NAR_settlement
00:00:00.000 | [MUSIC PLAYING]
00:00:03.380 | Hello, everybody.
00:00:09.240 | It's Sam from the Financial Samurai podcast,
00:00:11.840 | where I try to help you achieve financial freedom sooner
00:00:15.240 | rather than later and figure out all that's
00:00:18.240 | going on that highly matters in the personal finance world.
00:00:22.580 | In this solo episode, I want to talk
00:00:24.240 | about why every residential real estate
00:00:26.280 | investor is suddenly richer, how much real estate commissions
00:00:30.800 | will come down, and also a win-win scenario where
00:00:34.520 | the seller, the prospective buyer, the listing agent,
00:00:37.720 | and the buyer's agent will all benefit from a life
00:00:42.920 | post the National Association of Realtors settlement.
00:00:46.480 | Now, given the settlement, $418 million on March 15, 2024,
00:00:51.800 | after the judgment, I think, was in November 2023
00:00:54.920 | for $1.8 billion plus treble damages that could lead up
00:00:58.040 | to like $3 plus billion.
00:01:00.040 | This is great news for home sellers,
00:01:03.680 | for residential real estate investors and owners
00:01:06.920 | specifically.
00:01:08.160 | Why is that?
00:01:09.000 | Well, they were the ones burdened
00:01:11.420 | with paying the so-called, quote, "standard real estate
00:01:14.240 | commission," ranging from 5% to 6%.
00:01:17.420 | And now, after the settlement, real estate commissions
00:01:20.240 | should fall between 1% to 4% immediately.
00:01:24.040 | Well, maybe not immediately, immediately,
00:01:26.080 | but definitely within the next six months,
00:01:28.680 | definitely by the end of 2024 or 2025.
00:01:33.000 | Already, before this settlement happened on March 15,
00:01:37.440 | I had negotiated 3.5% from a veteran husband-wife couple
00:01:41.800 | who has been selling Westside San Francisco real estate
00:01:45.560 | for over 10 years.
00:01:47.640 | They agreed to 3.5%, and they agreed to accept 1.5%
00:01:53.480 | and pay the buyer's agent 2%, which I actually
00:01:56.000 | thought was unfair, because they were going to be doing
00:01:58.280 | a lot more of the work.
00:01:59.920 | And I told them that.
00:02:01.160 | And so they said, well, if you want to lower it to 2%,
00:02:04.080 | that's OK.
00:02:05.040 | I didn't think that was right.
00:02:06.400 | And they did say, well, if you want
00:02:08.120 | us to lower it to 1.5% for the buyer's agent, that's OK too.
00:02:13.000 | And if that's the case, my total commission expense
00:02:15.860 | would be 3%.
00:02:17.680 | But they were very, very, very hesitant on doing that.
00:02:21.440 | And that shows the power of luring in buyer's agents
00:02:26.480 | with higher commission payouts.
00:02:29.000 | And this is called steering, which is not
00:02:31.200 | looked positively upon by people in the industry.
00:02:34.640 | Now, ultimately, I didn't end up going with them,
00:02:37.400 | because I just want to own this awesome panoramic ocean view
00:02:41.400 | home in San Francisco's Westside,
00:02:43.000 | because I think we're at the beginning of another strong
00:02:46.160 | real estate upcycle in the city because of big technology
00:02:50.400 | and as well as artificial intelligence.
00:02:53.040 | I've seen this movie before.
00:02:55.320 | I saw when Google and Facebook went public.
00:02:58.920 | And it really pushed up San Francisco Bay Area real estate
00:03:03.280 | prices.
00:03:04.100 | And I think this is going to happen for the next 10 to 20
00:03:06.480 | years as well.
00:03:07.200 | So I decided to hold on.
00:03:09.600 | Well, what happens when real estate commissions go down?
00:03:14.080 | That means home sellers get to keep 1, 2,
00:03:18.920 | eventually perhaps up to 6% of the value of their homes,
00:03:23.720 | because that's how much real estate commissions will
00:03:26.440 | come down.
00:03:27.160 | So if it comes down by 1% to 4% on average over the next 12
00:03:29.840 | months, that is how much boost--
00:03:33.160 | that is the boost in value of everyone's real estate
00:03:37.320 | holdings in residential.
00:03:39.000 | So for example, if you own a million dollars
00:03:40.960 | worth of property, real estate commissions go down 1%.
00:03:44.240 | That's $10,000 boost.
