The DOJ Wants to Totally Change How We Buy Homes

How a major antitrust case could change the way homes are bought and sold, opening new opportunities for investors and operators

Feb 27, 2024
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The National Association of Realtors is not having a good time. Between a raft of antitrust litigation, blackmail, accusations of sexual harassment, leadership churn, and exhaustion of liability insurance coverage, the US’s largest trade association—representing 1.6 million real estate agents nationwide—is in deep trouble.

But for all the salacious headlines, one recent case stands above the rest, threatening to fundamentally rework how homes are bought and sold: Nosalek vs MLS PIN. Two weeks ago, the DOJ came out strongly in favor of "compensation decoupling", meaning that listing agents can no longer offer blanket compensation to buyers’ agents. So home buyers will need to pay for their own agents, a shift with potentially massive ramifications for the market and a watershed moment for new approaches to the home-buying process.

Today’s letter will go a bit outside Thesis Driven’s normal CRE comfort zone to explore the tumultuous world of residential brokerage. We’ll cover:

  • The major lawsuits facing the NAR;

  • A deeper dive into Nosalek;

  • Implications for the residential market and listing portals, including thoughts from Spencer Rascoff, founder of Zillow;

  • A conversation with Mauricio Umansky and Jason Haber on their new NAR alternative;

  • Potential opportunities for operators and entrepreneurs as well as implications for major players.

A gNARly Situation

Before we tackle Nosalek and its potential impact on the real estate market, it’s worth spending a bit of time on the organization tasked with defending the US’s 1.6 million real estate agents: the National Association of Realtors.

The NAR is a trade association, which means it collects dues from its members to cover its work providing services and advocating for policies on their behalf. Specifically, it’s the single largest trade association in the entire country, with an annual budget of around $300 million. In addition to lobbying, the NAR also does a bunch of things like mediating disputes between agents, enforcing ethics rules, and providing continuing education.

Unfortunately, things have unraveled fairly quickly for the NAR over the past six months. To summarize:

  • In August (2023), the President of the NAR, Kenny Parcell, resigned amid sexual harassment accusations and a bombshell NYT exposé;

  • In October, a jury found that the NAR’s requirement that agents put all listings on the MLS violates antitrust law and awarded the plaintiffs a $1.8 billion settlement (Burnett v NAR). Burnett is actually one of eighteen different commission antitrust lawsuits the NAR is battling; you can see the major ones mapped out here.

  • Later that month, the DOJ flagged "significant concerns" with a settlement in a separate but related case, Nosalek v MLS PIN, which we’ll discuss in much greater detail later on.

  • In January (2024), the new President of the NAR, Tracy Kasper, suddenly resigned "after a blackmail threat to disclose a personal, non-financial matter;"

  • Earlier this month, the DOJ announced that they’d like to fundamentally rework buyer agent compensation, throwing out the Nosalek settlement and putting the case back in play.

  • Last week, the NAR disclosed they have exhausted their liability insurance coverage.

"It started in August," said Jason Haber, Compass agent and the co-founder of the American Real Estate Association, a NAR alternative launched late last year. "Since then it has been compounding, unforced errors. One thing after another. It’s a failure of culture."

While each of those points could be its own letter, today we will focus on the decision with the greatest potential to rework the single-family home market: Nosalek. But the broader chaos within NAR paints a picture of a weakened association in a poor position to fight for its members’ interests—and perhaps facing an existential crisis of its own.

Why Nosalek Matters

As anyone who has bought or sold a home understands, buyers do not (directly) pay their agents’ compensation. Rather, most home sales listings on the MLS specify a share—typically half the commission, or 3%—that goes to the buyer’s agent. Terminology-wise, these commissions are "coupled"; even though the buyer’s agent represents the buyer, they are compensated by a share of the commission from the transaction.

Recent lawsuits—both Burnett and Nosalek—argued that NAR rules mandating this practice are a violation of antitrust laws, a conspiracy to inflate agent commissions. Without getting into the legal details, courts have generally been receptive of arguments that NAR’s rules are effectively collusion among competitive firms to keep prices high—a clear violation of antitrust laws. Sensing the threat, the NAR has favored settling these suits out of court. Last summer, Nosalek was settled for $3 million.

