Hello, everybody. It's Sam from the Financial Samurai podcast, where I try to help you achieve financial freedom sooner rather than later and figure out all that's going on that highly matters in the personal finance world. In this solo episode, I want to talk about why every residential real estate investor is suddenly richer, how much real estate commissions will come down, and also a win-win scenario where the seller, the prospective buyer, the listing agent, and the buyer's agent will all benefit from a life post the National Association of Realtors settlement.

Now, given the settlement, $418 million on March 15, 2024, after the judgment, I think, was in November 2023 for $1.8 billion plus treble damages that could lead up to like $3 plus billion. This is great news for home sellers, for residential real estate investors and owners specifically. Why is that?

Well, they were the ones burdened with paying the so-called, quote, "standard real estate commission," ranging from 5% to 6%. And now, after the settlement, real estate commissions should fall between 1% to 4% immediately. Well, maybe not immediately, immediately, but definitely within the next six months, definitely by the end of 2024 or 2025.

Already, before this settlement happened on March 15, I had negotiated 3.5% from a veteran husband-wife couple who has been selling Westside San Francisco real estate for over 10 years. They agreed to 3.5%, and they agreed to accept 1.5% and pay the buyer's agent 2%, which I actually thought was unfair, because they were going to be doing a lot more of the work.

And I told them that. And so they said, well, if you want to lower it to 2%, that's OK. I didn't think that was right. And they did say, well, if you want us to lower it to 1.5% for the buyer's agent, that's OK too. And if that's the case, my total commission expense would be 3%.

But they were very, very, very hesitant on doing that. And that shows the power of luring in buyer's agents with higher commission payouts. And this is called steering, which is not looked positively upon by people in the industry. Now, ultimately, I didn't end up going with them, because I just want to own this awesome panoramic ocean view home in San Francisco's Westside, because I think we're at the beginning of another strong real estate upcycle in the city because of big technology and as well as artificial intelligence.

I've seen this movie before. I saw when Google and Facebook went public. And it really pushed up San Francisco Bay Area real estate prices. And I think this is going to happen for the next 10 to 20 years as well. So I decided to hold on. Well, what happens when real estate commissions go down?

That means home sellers get to keep 1, 2, eventually perhaps up to 6% of the value of their homes, because that's how much real estate commissions will come down. So if it comes down by 1% to 4% on average over the next 12 months, that is how much boost-- that is the boost in value of everyone's real estate holdings in residential.

So for example, if you own a million dollars worth of property, real estate commissions go down 1%. That's $10,000 boost. If it goes down 4%, that's $40,000. And maybe in 10, 20 years when technology and AI automates real estate buying and selling, maybe that transaction cost will go down from 5%, 6% to 0% or 0.1%.

After all, if you look at the online brokerage rate commissions, they have all gone down to $0. And they are operating just fine. Heck, look at Robinhood. Robinhood is up like 80-plus percent from its bottom in 2022. And it doesn't charge anything. So this is how everyone has to think who owns residential real estate.

Your value just got a nice, at minimum 1%, and probably up to 4% boost in value over the next 12 months. So if you're thinking about selling, I would wait because it will take some time for real estate commissions to come down. Although I just said I negotiated 3.5% myself in January 2024 before the settlement, but after the verdict that occurred in November 2023.

Overall, in general, the ideal length of time to own real estate is forever. It's just the same thing with stocks. The ideal length of time to own stocks, the S&P 500 specifically, is forever. But with stocks, unfortunately, you can't enjoy your stocks. There's no utility in stocks. With real estate, at least, it's tangible.

You can see it. You can live in it. You can enjoy it. Even if you don't plan to sell any of your real estate holdings, your residential real estate holdings, you also have a boost of 1% to 4% immediately with the value when you calculate your net worth. Net worth is somewhat of an amorphous subjective calculation.

How much is a private business or a private equity stake really worth? You don't really know, so you've got to just kind of guess and come up with best-guessed estimate. But in real estate, it's kind of the same thing. You can think your real estate is worth x, but it might be worth x minus 10% or plus 5% or 10% if you go out to the market.

