Showing posts with label residential real estate. Show all posts
Showing posts with label residential real estate. Show all posts

Wednesday, May 15, 2024

The Origin of the 6% Commission Standard

The recent
National Association of Realtors (NAR) Settlement is in the process of changing how many real estate brokers and salespeople conduct business. The terms of the settlement all but abolish cooperative compensation amongst brokers. Although this may not be a substantial change for markets in which every buyer offers through a Buyer's Broker and every seller is automatically represented by a Seller’s Broker, the effects will be greatly felt in other markets. Some of the larger real estate markets have developed complex systems of agency that will now be simplified by one premise--in a residential real estate transaction, a buyer will now have to pay a Buyer’s Broker and seller will have to pay a Seller’s Broker.

Gone are the days in which real estate agents could expect to be paid directly from the proceeds of a transaction. Each party is now responsible for their own broker. Gone also are the days in which brokers incentivized their competitors to show their listing by offering and advertising cooperative compensation on the local MLS, as the NAR Settlement  bans the inclusion or posting of cooperative commission splits on MLS's. The world of real estate sales post-NAR settlement is a much more competitive place, where brokers are incentivized to be beholden to their clients and not to the profession. As this new era of competitive real estate begins to dawn, let’s take a look at how this stare of affairs came about.

The seminal moment which facilitated NAR’s acquiescence to a settlement was a federal jury finding NAR guilty of violating the Sherman Antitrust Act and colluding to fix real estate commissions in the Sitzer-Burnett case. Doing so opened the door for other plaintiffs to sue NAR for the same offense and a number of cases were filed shortly thereafter. The verdict in the Sitzer case, however, arose from a more general sentiment that residential real estate commissions are inflated. Since about 2019, many real estate purchasers, sellers, attorneys and consumer advocates expressed skepticism over the fact that real estate commissions have not varied much and were insulated from any market dynamics that took place in the past 15 to 20 years. There seemed to be a common belief, reflected in many of the commission lawsuits that NAR recently settled, that housing sales could be made cheaper, if brokers didn’t collaborate as much. Although the origin and vitality of that belief is discussed in the upcoming TRET podcast episode 18, to be released later this month, one unquestionable fact is that real estate commissions remained at or around 6% for over 15 years.

Understanding the origins of the seeming standardization of residential real estate commissions brings more perspective to this matter. Although historical commission data shows that real estate commission have hovered around 5.5% for some time, the most recent commission standardization happened during the wave of residential short sales that took place from about 2007 until about 2017. During this period, real estate commissions were typically approved for 6% by banks and financial institutions, who oversaw these sales and approved the commissions. Although most short sale commission agreements from this time period included legal disclaimers that such commissions were subject to bank approval and could vary, as endorsed by NAR, the vast majority of the time, commissions were granted at or around 6%. Since this practice was standard for about ten years, the residential real estate market grew accustomed to paying out 6% for sales. The 6% rate was further solidified as the rate that banks paid real estate agents for its Real Estate Owned and other distressed sales.

As the real estate market has stabilized over time and distressed sales have played less of a role in the sales market, consumers have begun to question the 6% commission. Whereas distressed sales typically involved owners selling at a loss and banks paying real estate broker commissions from the proceeds of the transaction, the traditional home sellers of today's market have to pay sales commissions of pocket. While banks had trading hedges and insurance to mitigate their losses on mortgages that were foreclosed or satisfied at a loss and could thus write off broker commissions as a part of that loss, traditional owners have no such protection. It is therefore understandable that real estate owners in today's market are seeking ways to lower commissions. Taking these tactics from the negotiation table to the courtroom, however, marks a new approach in this quest to lower residential commissions.

The complaints written to start the various commission court cases speak of hypothetical savings that could be gained merely from less collaboration and more competition amongst real estate brokers. They describe NAR as an orchestrator, seeking to protect the inflated price of commissions. This type of rhetoric has proven successful, as it ultimately resulted in a favorable verdict for the plaintiffs in the Sitzer-Burnett case. What seems to be lost in the most recent conversation on commissions, however, is that the standard 6% that existed in the market, was less an invention of NAR and more a convention, established by financial institutions.

Monday, April 15, 2024

Shrinkflation In the Real Estate Market

Inflation has been a reality for the past couple of years. As a result, many companies have decided to respond to the rise in prices and the weakening of the dollar by shrinking the size of their products without reducing their price. This practice has been given the name “Shrinkflation,” which is  defined as “the practice of reducing a product's amount or volume per unit while continuing to offer it at the same price.” Shrinkflation started to become apparent during the pandemic, but was so craftily employed that many doubted that it was even happening. Now, however, it is well acknowledged that just about everything is smaller, but more expensive. Shrinkflation has so integrated itself in today's reality that it has made its way into the real estate market.