But the story wasn’t over. Late last year, the Department of Justice expressed dissatisfaction with the Nosalek settlement, arguing it does not do enough to open up competition. And earlier this month, the DOJ made its intentions clear: to "decouple" commissions entirely, prohibiting sellers’ agents from making blanket compensation offers to buyers’ agents. That is, listing agents cannot explicitly promise any payment to buyers’ agents via the MLS. While this may seem like a small change, the implications are enormous.

I spoke with Zillow founder Spencer Rascoff on this topic, as few people know more about the arc of the residential real estate sector. "The real estate industry has done a great job of convincing buyers for the last 25 years that ‘buyers agents’ are free when really they're not," said Rascoff. "[The buyer] is actually paying for it because only one person brings a check to closing and that's the buyer."

But now all of that is likely changing. "Now," said Rascoff. "Buyers will have to pay out of pocket themselves."

Predicting Decoupling’s Impact

Analysts have varying opinions on the ultimate impact of decoupling, but it certainly reflects the biggest change in the mechanics of buying and selling homes in decades.

One, it seems unlikely that buyers’ agents’ 3% fee will simply be paid by the buyer instead of the listing agent with no other change to the market. As Rascoff noted, buyers today effectively retain an agent "for free" since the fee is paid by the listing agent; there’s little downside to working with an agent.

In a world where buyers’ agents are paid by buyers directly, the math and psychology changes dramatically. At today’s US median home price of $418,000, a 3% commission is $12,500—hardly an amount a buyer chooses to pay just out of the habit of hiring an agent. "I truly don't think buyers are ever going to pay a retainer or flat fee to real estate agents," said Phil Lang, founder of NYC-based real estate brokerage TripleMint and now Chief Business Officer at The Agency. "Today, fees come out of a transaction. If people have to plunk down money up front to search for homes, nobody's gonna do that—they'll just go directly to the seller’s agent."

And while a buyer’s agent can certainly attempt to negotiate compensation from a listing agent—there’s no rule against one-off dealmaking—they have little leverage after bringing a buyer to the table, and they’re unlikely to do significant work on only the hope that the other side will throw them a bone. Rob Hahn has a good overview of the possible second-order effects of this change:

First, no buyer agent anywhere would take the kind of risk of not getting paid at all, without either (a) huge upside, or (b) minimized downside. Think contingency fees for lawyers, who take 30-40% of the recovery routinely because of the risk of not getting paid at all. Minimizing downside likely means […] some kind of a retainer up front to minimize risk, then a refund/net-out system if the seller does agree to compensation.

Hahn (rightly) dismisses the notion that buyers would simply hire agents themselves at the current rate and structure. Instead, he proposes a few alternatives:

  • Retainers plus net-out from seller compensation. Buyer puts up (say) $12,000 to be paid out in case no sell-side compensation materializes; both sides are now aligned in pushing the seller to pay the buy-side fee;

  • Hourly rate and flat fee models;

  • Lower overall buy-side compensation, perhaps paired with one of the above models. While the current norm is a 2.5 to 3% fee, perhaps some agents would work for far less to the point a buyer would be willing to eat (or at least risk) the fee.

But Hahn also dismisses the idea that buyers would simply go without representation whatsoever, using the odd analogy of lawn care:

Another fear of the industry is that once buyers have to pay their own agents, most would just decide to go it alone. Go unrepresented and save 3%! Except that Americans spend about $52 billion a year for "lawn care." Meaning we spend billions so we don’t have to mow our own lawns. But those people are suddenly going to buy a $500K house without professional help? Riiight.

And this is where Hahn and I diverge. Mowing the lawn is a sweaty, painful, thankless, low-wage job that needs to be done at least once per week. Buying a house is an exciting, intellectually challenging chance to prove one’s business acumen that most people only have a few times in their lives. Multiple successful reality TV franchises are about buying and selling homes. Americans totally believe they will be able to represent themselves after watching a handful of YouTube videos.

And the free market is going to find some very creative ways to help them.

Technology to the Rescue?

