A massive change could be coming to the way realtors are paid for real estate transactions. Managing Editor of HousingWire, James Kleimann discusses how several court cases have the potential to turn the housing industry on its head.

Full Transcript is Below:

– Welcome to NFM TV. I’m your host, Greg Sher. We are about to cover a really important thing going on in the real estate industry that’s being talked about all over the place, and that is a class action lawsuit, two of them in fact, right now, against the NAR which could dramatically change the landscape of both the mortgage and the real estate business. And joining us right now is James Kleimann. He is the Managing Editor of HousingWire. Just two days ago, he published an article, “What Happens if 1 million real estate agents disappear?” James, thanks for being with us. Really appreciate you unpacking this.

– Yeah, thanks so much for having me. I think it’s a really important discussion, Greg.

– Well, where do we begin? And I know that I’m being asked by people at NFM and in the industry what I think of what’s going on and I’m gonna confess, I don’t really know. And so I’m hoping you can bring all this to light.

– So, Greg, you’re not alone. I talk with mortgage loan officers, branch managers, even folks on the real estate side – title as well. There’s a lack of knowledge about some of these issues and in this case, it’s two of them, there are three major cases right now. And so the lawsuits, they aim to ban the cooperative compensation in the multiple listing services, which are the NAR controlled home listings databases, right? So in doing so, they would remove the longstanding practice of requiring listing agents and sellers to predetermine and pay buyer agent commission rates. In the most impactful scenario, this would essentially unbundle the commissions whereby home buyers then would have to pay their own agents directly. So instead of me buying a house and agreeing to a deal with the seller and the seller’s agents and those agents compensating my buy side agents, I would be paying directly $5,000, 6,000, 10, whatever term that ends up being and that that could have massive impact not just in the real estate space but across mortgage as well, right? How many of their referral partners from your LOs are are getting deals from the real estate referrals?

– Let’s start by talking about the first time home buyer who comes into the process needing a lot of handholding. The thought of adding now this idea of them having to negotiate with their agent on how much they’re going to pay them, the thought of them having to come out of their pocket many of them using down payment assistant programs trying to put down as little as possible, just how disruptive could that be?

– It could be very disruptive. It really depends who you ask. A lot of buyers right now, they’re going to use agents, they’re gonna use agents in 85, 90% of transactions and that’s because they don’t feel like they’re paying for it. One could certainly argue that they do in the form that it’s kind of baked into the cake of the overall home purchase, right? But if you are to dislocate that from the the current structure and say, “Hey, James now you need to come up with an extra $10,000.” Well, you know, my DTI was already pushing 50%, right? And now suddenly I’m knocked out. Maybe I can only then swing an FHA loan with a 3% down. I’m no longer as competitive, but there are, I think a lot of consequences in the short term but also in the long term. You run the risk of one having a lot of less educated buyers already making a complicated process even more complicated. And so at present the NAR has roughly about what, 1.5 million agents. So the idea that a million could wash out so to speak, I think it’s very, very possible.

– So biggest impact you see for lenders, if this goes down?

– Yeah, the biggest is just you have a much smaller pool of agents in this case, right? And so if you are an LO and you are just kind of making it work you’re probably down, what, 50% from last year, Greg, it’s pretty significant. And suddenly a good handful of your normal referral partners are not getting as many deals or they’re getting lower commissions. You may need to find new partners. I think a lot of the direct to consumer lenders that have been spending huge money trying to figure out how to get those buyers into the funnel from internet leads through ,I know you guys do really interesting stuff with social media and TikTok is getting to that client directly so you don’t have to wait or hope that your buy-side agent is competent and willing to give you a deal, right? So there are a lot of ways around it but certainly I think you could see a scenario in which a lot of LOs also wash out because their referral partners washed out.

– So if you’re a real estate agent watching this and they’re probably gonna be several thousand, right, that fall into that 80% number that might all of a sudden find their livelihood up in the air, what recommendation would you make to them?

– They can change their strategies, they can work a little bit more on maybe getting more sell side listings, right? That’s a good way to insulate oneself to some of the potential consequences of some of these judgments. And this could all kick off as early as next year.

– Can I get your best guess of when something could fundamentally change with the commission structure?

– I think it could absolutely change in early 2024.

– Where it could be decoupled and the buyer’s responsible to pay their agent and the seller’s responsible to pay their agent. You think it could happen as early as 2024?

– I think it could absolutely happen. So much of that depends on the maneuvering in the courts. This is fundamentally, at this point, now a courts battle. I think it’s very, very likely that even if the NAR doesn’t settle, even if they win the case, there’s going to be some pressure to change the two rules that really kind of uphold this relationship between commissions. So we’re writing about this pretty much every day over at HousingWire. I like to do a lot of deep dive analysis and look at how does this impact the mortgage loan officers? How does this impact the sell side agents? What about the big brokerages, the NAR, changes that could result in really innovative practices. And you know, this actually could be great for mortgage. It could mean that you have a lot more influence over the transaction, over the process. But if you are able to survive it, if you’re able to be innovative and come up with different ways to reach the consumer to provide a good experience, you have to be really good at your craft. You have to know how to work DPAs. You have to know FHA. You have to be able to to be versatile and to provide a really smart, nuanced and personable experience.

– This has been great. If you don’t mind, I’d love to keep in touch with you every couple of months just to get our finger on the pulse here. Think we need to spread this around, right? We need to spread the message and you’re doing great things at HousingWire. Housingwire.com. That’s where people can go to follow your work.

– Thank you so much, Greg.

– I’m Greg Sher from NFM TV. We will see you again next time.