How The NAR Lawsuit Exposed The Broken Real Estate Brokerage Industry

Posted on Jul 15, 2019

This is the first in a series of blogs that Houwzer CEO & Co-Founder Mike Maher will be publishing monthly moving forward. Although this piece is focusing on the NAR lawsuit, many of our future topics are teased throughout.

In case you haven’t heard, the National Association of Realtors (NAR) was slapped with a second class action lawsuit alleging that mandatory fees for buyer brokers violate antitrust laws. The suit further alleges that NAR, along with Realogy (parent company of Coldwell Banker), HomeServices of America, Re/Max, and Keller Williams, have conspired to drive up seller costs and reduce competition by requiring a home seller to pay compensation to a buyer’s broker.

These cases are attacking the fundamentals of cooperation and compensation – practices that essentially serve as the foundation that residential real estate, Realtor associations, and MLSs in the United States were built upon. Houwzer typically does not comment on the merits of specific lawsuits. However, the importance of the recent NAR lawsuit can’t be ignored. NAR has been sued before on similar grounds, but what makes this different is the timing of the suit, the law firms involved, and the resulting impact on today’s real estate brokerage industry compared to yesteryear.  

I’m often asked about the role that Realtor Associations and MLSs play in the home sale process. To answer that question requires context. There are still more than 700 MLSsthroughout the country. Some are for profit, some are not for profit, and some are the local associations themselves. And the associations exist at the local, state, and national level creating an additional layer of complexity for agents and consumers alike. Although firms like BrightMLS are consolidating other MLSs, questions still remain about data ownership, membership and fee structures, and most importantly, the rules that govern buyer broker commissions and cooperation.  

Let’s talk specifics for a second to illustrate how confusing, and potentially conflicting, this could be. The California Association of Realtors (CAR) is a trade organization led by the same CEO for over 30 years. That CEO was also the CEO of zipLogix, a for profit company in which the National Association of Realtors was an investor. zipLogix is a real estate transaction management platform that contains the state-approved real estate documents. The only way to access those documents was through zipForms, and it was nearly impossible for other transaction management platforms to include those forms. zipLogiz was recently acquired by Lone Wolf, which has been hailed a victory by NAR and I’m sure the CEO of CAR. The reality is quite the opposite. This clear conflict of interest stifled innovation in the space for decades.

Houwzer believes that the interdependent relationships of Realtor associations and MLSs intentionally or unintentionally create local market pricing conventions that real estate brokerages and their agents feel obligated to adhere to under the guise of the term ‘cooperation’. While this has some benefits, it also has significant drawbacks. Consumers feel they have little power in their ability to control the pricing of the transaction of the largest asset they’ll own in their lifetime. In turn, this limits their options and therefore increases their costs.

We built the Houwzer model around the customer, and we believe that transparency is a critical component to arming the consumer in this complex, unique, infrequent, emotional, and expensive transaction. Unlike most mature industries, the brokerage industry has not seen the benefits of technology drive down the price. Most objective people agree that removing friction and costs for consumers in any transaction is ultimately a good thing. This is one reason why Houwzer has modified its buyer broker fee to 2.5% across all its seller listings. Not only does this further reduce costs for all parties in the transaction, it also allows Houwzer to remain cooperative with the other agents of the associations of which we are members. If possible, we may experiment in the future with reducing this price further if we believe the market conditions support it.

When we first launched Houwzer in 2015, we discovered that NAR has been and continues to be a top three lobbying organization in the country, usually second only to the US Chamber of Commerce – a fact that most consumers don’t know nor understand. When we share that information, people usually immediately ask why. We think it’s a really good question that more people should be asking. Perhaps this lawsuit will help all of us understand that better.

Regardless of that answer, what makes this case unique in terms of timing is another secret we uncovered in our early days. Houwzer’s COO brought this insider insight when he joined the team after leaving leadership roles at a local Keller Williams brokerage and Weichert’s Corporate team. When he shared these data-supported insights to me, the insight was both frightening and enlightening – local real estate brokerages are dying a slow, painful death. Most brokerages are franchises with 1099 independent contractor agents and agent teams. To be clear, Gary Keller, the owner of the Keller Williams franchise is doing quite well. But the local franchisee, on the other hand, is struggling to turn a consistent profit from its core service – real estate brokerage commissions. The average ‘company dollar’ for these brokerages is 10-15% – that is the percentage the brokerage keeps of every dollar that comes in the door from agents. 85-90% goes right back out the door to the agent on a weighted average basis.

Yes, that’s correct. Top producing agents and agent teams have demanded such high splits that there is little to no profit left for the brokerage. Since the agents generate most – if not all – of their own leads and business and essentially have to handle all aspects of the deal on their own, who can blame them for seeking such high splits? After all, that is the sign of an efficient market. This has resulted in the national average net profit for the local boutique and franchise broker to be a measly 2.5% and that includes bill-backs to agents for desk fees, printer copies, training, books, and other ancillary services. With 90% of agents failing out of the industry every two years, this systemic issue is only exacerbated by the fact that new agents replace attrited agents keeping the bill-back machine going and brokerages in the black, although barely making ends meet.

At the same time, the industry is seeing real compression on once market-norm commissions. The standard 6% commission is now closer to 5%. And we think this is just the beginning. This is one of the assumptions built into the Houwzer model from the very start. At its average home sale price of $400,000, Houwzer need only rely on a total of 3% across both sides of the transaction to remain both profitable and sustainable for the long term. Its unique relationship with its salaried employee agents allows it to have a unique relationship with its client – ultimately saving them money while providing a conflict and pressure-free, full-service experience.

So what’s the big, resulting impact of this lawsuit if it is found to be of merit? Well, simply put – local brokerages would become extinct as commission compression would make brokerages unprofitable overnight with no way to right the ship. Like the titanic, they can see the iceberg ahead but can’t move quick enough to avoid the impending danger. Coupled with new entrants like Houwzer who offer a traditional experience for half the cost, the traditional brokerage model is stuck between a rock and a hard place.

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