Countdown To Chaos (episode 1): 🗞 Real Estate Is About To Get Very Messy

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What’s On My Mind: Real Estate Is About To Get Very Messy

Below is the trending topic on my mind this week in real estate in the Beach Cities of Los Angeles.

I'm sure by now you've seen a story someplace about the March settlement between the National Association of Realtors (NAR) and various class action lawsuits claiming industry collusion over commissions. I recorded a video about it in March that you can find here.

Although any real estate professional should be paying attention to these developments, they caught my attention in particular because I was a consumer fraud class action attorney in my first career, and I worked on big class action cases against huge companies defrauding consumers, like the attorneys who brought these commission lawsuits.

Because of my unique background and skill set, I've been watching my adopted real estate industry very closely in the 22+ years I've been involved. I have more than a few opinions about bad practices in the industry for sure. I definitely have opinions about these recent real estate lawsuits.

I think this settlement sucks for all consumers, including both buyers and sellers, and doesn't do one thing to make our industry better or transactions cheaper. No, costs are not going down as suggested by the mainstream media. They are just going into a gaping black hole, the opposite of the transparency the class action attorneys profess to want.

But enough about my opinions for today. Today’s objective is to update you on the roll out and what we know three months later.

Where We’re At Today

Since March, the class action settlement has been preliminarily approved by the court, and the government has come out threatening to swing its big hammer, despite the fact the government had its chance in another case, and settled with the NAR in that case.

These new DOJ threats are in complete contradiction to the settlement agreement reached in that other case, and open a whole other can of worms we’ll have to save for another day.

To recap the marquee points from the outcome in the case:

• Commission offers to buyer agents (a longtime staple in the industry) can no longer be shown in the MLS

• Going forward, buyers must sign representation agreements with their agents to receive services

• Said representation agreements must spell out commissions negotiated between the buyer and the agent, and put the buyer ultimately on the hook for payment

It sounds pretty simple when it can be summed up in three points, but this is a seismic shift in the industry. Buyers have historically worked more casually with agents, and agents were compensated by sellers for their services pursuant to the terms of the listing agreement and offer of compensation in the MLS.

Now, there will be no uniformly and maybe no publicly offered compensation, and buyers may find themselves having to come to the closing table with a big chunk of funds to compensate their agent.

Who Wins?

The mainstream media (and even our President 🤯) crowed the settlement will make home buying cheaper and more affordable.

In what alternate universe that happens, I’m not sure. Good agents aren’t coming to work for substandard compensation.

The more likely outcome is that buyers will skip representation or find themselves with only bottom tier agents available. In my humble opinion, this sounds like a recipe for litigation. Who wins with litigation??

As far as I can see, the only winner here is a certain plaintiffs’ attorney in Missouri who convinced his hometown jury that agents nationwide are screwing their clients.

I’m still scratching my head trying to figure out how 50 states with different practices all ended up in one certifiable class. 

What’s Next?

Sellers will still be free to offer concessions that might be used to pay buyer agent commissions, but it’s unclear whether the MLS can be used for that purpose. Certainly buyers can ask for a concession regardless of what has been offered.

But not every seller will agree it’s in their own interest to pay such a concession. Sellers have gotten very comfortable in their superior bargaining positions with our current long running sellers’ market, but real estate is cyclical. Sadly, crucial decisions are being made by judges and government lawyers who don’t know what buyers’ markets look like. 

I personally will be advising my sellers to offer buyer agent fee concessions. There are many reasons having a strong buyer agent in the mix is good for sellers, and getting sales done and staying done.

But you also have to know that there is going to be a lot of confusion by sellers, and there will be agents who will sell greed to get a listing. Add to that all the confusion on the buy side around getting their agents paid and structuring competitive offers in this new normal.

The whole landscape is going to be very chaotic for a while, and it will be extra important to have good representation. Good representation costs money.

Should Buyers Skip Representation?

Should buyers represent themselves to save the buyer agent fees?

Maybe, but only if they buy and sell frequently and know how to price an offer (especially in the new paradigm), size up the listing agent, negotiate a multiple offer scenario, schedule their own inspections (usually on a short timeline), wrangle their lender into funding on time, negotiate repairs based on inspections, and analyze and sign a whole stack of legally binding paperwork.

If all of that is in their wheelhouse, representing themselves is an option. In my 22 years in this industry, I haven’t seen many of these buyers.

Should Sellers Care Who Represents Buyers?

What sellers should care about is getting multiple buyers bidding on their property so that they end up with the best price and terms for their situation. How does the buyer’s agent impact this? Well, incentivizing an army of agents to shop your property brings more possible buyers. That’s a good thing for sellers.