00:03:46.120 | If it goes down 4%, that's $40,000.
00:03:48.840 | And maybe in 10, 20 years when technology and AI automates
00:03:55.160 | real estate buying and selling, maybe that transaction cost
00:03:58.200 | will go down from 5%, 6% to 0% or 0.1%.
00:04:03.720 | After all, if you look at the online brokerage rate
00:04:05.840 | commissions, they have all gone down to $0.
00:04:10.680 | And they are operating just fine.
00:04:13.280 | Heck, look at Robinhood.
00:04:15.200 | Robinhood is up like 80-plus percent from its bottom
00:04:19.120 | in 2022.
00:04:20.800 | And it doesn't charge anything.
00:04:23.280 | So this is how everyone has to think
00:04:25.760 | who owns residential real estate.
00:04:28.680 | Your value just got a nice, at minimum 1%,
00:04:33.720 | and probably up to 4% boost in value over the next 12 months.
00:04:38.480 | So if you're thinking about selling,
00:04:40.620 | I would wait because it will take some time for real estate
00:04:45.480 | commissions to come down.
00:04:46.840 | Although I just said I negotiated 3.5% myself
00:04:50.040 | in January 2024 before the settlement,
00:04:53.000 | but after the verdict that occurred in November 2023.
00:04:57.960 | Overall, in general, the ideal length of time
00:05:01.440 | to own real estate is forever.
00:05:03.200 | It's just the same thing with stocks.
00:05:04.720 | The ideal length of time to own stocks, the S&P 500
00:05:08.000 | specifically, is forever.
00:05:09.960 | But with stocks, unfortunately, you can't enjoy your stocks.
00:05:12.520 | There's no utility in stocks.
00:05:14.800 | With real estate, at least, it's tangible.
00:05:17.280 | You can see it.
00:05:18.040 | You can live in it.
00:05:18.840 | You can enjoy it.
00:05:19.840 | Even if you don't plan to sell any of your real estate
00:05:23.520 | holdings, your residential real estate holdings,
00:05:26.320 | you also have a boost of 1% to 4%
00:05:29.520 | immediately with the value when you calculate your net worth.
00:05:34.320 | Net worth is somewhat of an amorphous subjective
00:05:37.040 | calculation.
00:05:38.320 | How much is a private business or a private equity
00:05:42.200 | stake really worth?
00:05:43.600 | You don't really know, so you've got to just kind of guess
00:05:46.920 | and come up with best-guessed estimate.
00:05:49.080 | But in real estate, it's kind of the same thing.
00:05:51.200 | You can think your real estate is worth x,
00:05:53.840 | but it might be worth x minus 10% or plus 5% or 10%
00:05:57.840 | if you go out to the market.
00:06:00.280 | However, for your books, for your personal private books,
00:06:03.840 | net worth calculation, you can boost your real estate holdings
00:06:06.360 | by 1% to 4% because of real estate commissions declining.
00:06:12.880 | And here's the thing, folks.
00:06:14.760 | Do not take offense to this change
00:06:18.000 | in the structure of real estate commissions.
00:06:21.080 | The only people really complaining,
00:06:23.720 | the only people commenting on Financial Samurai, for example,
00:06:26.640 | who are upset about this, are real estate agents.
00:06:29.120 | And I understand this.
00:06:30.640 | And the reason why is because buying agents
00:06:35.240 | will probably earn less money.
00:06:37.520 | And selling agents, maybe they'll earn less money, too.
00:06:41.200 | But not necessarily, because when you cut prices,
00:06:46.520 | volume tends to go up.
00:06:48.240 | It's the elasticity of demand.
00:06:51.720 | And so in this case, maybe there might be more real estate
00:06:54.800 | transactions.
00:06:55.520 | Because think about all the people who've
00:06:56.760 | been sitting on the sidelines.
00:06:58.240 | They don't want to pay the 5% to 6% commission rate.
00:07:01.920 | And they're finally seeing the news saying, oh, a judge
00:07:04.880 | and the jury of our peers said this
00:07:06.760 | is price fixing and collusion.
00:07:08.840 | And therefore, real estate prices
00:07:10.720 | are going to face market rates, market pressure.
00:07:15.560 | This ruling is not an indictment on the hardworking and honest
00:07:20.040 | real estate agents out there who are just
00:07:22.200 | trying to make a living.
00:07:23.920 | This is not personal.
00:07:25.040 | This is business.