From a macro view, residential sales brokerage is an unbalanced—some may say inefficient—industry. Last year, 1.6 million agents sold 3.8 million homes, approximately 2.4 homes per agent. To be fair, many of those agents were not working on real estate full-time. But it’s still a remarkable ratio of human beings to end product.

Nosalek threatens to dramatically rework this math. After decoupling, notes Rascoff, "Many buyers will choose to be unrepresented, meaning they'll just see houses on their own with listing agents." After finding a property they like, "They'll hire a lawyer to complete the transaction and they won't have a buyers’ agent at all."

In all likelihood, the ultimate outcome will likely be some combination of Hahn and Rascoff’s predictions: some buyers will retain an agent (albeit at a lower rate), while others will choose to go unrepresented. This creates two new needs for technology: helping buyers’ agents serve more clients at once and helping self-serving buyers find, vet, and purchase properties. Let’s tackle each:

Helping Agents Serve More Clients

I do not know where the "market clearing" price is for buyers’ agents in this new normal, but it’s likely that—with NAR commission mandates verboten—there will be a wide range of offerings from "full service" representation that looks much like what we have today to varying levels of "light touch" buyers’ rep services. Hahn paints a picture of what this might look like:

But what if the changes ahead of us means a smaller denominator: far fewer REALTORS? What if the 50% or so of REALTORS who do zero transactions can’t possibly convince any buyer to pay them a retainer, and certainly not a high hourly rate. So they leave and find something else to do with their time. What if another 25% or so can’t make it work on $20 an hour and end up as a paid assistant on an agent team? 7.6 million transaction sides divided by 400,000 working REALTORS is more like 19 transactions per REALTOR.

A $2,500 retainer x 19 transactions = $47,500 in annual income vs. the average of $44,813 in January of 2023. A $5,000 retainer with every seller refusing to compensate you is a $95K a year job. We all know that some sellers would be willing to take an offer with a compensation request built in, because their net would be higher, so the $95K a year is a floor, not a ceiling.

I’d take Hahn’s logic further and predict even more low-cost, high-scale agency models making far greater use of technology. A buyer’s agent charging a flat fee of (say) $500 and representing 100 clients simultaneously doesn’t have time to join his or her clients on every tour. Rather, they’ll need more robust project management and communication tools for handling multiple work-streams and maintaining consistent communication with an order of magnitude more clients at once. Scale dynamics may see the rise of "celebrity" buy-side agents managing even more clients in a network-style firm with very light-touch representation.

"I believe what will happen is there'll be fewer agents in the industry and more, you know, more power will accrue to the top agents," said Rascoff. "Luxury Presence is one of my portfolio companies. It’s a company that provides software and website tools to top agents. I think there'll be the beneficiary of a trend like that."

We’ll also likely see much more use of centralization and virtual assistants in this model, with many buyers’ agents choosing to send work overseas or automate it entirely to be able to serve more clients at once. Quality may suffer, which will introduce an opportunity for automated quality assurance and monitoring tools.

On that note, compliance will become a hot-button issue. Real estate agents are licensed and tightly regulated by state governments, many of which will not take kindly to some of the lower-priced buy-side models likely to emerge post-decoupling. This may lead to wide variances in acceptable models state-to-state, with some jurisdictions cracking down on low-cost models while others let the market rip.

It’s also likely we’ll see the rise of more "high-service" buy-side residential brokers who maintain their current commission level by adding more value—for instance, finding off-market properties and doing more of the legwork for buyers. This model, more common among investment sales brokers today, may enter the residential universe as buyers’ agents look to differentiate and justify their fees.

Helping Unrepresented Buyers

But some buyers will choose to eschew agent representation entirely, something the regulatory regime has little power to stop. In fact, there will likely be a fuzzy line between budget "buyers’ reps" doing much of their work in the Philippines and zero-cost AI assistants helping buyers comb the MLS, identify high-potential properties, schedule tours, and even negotiate a purchase. We’re already seeing the emergence of AI playing the role of buy-side agent; for example, Tomo’s recent release of an AI-powered home search tool.

