Sun. Jul 14th, 2024

Why Every Residential Real Estate Investor Is Suddenly Richer

Mar 27, 2024


Who stands to gain the most from the settlement reached with the National Association of Realtors regarding commission price collusion? The clear beneficiaries are residential real estate investors and owners. Why? Because they were the ones burdened with paying the so-called “standard” real estate commission ranging from 5% to 6%.

Following the judgment against the NAR and other real estate brokerages, such as Keller Williams, it’s expected that average real estate commission rates will decrease by 1% to 4% this year. Consequently, residential real estate owners will retain an additional 1% to 4% of their home equity when they sell.

Even for those who opt not to sell, there’s a boost in the value of their residential real estate holdings in their net worth calculations by 1% to 4%, if they choose to include it. Therefore, whatever your residential real estate holdings are estimated to be worth, multiply them by 1% – 4% to find out how much more they are worth today.

Looking forward, it’s conceivable that residential real estate owners could eventually see an increase in the value of their holdings by 5% to 6%. After all, across every industry, competition pressures commission rates down to 0%.

My background: I’ve been investing in residential real estate in San Francisco and Lake Tahoe since 2003. Physical real estate and private real estate investments in the likes of Fundrise, a sponsor, account for about 60% of my ~$270,000 passive income so my wife and I can be free. I started Financial Samurai in 2009 to chronicle my journey to financial independence. Today, this site is read by over one million readers a month.

Chart Showing How Residential Real Estate Investors Gain

Here is a chart I created illustrating multiple real estate valuation price points, demonstrating how real estate valuations increase as commission rates decline. The greater the reduction in commission rates and the larger your portfolio of residential real estate, the greater your gains will be.

Roughly 65% of Americans own homes, therefore, the majority of Americans benefit from a decline in real estate commission rates.

How much residential real estate investors and owners benefit, make, save thanks to the National Association Of Realtors ruling and settlement against real estate commission price fixing

The Only Residential Real Estate Investors Who Don’t Benefit

Only one type of residential real estate investor may not benefit from the NAR settlement on price fixing. These are investors who are unwilling to advocate for their wealth and negotiate down a listing agent’s commission.

They might fall into categories such as being too affluent to be bothered, too apprehensive about confrontation, unaware of the ruling, or simply complacent with being taken advantage of.

However, for the vast majority of rational investors who are informed and eager to maximize their wealth, negotiating down proposed real estate commission rates will be a priority.

The worst-case scenario is the real estate agent saying “no.” In such case you can continue interviewing until finding one who agrees as there are more real estate agents in America than there are homes for sale.

Ultimately, the lawsuit is aimed to reinvigorate the free market’s functionality for consumers. The lawsuit isn’t an indictment of the integrity of hard-working and honest real estate agents.

The argument suggesting that homebuyers will now be “screwed” due to listing agents is unfounded. This notion presupposes that the majority of listing agents are unscrupulous, dishonest, and deceitful. Unless real estate agents, who are the primary opponents of this ruling, consider themselves to fall into this category, homebuyers need not worry so much.

Believe You Have The Ability To Negotiate A Better Deal

Those who are inclined to take action harbor a belief in the possibility of change. If you lack faith in your capabilities, you’ve already set yourself up for defeat. Here’s an example of how a defeatist mentality could cost you.

In 2014, when my wife was experiencing burnout after a decade in her job, I suggested she negotiate a severance package, similar to what I had accomplished in 2012.

Her immediate response was, “I can’t do that! My manager would never agree! I’m too valuable to the team. Why would they let me go with a severance package?”

This response echoes sentiments I’ve encountered countless times since publishing my bestseller, “How To Engineer Your Layoff.” Ironically, this retort often stems from a self-centered perspective. Once you consider the viewpoint of your manager and the company, negotiating a severance becomes more feasible.

Another reason for skepticism in negotiating a severance package is a lack of confidence in negotiation skills. This lack of confidence often arises from limited experience and knowledge. My book solves this problem and so do numerous articles on Financial Samurai.