Next, consider that buyers will have four options going forward to get their offers in front of sellers, and transactions closed. They’ve really always had these same options, but it was simply easier to default to an independent agent paid for by the seller.

Buyers can (1) bring a highly paid top notch agent who will make sure the transaction runs and closes smoothly; (2) bring a cheap, mediocre (or worse) agent who will either cause problems or do nothing; (3) come without an agent and slow things down because nobody is available to explain things and answer questions; or (4) use the listing agent or somebody on that agent’s team to represent their buying interests.

I’ll go into the implications of each scenario in a future article, but for today, just know that each scenario represents an increasingly higher risk of the deal unraveling or resulting later in litigation. For today, just recognize that sellers must understand and care about the new normal, and won’t likely save much money when they are not paying for top notch representation on the other side.

But wait. How come buyers haven’t always paid for their own representation?

Unfortunately, there are so very many cash outlays already required from buyers to close on a home (closing costs, loan fees, insurance, down payment, etc), leaving most buyers strapped for cash in home buying transactions.

This is exactly where the custom of sellers paying the buyer's agent came from, not because of some big conspiracy, as alleged by the class action attorneys and the government. And at the end of the day, the expense is deductible against equity gains, and sellers have a greater assurance that the deal will get done smoothly and stay done. It was a good practice, until some greedy lawyers decided it wasn’t.

When Does The New Normal Start?

I’m already seeing sellers offering discounted commissions in the MLS. All I can assume is that less ethical agents are trolling for listings, telling sellers they don’t have to pay buyer commissions anymore, without explaining the risks. In my research, the most reputable listing agents are still listing standard commissions in the MLS and it’s business as usual. 

But that all changes on August 17th when MLSs will no longer show commission offers. Buyers will have to start signing representation agreements and confront the reality that sellers may or may not pay for their agent. Buyers may also find it increasingly difficult to hire good agents to represent them. I can tell you that our buyer side business is about to undergo a radical change (to be announced soon).

So mark your calendars! You have a little over two months to lock down a deal and expect the old rules to apply. 

Next week, I’ll discuss more about the winners and the losers in the new normal.

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Market Trendlines This Week In The Beach Cities

What is the state of play in your target community? Is it a buyers' market? Is it a sellers' market? How strong is the trend? We're here to tell you that in the Beach Cities, the seller versus buyer market debate is a community by community analysis.

We talk tons about market trends on social media. Not seeing your personal target communities covered? Custom charts and reports are always available on request. We can report on all property types, zip codes and custom drawn boundaries. Just ask!

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Coming Soon: Something Totally Innovative In Real Estate

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The RE:mix

These are a few of the stories we reported on in last week’s Sunday RE:mix. Visit your subscriber dashboard to subscribe to the Sunday RE:mix to get stories delivered to your inbox on Sundays, nearly a week before they appear The Trendline.

• Microsoft Removes Portal Data From Bing Real Estate After Outcry

• Weekly Mortgage Rates Dip, Home Price Gains Soften

• US Job Creation Exceeds Forecasts, Signals Delays In Rate Cuts

• How Much Longer Will We Have To Deal With Higher Mortgage Rates?

• The Number Of Homes For Sale Is Increasing

• Your Equity Could Make A Move Possible

Do You Know About Our Office Hours?

We offer Office Hours as a low-key way to get your real estate questions answered without a lot of scheduling and commitment. Twice a week, Tracy hangs out on Zoom and is available to answer all your real estate questions. Click on siliconbeachzoom.com during the designated hours and you will land in our waiting room. Tracy will bring you in when the person ahead of you is done. Everything is private. Here are your next opportunities to join Tracy for Office Hours:

• Thursday, June 13, 2024 from 10 am to noon PT

• Sunday, June 16, 2024 from 10 am to 1 pm PT

• Thursday, June 20, 2024 from 10 am to noon PT

• Sunday, June 23, 2024 from 10 am to 1 pm PT

Alternatively, private 1:1 conversations can be scheduled here.

Find Tracy Around The Web

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• Have We Met? Read my bio

• My YouTube Channels - TracyTalksReal & TracyTalksRealLOCAL

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• Digital Office Hours - I hang out and you come ask questions 😊

• Schedule a 1:1 meeting for Zoom or IRL

Find Tracy In Real Life

Here are the public events where you can find me in coming weeks. Say hi if you’re in the house.

• June 10th - Catalysts Institute For Local Control Teleconference

• June 15th - Livable California Statewide Teleconference

• June 18th - Westchester/Playa Neighborhood Council Planning & Land Use Committee Meeting

• June 24th - Westchester/Playa Neighborhood Council Community Plan Update Committee Meeting

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Until Next Week…

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