them accurate data to plug into their model.
• Help with design to boost the property’s value, especially if they are (likely) doing renovations and need to refinance it or sell it afterwards. Again, an investor needs to make $. For instance, if they don’t make at least a 50% return on their construction dollar (hopefully more) then the property is likely not worth the investment.
• There is more, but you get the idea…

*Tangent Alert* Why aren’t Inspections Disclosed?

Agents need to be adept in at least basic understanding of construction so they can read an inspection report. Most aren't. Another skill an investor agent must have. And, pardon me here but….why the he!! aren’t inspections made public? Agents are supposed to disclose known / latent defects with the home but I can’t tell you how many times I see a home come back on the market for sale and there is no additional disclosure about what the previous buyer’s inspection turned up. The listing literally says the buyer exited the deal because of inspection. What did they find? May be minor or may not, now I have to play easter egg hunt to find out.

IMO, sellers / homeowners / agents should be required to put all recent inspections of the home on the MLS for buyers to see. I have seen too many homeowners and their agents try to cover up something wrong with the home, after an inspection was recently performed. Why isn’t this a requirement if the law says agents and owners have to disclose all known / latent defects with the home?

So before you offer on a house, ask explicitly if there has been an inspection by an interested buyer or the homeowner in the last year and get the answer in writing. This will protect you if you find something later that should have been disclosed and was known by the seller. And sellers / homeowners / seller agents, you should want to have your own inspection done on the home you are selling. It protects you against the buyer suing you later for negligence or trying to cover up known / latent defects with the home (not legal advice, just my personal experience). You may not have known about it, or known why your bathroom always smelled (it was the leaking sewer pipe) but now you have to prove that in court. It also helps with negotiating since any interested buyers can’t try to renegotiate the deal because of something they didn’t know about.

And state real estate boards and NAR. You should make this a requirement for any agent / Realtor. If a seller’s agent does not disclose previous inspections / known / latent defects with a property they re selling, they should lose their license. IMO.

And lastly, to you slumlords out there. Those of you negligent of your property’s problems and allowing your tenants to live is squalor, like the owner of a property I just toured with a 12” hole in the soggy, sagging bathroom floor and with several young children living in the house….There is a special place in hell for you. You should go to jail. I reported it to the county and building department, I hope they take action.

But I digress….

The Skeptics Take:

Whew, what a way to end today! Gets me fired up!

IMO, these “commission lawsuits” are important and will be consequential for the industry. They will force homebuyers to be more informed about the process and the commission/payment to your agent will now be more negotiable and transparent. I view them as good for the consumer / homeowner and what’s good for them should be good for society, and thus agents. While it might crowd out some agents, they probably weren’t going to be very successful anyway. The quality of all active agents should go up as a result.

And agents who help investors (many don’t like to) should be relatively insulated from these changes. They essentially have a special practice. And they probably should be / are also be investors themselves. Heck most agents don’t actually own real estate. And the ones that do usually just own their own home, not investment properties. The difference is the world. Would you buy a car from someone who hasn’t / doesn’t drive?

Side note: It should be mentioned that in the commercial real estate world, they mostly don’t have these problems. Commissions have always been separate and negotiated and there are no MLS monopolies and special interest lobbying organizations (mostly). The issues I discuss in this article are limited to the residential real estate market.

So do we still need agents at all? Yes, although some home buyers will choose to not work with an agent. AI has yet to figure it all out, but who knows. As it stands many of the processes are just too antiquated and involve too many (human) parties. Large companies like Zillow, Redfin and OpenDoor have failed in their iBuyer efforts thus far. But I do think many of the current mundane or overly expensive tasks an be drastically simplified and reduced because of technology. And who knows, maybe one day there will be a time when we buy a home with the click of a button + cryptographic contracts, and presto-chango…new home! But so far that hasn’t worked out. So treat your agent well.

And with that, one last shameless plug!

We have Launched a New Investor-Agent Website!

Fellow real estate investors, we officially launched our new website: Nashville Investor Agent, real estate services focused on helpful investors find, negotiate, purchase/sell, renovate and manage investment properties here in Nashville. Come take a test drive, and please share with your friends!

That’s it for now.

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

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That’s it for this week. If you are interested in talking real estate investing and digging deeper into any of these ideas, reach out! I always like a rigorous discussion and helping fellow real estate investors.

Looking for a realtor in the Nashville area? Send me a note here on BP! We work with the best here who specialize in helping investors find great properties.

* The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.