For decades, disruptors and innovators in the residential real estate industry have been trying to chip away at the near monopoly that Realtors have had over home sales.
The monumental verdict in the Sitzer/Burnett commission lawsuit trial may finally be the giant-killing blow against the National Association of Realtors (NAR). Unless the decision is appealed, NAR will have to pay at least $1.8 billion in damages to residential home sellers who successfully proved that the organization – which represents real estate agents at most of the top brokerages in the United States – colluded with other defendants to inflate agent commissions.
The plaintiffs alleged that NAR’s Clear Cooperation Rule is “a market-shaping and distorting rule” that stifles innovation and competition. Even before the verdict was reached in the class-action trial, NAR warned that the “outcome could have a lasting impact on the way real estate professionals and transactions operate.”
This turned out not to be an overstatement – and its possible abolition is opening the doors to entirely new ways to buy and sell homes.
When CoreLogic acquired Roostify, the digital mortgage technology company I co-founded and led for more than a decade, in February, our mission was to accelerate and simplify the home lending experience.
However, not many people may know that when Roostify started over 11 years ago, our initial vision was to empower home buyers to manage as much of the home-purchase journey as they wished on their own through technology rather than working with brokers.
We built out a solution that put the consumers (homebuyers and home sellers) at the center of the transaction instead of a Realtor. We learned the hard way about the control that the NAR maintains over the entire residential real estate industry.
In particular, there are three levers of control that allow NAR to exert influence not just over transaction pricing, but also over market evolution and the pace and direction of innovation.
Each of these levers are intertwined with each other, but each represent major market disruption opportunities if left open to the free market without collusion. In simple terms, NAR is stifling innovation to maintain its monopoly.
Technology has brought greater transparency and predictability to the industry over the last 10 years. It brings us to a point in time where, with effective regulation, consumers can truly be placed at the center of the home-buying experience.
Here are the control levers that NAR has traditionally used to control every facet of the home buying and selling market:
- The listing/buyer agent dynamic: I personally learned the hard way about this party/counterparty dynamic when I bought my first home. I tried to do so without buyer agent representation, and was told by the listing agent that they would not entertain my offer unless it was submitted by another agent (of course, they offered to represent me as wel).
The United States is unique among OECD countries in not providing a clear path for buyers to represent themselves. As homebuyers know, agents provide value, but no two of them perform the same way or deliver the same value.
The question is whether their value is commensurate with the commission that they receive as an effective entitlement. As the Sitzer/Burnett case may well show, most listing agents are trained to steer their clients to offers that support this dynamic. Talk about a conflict of interest.
- The Multiple Listing Service: The MLS remains the primary means through which existing homes are listed in the United States. Much has been written about commission splits between listing and buyer agents being published on the MLS, making it the de facto listing source for Realtors.
In fact, 86% of homes that are sold in the US are listed on the MLS. IDX advancements have made this data more accessible to real estate portals. The “shop” experience has been digital for more than 15 years, but the “buy” experience remains offline. Why?
When potential buyers find a property, they still must work through a selling agent and the listing agent to make an offer. It’s akin to finding your car online and having to go into a dealership to buy it only 10 times more painful.
- Real estate forms: It is said that a contract is only as good as the paper it’s written on, and real estate purchase contracts are written on template legal documents that have been reviewed and approved by state-level real estate departments. Realtors are able to modify select provisions in the contract form as they negotiate on behalf of their clients.
This “straitjacket” approach obviates the need for the Realtor to maintain a license to practice law or for the client to engage an outside attorney to advise on certain terms.
The contract forms (including subsequent addendums) and data residing in the contract forms are all owned by the local association of Realtors, which are ultimately affiliated with NAR. And the technology itself is provided as a member benefit to members of both NAR and the statewide Realtor association. So that is an incentive to stay in NAR, right?
But let’s think about the data that resides in these forms. The trail of data for a single transaction tells the story of changes to purchase price, closing time frame and contract terms. It also tells the story of the network of listing and selling agents, title and escrow officers and lenders that collaborate on the transaction.
Furthermore, in many states the purchase contract is the form of an offer that multiple prospective buyers will submit to a seller – all of which is done through Realtors today. Each offer is an instructive data point, representing leading indicators of home value and market trends, informing price trajectory in a way that no appraiser or automated valuation model can.
The value of this data in aggregate is massive and provides all sorts of opportunities for optimization of the home buying and selling experience. And it needs to be unlocked. There is no evidence that the consumer is seeing this benefit.
While the Sitzer/Burnett ruling may have an immediate major impact on the listing/buyer agent control lever, the other two levers will likely remain intact, at least in the near term. It will be interesting and important to monitor legal, regulatory and market activity related to these domains.
Rest assured that Silicon Valley is watching, because the industry has been ready for real disruption for decades.
Rajesh Bhat serves as a Board Director of The Mortgage Office.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Rajesh Bhat at [email protected]
To contact the editor responsible for this story:
Deborah Kearns at [email protected]