00:07:26.120 | The ruling was against letting the markets do their job.
00:07:31.200 | Think about how the markets did their job
00:07:33.960 | with practically every single industry
00:07:36.240 | that faces competition.
00:07:37.880 | It has pushed commission rates down.
00:07:41.240 | This is one of the reasons why I left the equities
00:07:43.320 | business in 2012.
00:07:45.240 | It seemed very clear to me that commission rates in trading
00:07:48.200 | were going to go down because algorithmic and electronic
00:07:51.400 | trading, which it has.
00:07:52.840 | And now a lot of the trades are free.
00:07:55.380 | So for institutional equities, you can really only make money.
00:07:58.640 | Maybe, well, you can make money on research.
00:08:01.480 | You can make money on block trading.
00:08:03.720 | But those commission rates have come down,
00:08:05.460 | so compensation has come down.
00:08:07.320 | And that's just the way free markets work.
00:08:11.360 | So the ruling is trying to fix the free markets not working
00:08:16.960 | in real estate commissions, which
00:08:18.780 | have stayed sticky for decades, while every other industry
00:08:21.800 | that I can think of has seen commission rates go down.
00:08:25.540 | So I do want to highlight a way for buyer's agents
00:08:30.380 | to make money.
00:08:31.860 | And the one thing I think is very important
00:08:33.780 | is that all buyer's agents will now
00:08:37.100 | be required for their clients to sign a contract
00:08:41.140 | to be able to work with them.
00:08:42.660 | Because it's unfair.
00:08:43.500 | It's unfair for prospective buyers
00:08:45.580 | to use a buyer's agent for 20 showings
00:08:48.780 | and submit offers for five properties, not succeed.
00:08:52.980 | And then the buyer agent never gets
00:08:54.540 | paid for any of the work that they've done.
00:08:56.580 | That's really not fair.
00:08:57.660 | We should compensate buyer's agents accordingly.
00:09:00.580 | And the market will dictate that.
00:09:02.780 | And so what I think will happen is
00:09:04.940 | there's going to be clear contracts.
00:09:07.060 | And in the contracts, it'll highlight exactly what
00:09:09.380 | the buyer's agent will do.
00:09:11.580 | And I have this in a post.
00:09:12.620 | It's a really nice, simple graphic.
00:09:15.460 | Has a nice fee schedule.
00:09:17.180 | Client onboarding, $200.
00:09:19.180 | Draft and submit offer, $500.
00:09:21.860 | And $100 for every additional offer.
00:09:25.380 | $100, open escrow with title and begin escrow process.
00:09:29.500 | $100, schedule and coordinate home inspection.
00:09:32.420 | $250, review homes, inspection, and draft buyer response.
00:09:37.940 | $25 to process all amendments and addendums.
00:09:41.260 | This is per addendum.
00:09:43.180 | $250, review closing statement and finalize transaction.
00:09:47.020 | $200, buyer final walkthrough.
00:09:50.140 | $400, transaction brokerage insurance due at closing.
00:09:54.260 | For a total cost of $1,900 to $2,300.
00:09:57.940 | And all commissions paid by seller
00:10:00.100 | to be credited to buyer at close of escrow.
00:10:02.780 | This is the key.
00:10:03.540 | You just credit the buyer so that the buyer can pay for this.
00:10:08.580 | And that is the workaround.
00:10:10.660 | And why would a seller ever credit the buyer?
00:10:15.140 | Well, it's to get the deal closed, right?
00:10:17.620 | The seller wants to sell and it's a negotiation.
00:10:20.700 | You've got to give and take.
00:10:22.220 | It is the way things are.
00:10:24.940 | And there's another addendum.
00:10:26.220 | It says, if the transaction does not close,
00:10:28.060 | the buyer to receive $500 credit towards future transactions.
00:10:32.700 | So this is an incentive for the buyer
00:10:34.980 | to keep on using the buyer's agent.
00:10:38.620 | And everything is negotiable, folks.
00:10:40.620 | The prices that I just said are negotiable.
00:10:43.740 | You might want to incentivize the buying agent
00:10:47.060 | to try to get you a better price or a lower price on the deal.
00:10:51.060 | And if they can get it down by, let's say, every $10,000,
00:10:56.180 | they earn an extra 10%.
00:10:58.020 | Or so, whatever it is.
00:10:59.380 | Every dollar you save from the price that the agent is asking,
00:11:03.820 | the listing agent is asking, the buyer agent gets 10%.