However, for your books, for your personal private books, net worth calculation, you can boost your real estate holdings by 1% to 4% because of real estate commissions declining. And here's the thing, folks. Do not take offense to this change in the structure of real estate commissions. The only people really complaining, the only people commenting on Financial Samurai, for example, who are upset about this, are real estate agents.

And I understand this. And the reason why is because buying agents will probably earn less money. And selling agents, maybe they'll earn less money, too. But not necessarily, because when you cut prices, volume tends to go up. It's the elasticity of demand. And so in this case, maybe there might be more real estate transactions.

Because think about all the people who've been sitting on the sidelines. They don't want to pay the 5% to 6% commission rate. And they're finally seeing the news saying, oh, a judge and the jury of our peers said this is price fixing and collusion. And therefore, real estate prices are going to face market rates, market pressure.

This ruling is not an indictment on the hardworking and honest real estate agents out there who are just trying to make a living. This is not personal. This is business. The ruling was against letting the markets do their job. Think about how the markets did their job with practically every single industry that faces competition.

It has pushed commission rates down. This is one of the reasons why I left the equities business in 2012. It seemed very clear to me that commission rates in trading were going to go down because algorithmic and electronic trading, which it has. And now a lot of the trades are free.

So for institutional equities, you can really only make money. Maybe, well, you can make money on research. You can make money on block trading. But those commission rates have come down, so compensation has come down. And that's just the way free markets work. So the ruling is trying to fix the free markets not working in real estate commissions, which have stayed sticky for decades, while every other industry that I can think of has seen commission rates go down.

So I do want to highlight a way for buyer's agents to make money. And the one thing I think is very important is that all buyer's agents will now be required for their clients to sign a contract to be able to work with them. Because it's unfair. It's unfair for prospective buyers to use a buyer's agent for 20 showings and submit offers for five properties, not succeed.

And then the buyer agent never gets paid for any of the work that they've done. That's really not fair. We should compensate buyer's agents accordingly. And the market will dictate that. And so what I think will happen is there's going to be clear contracts. And in the contracts, it'll highlight exactly what the buyer's agent will do.

And I have this in a post. It's a really nice, simple graphic. Has a nice fee schedule. Client onboarding, $200. Draft and submit offer, $500. And $100 for every additional offer. $100, open escrow with title and begin escrow process. $100, schedule and coordinate home inspection. $250, review homes, inspection, and draft buyer response.

$25 to process all amendments and addendums. This is per addendum. $250, review closing statement and finalize transaction. $200, buyer final walkthrough. $400, transaction brokerage insurance due at closing. For a total cost of $1,900 to $2,300. And all commissions paid by seller to be credited to buyer at close of escrow.

This is the key. You just credit the buyer so that the buyer can pay for this. And that is the workaround. And why would a seller ever credit the buyer? Well, it's to get the deal closed, right? The seller wants to sell and it's a negotiation. You've got to give and take.

It is the way things are. And there's another addendum. It says, if the transaction does not close, the buyer to receive $500 credit towards future transactions. So this is an incentive for the buyer to keep on using the buyer's agent. And everything is negotiable, folks. The prices that I just said are negotiable.

You might want to incentivize the buying agent to try to get you a better price or a lower price on the deal. And if they can get it down by, let's say, every $10,000, they earn an extra 10%. Or so, whatever it is. Every dollar you save from the price that the agent is asking, the listing agent is asking, the buyer agent gets 10%.

So if you save $100,000 from their purchase price, 10%, $10,000 goes to the buyer's agent. I think that's very well worth it. You still save a net $90,000. So I think this type of structure, this type of agreement will be more commonplace. It's very clear. It's a pay for service, which I think is fair.

And in a way, I think it could generate more revenue for buyer's agents. Now, you let me know what you think about this fee structure. I think it's quite fair. And if you negotiated and both sides agree, then it is, by definition, fair and affordable because both sides agree to it and signed to the contract.

Now, let's just do a quick example of how both seller and the buyer and both agents win. Here's a scenario where a listing agent charges a 2% commission to list and successfully sells a $500,000 house. First of all, the listing agent earns $10,000 gross commission. 2% times $500,000. And despite the 2% commission being slightly lower than the 2.5% to 3% commission they might have earned with a 5% to 6% commission and splitting it with the buyer's agent, it remains pretty good.