Believe in your power and ability to negotiate lower real estate commission rates. In 2017, I successfully negotiated my real estate commission down to 4.5%. Then, in January 2024, before the NAR settlement but after the verdict, I managed to further negotiate my selling commission rate down to 3.5% with an experienced husband-and-wife team.

Advocate for what you deserve. If you’re struggling to believe in yourself, seek out someone who does. Happily, my wife was able to negotiate a unique severance package that gave her a 60% raise.

How to engineer your layoff - learn how to negotiate a severance package and be free
Use the code “saveten” at checkout to save $10.

Residential Real Estate Buyers May Benefit Too

Even though homebuyers never paid a real estate commission, they could also potentially benefit from the real estate commission price fixing settlement too.

With residential real estate owners now 1% – 4% richer, when they choose to sell, some owners may decide to share in some of their real estate commission savings gains with the buyer in the form of a credit at closing. Why would sellers do this? To help get the sale across the finish line. The credit can be used to pay for the cost the buyer has to now pay their buyer’s agent if they choose representation.

The sharing of real estate commission savings likely won’t by split 50/50 with the homebuyer. However, even if just 20% of the savings of the 1% – 4% (0.2% – 0.8%) in commission savings was offered to the buyer, this could be a win too.

Why? Because the price buyers will pay for a buying agent’s services will be affordable given it will be determined by the free markets.

If a buyer’s agent charges more than what a buyer thinks they are worth, then a contract will not materialize. And if a contract does materialize, then a buyer, by definition, can afford to pay the buyer’s agent. The buyer believes an agent’s value is equal to or worth more than the cost.

Hooray free markets! Nobody is forcing anybody to do anything.

Example Of A Buyer’s Agent Fee Schedule

Below is a proposed new home purchase fee structure introduced by a real estate agent I saw on Twitter. It shows what a buyer’s agent will do for a prospective homebuyer in a clear and concise manner.

Example of a Buyer's Agent fee schedule post the NAR settlement ruling

In my opinion, this buyer’s agent fee structure looks fair.

A prospective homebuyer can add an incentive, such as offering to pay X more if the buyer’s agent can get a lower price. A prospective homebuyer can also offer to pay for helping write a real estate love letter, spending time negotiating a tricky problem found during the inspection contingency period, and more.

In other words, everything is negotiable. So longer as the contract is clear and agreed upon by both parties, all is good.

Example Of How Both Seller, Buyer, And Both Agents Win

Let’s examine a scenario where a listing agent charges a 2% commission to list and successfully sell a $500,000 house, highlighting the benefits for all parties involved.

Firstly, the listing agent earns $10,000 gross, a significant win. Despite the 2% commission being slightly lower than the 2.5% to 3% they might have earned with a 5% to 6% commission and splitting it with the buyer’s agent, it remains a substantial sum.

Secondly, by opting for a 2% commission instead of the traditional 5% – 6%, the homeseller saves $15,000 ( ($500,000 x 3%) -$20,000 ($500,000 X 4%). This is a clear benefit.

Thirdly, the buyer’s agent earns $2,000 gross under the sample fee structure above, adding to the overall success.

Lastly, the homebuyer receives a $3,000 credit from the homeseller, representing 20% of the 3% commission savings (0.6% x $500,000 = $3,000). Consequently, the homebuyer effectively “makes” $1,000 from the purchase, as they only pay the buyer’s agent $2,000.

The Seller Wins The Most But Also Shares In Their Winnings

The homeseller’s overall commission rate stands at 2.6%, which is 2.4% – 3.4% lower than the “standard” 5% – 6% rate. To illustrate, at a 5% rate, the homeseller would have paid $25,000 in commissions. With a 2% commission, the homeseller pays $10,000 in commissions and provides a $3,000 credit, totaling $13,000, equivalent to 2.6%.