00:11:07.500 | So if you save $100,000 from their purchase price,
00:11:12.180 | 10%, $10,000 goes to the buyer's agent.
00:11:16.180 | I think that's very well worth it.
00:11:17.740 | You still save a net $90,000.
00:11:20.740 | So I think this type of structure,
00:11:22.740 | this type of agreement will be more commonplace.
00:11:25.020 | It's very clear.
00:11:26.980 | It's a pay for service, which I think is fair.
00:11:30.980 | And in a way, I think it could generate more revenue
00:11:35.420 | for buyer's agents.
00:11:36.980 | Now, you let me know what you think about this fee structure.
00:11:39.620 | I think it's quite fair.
00:11:41.820 | And if you negotiated and both sides agree,
00:11:45.460 | then it is, by definition, fair and affordable
00:11:48.660 | because both sides agree to it and signed to the contract.
00:11:52.340 | Now, let's just do a quick example of how both seller
00:11:55.460 | and the buyer and both agents win.
00:11:57.780 | Here's a scenario where a listing agent charges a 2%
00:12:01.100 | commission to list and successfully sells a $500,000
00:12:04.180 | house.
00:12:05.580 | First of all, the listing agent earns $10,000 gross commission.
00:12:09.140 | 2% times $500,000.
00:12:11.780 | And despite the 2% commission being slightly lower
00:12:14.500 | than the 2.5% to 3% commission they might have earned
00:12:17.780 | with a 5% to 6% commission and splitting it
00:12:20.660 | with the buyer's agent, it remains pretty good.
00:12:24.420 | 2% is just 0.5% to 1% below what they could have earned
00:12:30.620 | before the settlement.
00:12:32.900 | Secondly, by opting for a 2% commission instead
00:12:35.380 | of the traditional 5% to 6% commission,
00:12:38.260 | the home seller saves $15,000 to $20,000.
00:12:43.540 | So 3% to 4% times $500,000 is $15,000 to $20,000.
00:12:47.340 | That's a clear benefit and a winner.
00:12:49.660 | And again, I've already said that home sellers
00:12:52.420 | or residential real estate owners or investors
00:12:56.340 | win the most from the settlement.
00:12:58.580 | Third, the buyer's agent, under the agreement
00:13:01.300 | I just talked about, earns $2,000 gross.
00:13:04.980 | And that is also a win.
00:13:07.700 | Lastly, the home buyer receives a $3,000 credit
00:13:11.980 | from the home seller.
00:13:13.420 | And that represents 20% of the 3% commission savings.
00:13:18.100 | In other words, 0.6% times $500,000 equals $3,000.
00:13:22.300 | Because the seller wants to close the transaction
00:13:25.780 | and share the wealth of the commission savings.
00:13:28.300 | They could have offered more than 20% of 3%.
00:13:31.820 | They could have done 30%, 40%.
00:13:33.340 | They could have done 50%.
00:13:34.380 | It's everything negotiable.
00:13:36.580 | But the point is there is a winning scenario here.
00:13:41.420 | And consequently, in this example,
00:13:43.260 | the home buyer effectively makes $1,000 from the purchase
00:13:47.340 | because they got a $3,000 credit
00:13:49.020 | and they only had to pay the buyer's agent $2,000.
00:13:52.980 | So how about them apples?
00:13:54.540 | That sounds like a quadruple win.
00:13:57.460 | Okay, the home seller's overall commission rate
00:14:01.060 | isn't 2% because they offered 30% of the 3% savings.
00:14:07.060 | So the net overall commission rate for the home seller
00:14:11.220 | is 2.6%.
00:14:12.780 | And that's still lower, 2.4% and 3.4% lower
00:14:16.980 | than the "standard" 5% to 6% rate.
00:14:20.100 | And yes, buyer's agents will earn less than they would
00:14:24.300 | if they could have earned 2.5% to 3% commission rate.
00:14:27.820 | What is that, $12,500 to $15,000 they could have earned
00:14:32.300 | if they successfully represented their buyer
00:14:34.500 | to buy this house.
00:14:36.100 | But they still make $2,000 and it's honestly a reflection
00:14:39.660 | of the dynamics of free markets.
00:14:41.900 | Free markets determine this and home buyers will determine
00:14:46.220 | how much they're willing to pay for a buyer's agent.
00:14:49.380 | The market has changed, think about it.
00:14:51.340 | The majority of home buyers are now taking charge
00:14:53.560 | of their home search online themselves.