2% is just 0.5% to 1% below what they could have earned before the settlement. Secondly, by opting for a 2% commission instead of the traditional 5% to 6% commission, the home seller saves $15,000 to $20,000. So 3% to 4% times $500,000 is $15,000 to $20,000. That's a clear benefit and a winner.

And again, I've already said that home sellers or residential real estate owners or investors win the most from the settlement. Third, the buyer's agent, under the agreement I just talked about, earns $2,000 gross. And that is also a win. Lastly, the home buyer receives a $3,000 credit from the home seller.

And that represents 20% of the 3% commission savings. In other words, 0.6% times $500,000 equals $3,000. Because the seller wants to close the transaction and share the wealth of the commission savings. They could have offered more than 20% of 3%. They could have done 30%, 40%. They could have done 50%.

It's everything negotiable. But the point is there is a winning scenario here. And consequently, in this example, the home buyer effectively makes $1,000 from the purchase because they got a $3,000 credit and they only had to pay the buyer's agent $2,000. So how about them apples? That sounds like a quadruple win.

Okay, the home seller's overall commission rate isn't 2% because they offered 30% of the 3% savings. So the net overall commission rate for the home seller is 2.6%. And that's still lower, 2.4% and 3.4% lower than the "standard" 5% to 6% rate. And yes, buyer's agents will earn less than they would if they could have earned 2.5% to 3% commission rate.

What is that, $12,500 to $15,000 they could have earned if they successfully represented their buyer to buy this house. But they still make $2,000 and it's honestly a reflection of the dynamics of free markets. Free markets determine this and home buyers will determine how much they're willing to pay for a buyer's agent.

The market has changed, think about it. The majority of home buyers are now taking charge of their home search online themselves. They're browsing listings and attending open houses. When I go to open houses, 95% of the people browsing aren't browsing with their real estate agent. I don't know why, but their real estate agents are doing something else.

And then thanks to platforms like Zillow and Redfin, home buyers can access all the necessary data to determine fair market prices for comparable homes. Heck, Zillow has its estimate and Redfin also has its estimate and you can look at the comps yourself and come up with your own estimate after you look at the homes individually or through open houses.

And then making an offer, very simple now with DocuSign. Literally, you just click buttons, it's a preset form and you just click the buttons with your signature and you can do it within five minutes. And that's the strategy I've used, spray and pray. You just make all these offers to homes that you like, maybe you underbid on them, whatever, and you just never know because the opportunity cost isn't as great anymore.

You don't have to meet in person to sign whatever, how many pages of documents physically. It's so easy through DocuSign. Meanwhile, home buyers can educate themselves online at no cost, they can learn about the home escrow process, the earnest money deposit, financing options, home inspection contingencies, financing contingencies, how to write a real estate love letter.

You can find all of this on Financial Samurai if you just Google whatever it is you wanna learn and add Financial Samurai, you will find many, many, many answers because I'm a real estate enthusiast who has been buying his own real estate since 2003. And so in conclusion, there will be very big changes.

They'll be maybe slow, but I think they're gonna be faster than expected because the consumer, the home seller and the home buyer is getting more educated more quickly than ever before thanks to podcasts, blog posts, media reports and social media. And net net, I think this is a good thing because the five to 6% is a wealth transfer in the way towards efficiency and free markets.

Old Americans look like they're staying in their homes for longer. And as a result, they are benefiting. They are riding that real estate wave because again, the ideal time period to own a home is forever. And so with real estate commissions coming down, I hope you all hold your real estate holdings for longer as well.

Thanks so much everyone for listening. For those interested in investing in residential real estate in lower cost areas, you can check out Fundrise, a long-term sponsor of Financial Samurai. Financial Samurai is also an investor in Fundrise funds. You can go to financialsamurai.com/fundrise, F-U-N-D-R-I-S-E. Both Ben Miller, the CEO and I think we have passed the bottom of the real estate market.

I think that was in third quarter of 2023. We think mortgage rates will be coming down. I think there's pent up demand. And I think the trend is a multi-decade trend towards demographic shifts, towards the lower cost areas of the country. Thanks to technology and work from home. Finally, if you want to increase your chances of achieving financial independence sooner, subscribe to the free Financial Samurai newsletter at financialsamurai.com/news.

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