A look at how proptech companies and the department of justice could change real estate.
The Department of Justice (DOJ) recently served a civil investigative demand letter looking into the handling of data on CoreLogic's platform as it relates to broker compensation. Federal authorities are actively investigating allegations of antitrust violations across multiple listing services in the United States, which is a clear signal that the archaic system of sellers paying broker compensation is ripe for change.
Additional pressure has hit the real estate market in recent months, with two separate class-action lawsuits that were filed to protest the National Association of Realtors' (NAR) rules regarding buyer-broker compensation. NAR requires home sellers to compensate the buyer’s broker, even if their involvement in the process was minimal. But the class action lawsuits now allege that specific organizations, namely HomeServices of America, Realogy, NAR, Keller Williams and RE/MAX, have broken antitrust laws.
These organizations have allegedly required their property sellers to pay their buyer’s broker to gain access to and list a home on the multiple listing service (MLS). Though NAR has vowed to fight the “baseless” claims, the DOJ’s new lawsuits reveal that the traditional way of doing real estate — in which companies often attempt to drive up costs and eliminate competition — may be on its way out.
What Is An MLS?
To maximize the chance to find a buyer, brokers list the property on their local MLS, a privately-owned home advertising database available exclusively for licensed brokers and agents. There are about 700 of these MLS services in the United States. For years, the MLS has held an ironclad grip on the industry, with the conventional wisdom being that it is challenging (if not downright impossible) to sell a property without listing it on the platform.
As a prerequisite to advertising a home, MLS rules require that brokers offer compensation to the buyer’s broker who finds a buyer for the property. A full-service seller's broker will generally decide how much of his or her compensation to split with a buyer’s broker (usually between 2.5-3% of a 6% commission fee). A listing-only broker will have the seller decide how much they would like to offer as compensation to a buyer's broker. Once an MLS listing is finalized, the posted listing then syndicates to hundreds of consumer real estate sites, including Zillow, Redfin and Trulia.
Should the DOJ find anti-competitive practices among MLS members, they could require broker commission figures to become public information. If data brokers start to share commission fees, it would enable home sellers and buyers to transact at a more affordable price. For example, if real estate agents market their commission rates on Redfin or Zillow, consumers would be able to see which agents charge more or less.
Opening The Door For Proptech Solutions
Sharing commission data could give rise to tech platforms that offer agents' services on demand, similar to the way Uber uses software to provide ride-hailing services. Real estate agents could earn supplemental income by conducting paid showings, viewings and contracts on demand. The more popular an agent, the higher a fee they could charge, as with UberLux. This provides cash-flow to agents and minimizes time-wasting, tackling head on the most significant problems agents face in the current system.
If the DOJ sees grounds for antitrust violations, or if the class action lawsuits prevail, then we may see the rise of property tech (proptech) companies offering disruptive solutions for home sellers and buyers to transact with one another directly. If a seller can decide in the future to offer only a seller's agent a commission, for example, then we may see a one-broker system where a buyer's broker doesn't exist anymore, and the seller’s broker will represent the seller and buyer in a limited capacity.
In 2016, Redfin reported that transactions involving for-sale-by-owners properties and limited service agents represented 19% of the marketplace. Since Redfin now allows buyers to contact sellers on their platform without a buyers' agent, those numbers could continue to grow as direct sellers and buyers forgo the use of a real estate agent. In this scenario, it’s easy to envision the rise of real estate tech brokerages that offer transaction automation as the means to monetize future revenue. Integration with companies to complete the sales process, like title and escrow services such as Endpoint, would provide real value and an opportunity for revenue. One could argue that solutions such as Opendoor and Zillow Offers are a response to the contraction of broker commissions and a possible alternative to replacing agents as they look to replace broker commissions with finance fees. Opendoor app users can arrange to view an Opendoor home without an agent.
There are many tools on the market aiming to help homeowners in the selling process, including a solution offered by my company. Another tool, Open Listings, focuses on giving buyers 50% of their commission to the buyer at closing while providing tools to schedule their visits, make offers, handle negotiations and get paired with an agent to handle the transaction through to closing. These solutions, as well as the DOJ's potential findings outlined above, could open the door for a new state of real estate.
Progress In The Real Estate Industry
The real estate market has been slow to adopt technology that gives more value to customers. But I believe the democratization of agent fees will provide more options to sellers and buyers. However, if the DOJ antitrust probe and class action lawsuits against the NAR result in lower commission fees, we may see the end of the traditional real estate agent all together — and the rise of software that automates real estate transactions. In this case, the role of the Realtor will surely transition to those tasks that cannot be automated.
Advanced technologies may put the power into the hands of sellers and buyers to ensure a fair and just way to buy and sell homes. Technology is the great equalizer of our day, and real estate tech platforms could provide an equal and appropriate way for Realtors, sellers and buyers to work together.