00:14:55.660 | They're browsing listings and attending open houses.
00:14:58.260 | When I go to open houses, 95% of the people browsing
00:15:01.300 | aren't browsing with their real estate agent.
00:15:03.500 | I don't know why, but their real estate agents
00:15:05.780 | are doing something else.
00:15:07.460 | And then thanks to platforms like Zillow and Redfin,
00:15:09.900 | home buyers can access all the necessary data
00:15:12.540 | to determine fair market prices for comparable homes.
00:15:15.260 | Heck, Zillow has its estimate and Redfin also has
00:15:18.100 | its estimate and you can look at the comps yourself
00:15:21.180 | and come up with your own estimate after you look
00:15:23.340 | at the homes individually or through open houses.
00:15:27.780 | And then making an offer, very simple now with DocuSign.
00:15:31.140 | Literally, you just click buttons, it's a preset form
00:15:34.140 | and you just click the buttons with your signature
00:15:36.540 | and you can do it within five minutes.
00:15:38.660 | And that's the strategy I've used, spray and pray.
00:15:40.940 | You just make all these offers to homes that you like,
00:15:44.140 | maybe you underbid on them, whatever,
00:15:46.400 | and you just never know because the opportunity cost
00:15:48.820 | isn't as great anymore.
00:15:49.860 | You don't have to meet in person to sign whatever,
00:15:52.260 | how many pages of documents physically.
00:15:54.460 | It's so easy through DocuSign.
00:15:57.020 | Meanwhile, home buyers can educate themselves online
00:15:59.900 | at no cost, they can learn about the home escrow process,
00:16:03.700 | the earnest money deposit, financing options,
00:16:07.140 | home inspection contingencies, financing contingencies,
00:16:11.180 | how to write a real estate love letter.
00:16:13.000 | You can find all of this on Financial Samurai
00:16:15.380 | if you just Google whatever it is you wanna learn
00:16:17.740 | and add Financial Samurai, you will find many, many,
00:16:21.500 | many answers because I'm a real estate enthusiast
00:16:24.100 | who has been buying his own real estate since 2003.
00:16:27.860 | And so in conclusion, there will be very big changes.
00:16:32.100 | They'll be maybe slow, but I think they're gonna be faster
00:16:34.980 | than expected because the consumer, the home seller
00:16:37.660 | and the home buyer is getting more educated more quickly
00:16:41.540 | than ever before thanks to podcasts, blog posts,
00:16:45.340 | media reports and social media.
00:16:47.980 | And net net, I think this is a good thing
00:16:50.260 | because the five to 6% is a wealth transfer in the way
00:16:54.580 | towards efficiency and free markets.
00:16:56.900 | Old Americans look like they're staying
00:16:58.900 | in their homes for longer.
00:17:00.500 | And as a result, they are benefiting.
00:17:02.900 | They are riding that real estate wave because again,
00:17:05.940 | the ideal time period to own a home is forever.
00:17:10.260 | And so with real estate commissions coming down,
00:17:12.540 | I hope you all hold your real estate holdings
00:17:16.140 | for longer as well.
00:17:18.040 | Thanks so much everyone for listening.
00:17:20.060 | For those interested in investing in residential real estate
00:17:22.460 | in lower cost areas, you can check out Fundrise,
00:17:25.060 | a long-term sponsor of Financial Samurai.
00:17:28.180 | Financial Samurai is also an investor in Fundrise funds.
00:17:31.820 | You can go to financialsamurai.com/fundrise, F-U-N-D-R-I-S-E.
00:17:36.820 | Both Ben Miller, the CEO and I think we have passed
00:17:39.740 | the bottom of the real estate market.
00:17:41.620 | I think that was in third quarter of 2023.
00:17:43.660 | We think mortgage rates will be coming down.
00:17:46.140 | I think there's pent up demand.
00:17:47.740 | And I think the trend is a multi-decade trend
00:17:51.220 | towards demographic shifts,
00:17:53.060 | towards the lower cost areas of the country.
00:17:54.660 | Thanks to technology and work from home.
00:17:57.180 | Finally, if you want to increase your chances
00:17:59.640 | of achieving financial independence sooner,
00:18:02.020 | subscribe to the free Financial Samurai newsletter
00:18:04.780 | at financialsamurai.com/news.
00:18:08.500 | Thanks for listening, sharing, reviewing, means a lot.
00:18:12.660 | Take care.
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