This arrangement showcases the beauty of cooperation and mutual benefit. Although in this scenario, buyers’ agents earn less than they would with a 2.5% to 3% commission rate, it’s a reflection of the dynamics of free markets.

The majority of homebuyers are now taking charge of their home search online. They’re browsing listings and attending open houses independently.

Thanks to platforms like Zillow and Redfin, homebuyers can access all the necessary data to determine fair market prices for comparable homes, all free of charge.

Making an offer has also been simplified with services like Docusign, enabling buyers to submit offers online within minutes, eliminating the need for in-person signings. This streamlined process resembles submitting applications through platforms like the common app for college admissions.

Furthermore, homebuyers can educate themselves online at no cost, learning about the home escrow process, financing options, and home inspection contingencies. Resources like my website offer strategies for managing the escrow period effectively, including how to request additional time if needed.

Homebuyers can also conduct their own inspections, inviting friends and family to help identify any issues and hiring professionals if necessary. The goal is to thoroughly assess the property for repairs needed to make a fair offer.

While dishonest listing agents exist, a longer escrow period and thorough inspections provide safeguards. Real estate agents are obligated to be honest and transparent, supported by disclosure statements. If issues arise, homebuyers have legal recourse.

Cost to sell a home, real estate fees, transfer tax, other costs
The cost to sell a house is outrageous, fight to lower your commission fees

If You Own Residential Real Estate You Are Suddenly Wealthier

One of the most promising arbitrage opportunities today lies in residential real estate ownership. We just got through the bottom of the latest real estate down cycle, which was in 2H 2023. Over time, the prevailing 5% to 6% commission rate is poised to diminish. It will mirror the trajectory of online brokerage trading commissions, which have transitioned from $200+ per trade decades ago to being virtually free today.

Consider the landscape 30 years from now, with automation, AI, and ongoing technological advancements. Can we reasonably expect real estate commission rates, especially following the NAR settlement exposing price fixing, to remain static by the year 2054? Unlikely. Just as the S&P 500 and single-family home prices are anticipated to rise in 30 years, so too are commission rates likely to decline.

To amass wealth, one can capitalize on trends, such as investing in real estate within the Sunbelt/Heartland regions due to demographic shifts toward more affordable areas. Additionally, recognizing trends that favor one’s interests, such as the reduction in real estate commission rates, is important.

older Americans are staying in their homes longer

If you own a home, condo, vacation property, or multi-family unit, congratulations – your wealth has suddenly increased. Armed with the knowledge that real estate commission rates are on a downward trend, it’s logical to prolong ownership of your properties.

At the end of the day, the ideal length of time to hold your properties is forever. Feel good knowing that over time, you’ve got a positive tailwind due to lower selling costs.

Reader Questions And Suggestions

As a residential real estate owner, does my declaration that owners are suddenly richer by 1% – 4% make sense? Does the declining in real estate commission rates encourage homeowners to hold onto their homes for longer? Besides real estate agents, is anybody else agains the real estate commission price fixing lawsuit?

For those interested investing in residential real estate in lower-cost areas, explore Fundrise. Managing over $3.3 billion, Fundrise focuses primarily on residential and industrial real estate investments in the Sunbelt region. With lower valuations and higher yields, the Sunbelt presents an appealing prospect due to demographic shifts catalyzed by technology and remote work trends. Financial Samurai is an investor in Fundrise and Fundrise is a long-time sponsor of Financial Samurai. 

Fundrise

About the author: Sam Dogen is the founder of Financial Samurai, the web’s #1 personal finance site, boasting over 1 million organic pageviews monthly. Every piece on Financial Samurai stems from firsthand experience because Sam believes money matters are too crucial to rely solely on speculation. In 2009, he catalyzed the modern-day FIRE movement, which has since become a global sensation. Since 2003, Sam has been investing in physical and private real estate, now constituting approximately 60% of his annual passive income totaling $270,000.

Join his free newsletter today if you’d like to achieve financial independence too. There is no rewind button in life. Might as well make the most of it.



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