Tomo is one company hoping their AI-powered tool could serve as a stand-in for the buyer’s agent

Decoupling may also provide the spark that pushes another wave of innovation among real estate discovery tools. The most dominant real estate portals today have changed little since 2008 and primarily function to funnel buyer leads to agents. Decoupling would fundamentally alter the value of those buyer leads—and the portals’ biggest source of revenue. "If buy-side compensation goes away, Zillow’s Premier Agent and Flex models get hit hard," notes Lang. "And sell-side leads don't traditionally come from the internet."

But that’s not stopping the portals from attempting to build their pipelines of sell-side leads. "The real estate portals are building up listings businesses to try to generate seller leads as sort of a hedge against the potential decline in the value of buyer leads," notes Rascoff.

But that doesn’t mean buyer leads don’t have value, and portals will likely experiment with new models to capture that value. In a world of self-representation, portals have an incentive to go further and put better discovery tools in buyers’ hands, possibly charging them directly for closing-related services or shifting to a lead generation model referring home buyers to moving-related goods and services.

It’s also likely we’ll see tracking and project management tools emerge to help buyers run their own home search processes, whether integrated with the portals or standalone. "Notion for Homebuying" makes far more sense in a post-Nosalek world. Tools that help unrepresented buyers find lawyers and title insurers—services that today often come through agent referrals—also stand to benefit.

Long Live the Agent

It would be far too premature to predict the end of the real estate agent. Companies originally intending to "disrupt" the residential brokerage business have instead found themselves becoming tools for agents time and time again—including Rascoff’s Zillow Group.

And some insiders also anticipate that the current status quo will persist through a set of gentlemen’s agreements—with violators being ostracized—rather than NAR mandates. "You'll always have agents looking out for the best interest of agents, as they know tomorrow they'll be on the other side," said The Agency’s Lang. "If I'm a listing agent, I want to keep an industry norm that a seller pays a buyer's broker. Tomorrow, that may be me that needs to get that compensation. In many markets, you have a couple great agents or firms that dominate. The managers at the larger firms in any city are going to make sure that offers with buy-side compensation are part of the norm."

Decoupling also threatens to bring more conflict and litigation to the brokerage world. "You have sticky situations that come up when a buyer is unrepresented but feels like the seller's broker is representing them," notes Lang. With more "dual agency" situations, the potential for misunderstandings—or worse—is greater. NAR’s troubles only make this problem more acute. "If NAR fails, there is no code of ethics to hold licensees accountable or structure for facilitation of mediation as well as arbitration for both member and consumer. This could present costly dynamics to conflict scenarios in real estate." said Daniel Moskowitz, broker-in-charge at Dunes Real Estate.

It is also possible that this problem simply goes away in a year. The Department of Justice, after all, is led by Merrick Garland, a Biden appointee unlikely to be retained by a hypothetical second Trump administration. And whoever replaces Garland will probably have priorities other than pursuing real estate agents (who tend to lean Republican). So if residential brokers can hang on for another 11 months, this problem might just disappear—for now. (As of this writing, RCP’s betting odds tracker place Trump’s chances around 44%.)

It’s also important to distinguish the future of the real estate agent from the future of NAR, which is facing its own competition. Late last year, The Agency’s Mauricio Umansky and Compass’s Jason Haber launched the American Real Estate Association, an alternative trade group. "You can't replace something with nothing, you need an alternative, so we created the AREA with that in mind," said Haber. "There's a lot of change in the real estate industry right now; we're at the forefront of that change with this new trade association. We don't have viability issues of NAR, and we’re [building] an inclusive community and culture."

Thus far, AREA claims to have "over 2,000 agents" on their waiting list; Umansky anticipates the organization will complete its filings and begin formally accepting members "in three months," with fees being introduced in early 2025.

Still, the residential brokerage world is feeling the pain of NAR’s weakness today. "The best case scenario, it'll take time and money to get to the other side of this," said Lang. "The worse case is that buyer's representation goes away. If you asked me a few years ago, I'd say the NAR is a very powerful lobbying group and I'd say there's no way they'd let this happen."

In a way, the DOJ is hitting agents when they’re down, already suffering from lower sales velocity due to rising rates. "This couldn't come at a worse time for the industry," notes Lang. Regardless of the final outcome, we are likely witnessing the biggest shakeup in residential sales in many years—one that will create pain and opportunities alike.

—Brad Hargreaves

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