Monday, February 19, 2024

Homebuyer Programs to the Forefront

Wintertime is usually a slow time for the residential real estate market. Cold temperatures and budgets that are recuperating from the holidays make January and February low activity months. The weather in many areas also makes most construction activities a non-starter. During this time of year, seasoned real estate professionals get into prep mode, establishing or maintaining professional relationships, stepping-up marketing efforts and preparing properties for the Spring. Homebuyers can use this time to prepare as well, by getting their financing in order, paying off debts and seeking additional sources of funding. One source of funding that often is overlooked is homebuyer programs and downpayment assistance funds.

Saturday, January 6, 2024

Flourish in New Beginnings: Navigating Life in a Different City

By Sharon Wagner

Moving to a new city brings a mix of excitement and nerves, especially after overcoming personal challenges. Courtesy of The Real Estate Think Tank, this guide is crafted to assist you in thriving in your new environment. It provides you with strategies to create a strong support system. Learn how to maintain focus amidst the changes. It also teaches you to cultivate a positive attitude during this transition.

Wednesday, December 6, 2023

Strategic House Flipping as a Gateway to Adult Education Funding

By Sharon Wagner

Embarking on the path of higher education as an adult can be a financially daunting endeavor. In the quest to secure funding for this journey, the realm of house flipping presents an innovative and viable solution. This guide is designed to arm adult learners with strategic insights, seamlessly interweaving the art of real estate investment with the pursuit of academic goals, thereby transforming financial barriers into opportunities for growth and success.

Thursday, September 28, 2023

Unlocking Retirement Wealth: A Senior’s Blueprint to House Flipping Success

By Sharon Wagner

Please enjoy this article from guest author, Sharon Wagner. TRET will return next month with another article continuing its series on property types.

Navigating the world of house flipping can be an exciting and profitable journey for seniors who are seeking an active and rewarding retirement. While the venture promises lucrative gains, it also calls for strategic planning, unwavering dedication, and tactical execution.

The following are indispensable guidelines aimed at assisting mature adults in carving out a successful career in the house-flipping arena, while also enjoying a balanced lifestyle. The Real Estate Think Tank explores these crucial facets in detail.

Tuesday, May 16, 2023

Real Estate Is Power

Lost in all the talk about real estate markets and real estate wealth generation is one key fact—real estate ownership is one of the surest ways to consolidate influence and power. If you don’t think this is true, simply look up the largest land owners in each major US city and follow the trail of their political contributions and donations. Large land owners can exert a tremendous amount of influence on neighborhoods and local laws. One very public example of this is Dan Gilbert, whose mortgage and real estate empire influences the entire Midwest, but also Detroit and Cleveland in particular. Even former president Trump, who has a less than stellar reputation in the New York real estate market, was able to parlay a real estate empire into a presidency.

Saturday, April 29, 2023

Discipline and the Down Payment: Using Your Superpower To Get Paid!

Real estate is about asset and cashflow management. Put more simply, it’s about managing what you have. The right purchase exchanges your resources, in the form of cash, into a property, contract, tax lien, note or some other real estate asset. Once you have obtained a property, decisions have to be made regarding its repair, management and sale, if that is your plan. No matter where you are in the process—purchasing, managing, or selling, discipline is key.

One of the most controllable aspects of our lives is our behavior. How we act and respond to the world shapes our present and our future. Our ability to act in a way that brings about our desired outcomes is uniquely ours and belongs to no one else. In that way, discipline is our superpower. 

Thursday, February 24, 2022

Transform Your Garage Into a Home Office Area

Suzie Wilson

If you work remotely or run a business out of your home, you know how important it is to have the right work area. It’s almost impossible to set any kind of boundaries between work and life, without one. If you don’t have a room in your house that can be used as a home office space, there are other alternatives out there, including turning your garage into an office. Because the garage is set apart from the central living spaces in your house, it can work especially well for those who need a little more privacy or quiet for their work.

Saturday, January 1, 2022

2021: What A Year

Ok, I’ll admit it…I wasn’t prepared for the impact that returning to work in person would have on my life and on TRET. Now, 2021 is coming to an end and I find myself yet again writing another end-of-the-year post in which I am apologizing for the recent inactivity on this awesome blog. This time, however, it’s a little different.

2021 marked 10 years since I published the first post on this blog. At the time I was real estate agent and teacher who was about to begin law school and was looking for ways to better understand real estate modeling and real estate finance. I hoped to create a community of like-minded people so that we could explore ways to better value real estate properties and mortgages and discuss the market. Ten years and many experiences later this blog has grown and transformed into a general forum on all things real estate and I am amazed at the direction it has taken. 2021 has been an amazing year for TRET, so let’s take a look at the year in review.

Tuesday, August 31, 2021

The End of Summer

Stephon Martin

Waves, real estate, summer, commercial real estate, residential real estate
August is coming to a close and although Summer isn’t officially over until September 23rd, the end of August has an unofficial feel of transition. School will soon have begun for all children in the United States and the country will attempt to push forward out of the shadow of COVID-19. Some areas will forge ahead more successfully than others, but an attempt will be made by all. The beginning of September means that the holiday season is just around the corner. With the impending change of the season, how will the real estate market be affected?