Last week, I saw something that is not an uncommon sight here in Las Vegas. This was parked outside my office building.
That is a 2021 Lamborghini Urus (it had paper plates still on it). This is a car which starts at $222K but with options and such, it’s normally for sale around $300K. I happen to think it’s an atrocity and a horrible misuse of the Lamborghini brand, but then, we live in 2021 when everybody has to have a SUV. Porsche, Bentley, Ferrari, AMG, Jaguar… it is what it is. So I took a picture of it, and for laffs posted it on the Book of Faces with the words: “No buyer agents were involved in the purchase of this.”
Among the amusing responses from friends who thought I had bought a Lambo was one that actually made me stop and think:
Yep. And they probably got screwed!! It’s often the case when only one person is representing the sale.
Obviously, you can’t fault real estate agents for having fun with a car purchase that costs the same as many houses and defending all of the services that a good buyer agent provides to a home buyer. And the commenter is probably correct that the buyer of the Lamborghini Urus “got screwed.” I mean, does anybody walk out of a car dealership feeling thrilled that they pulled one over on the dealer? (The ones who do feel that way probably got screwed worse.)
That thread made me think though. Why don’t I care in the least bit that whoever owns the Lamborghini probably got screwed? Instead of $300K for the car, maybe she could have paid $280K and saved a bunch of money. (I always imagine that the owner of a SUV is female; I know, but I can’t help it.) Yet, if I were to go out on the street and start interviewing people, I’d bet that zero out of a hundred people would care. At all.
The reason, I think, is quite simple. No one owns a Lambo who can’t easily afford one. Nobody but nobody is buying a frikkin’ $300K super SUV for transportation needs. A $20K used Hyundai would have filled transportation needs quite adequately. So no one cares that some super rich multimillionaire “got screwed” buying a Lamborghini unrepresented.
The more interesting question, of course, is once we apply that to houses. REALTORS often talk about how unrepresented buyers would be taken advantage of, get screwed, overpay, or otherwise end up in a world of hurt when purchasing the biggest asset most of them own with a 30-year debt commitment. That sentiment underlies much of the discussion and debate around the current commission kerfuffle with private litigants, the Department of Justice, and I expect regulators and legislators soon enough. But the Urus thing gives us an angle to think about this.
Do the Rich Need Representation?
When we’re thinking about the Millennial first-time homebuyer, struggling to scrape money together to make the downpayment then jump through hoops to qualify for a mortgage, and competing against dozens of others also wanting to buy a home, our hearts go out to them. And yes, an expert who can help guide them through the transaction, negotiate on their behalf, and really go to bat for them as a fiduciary is quite necessary for them.
But what about the rich? What about our Urus owner? Do we really care all that much if they get screwed in a transaction to buy some $5 million mansion? Do the rich really need a buyer’s agent to negotiate for them?
Keep in mind, need is different from want or good to have. Would Elon Musk benefit from having a great REALTOR when he goes to buy some $25 million country estate in the Hill Country? Of course he would. But does he really need one to protect his interests to make sure he doesn’t get screwed? Do we as a society, as a country, care all that much if he has representation or not? I don’t think so.
We’ve all heard stories of the super rich going to their neighbors and offering enormous mountains of money to buy their houses to create privacy. Back when I lived in NYC, I remember hearing stories of hedge fund managers buying not just the entire penthouse, but the condos on the next floor below just so they wouldn’t have to deal with complaints from downstairs neighbors. They did not pay market price; they paid way, way, way more than market price.
I confess that in much the same way that I can’t find myself to care if a Lamborghini owner got screwed on the deal for a $300K car, I can’t find myself to care if a multimillionaire gets screwed on the purchase of a $3 million house. The rich do not need a REALTOR. They might want one. They could use one. But they don’t need one. Their interests are protected just fine by the simple fact of their wealth. And if they want one, they can afford one, period. As Sir Mix-A-Lot once said, “Kid Sensation dropped a twenty; didn’t even miss it.” I don’t feel bad for Kid Sensation.
The Relevance to Important Issues
I wouldn’t have thought further about this, except that there was a comment on my recent post about the DOJ pulling out of the NAR settlement deal that is oft-made about the various commission lawsuits going on right now.
It seems to me that the most logical method for the government to solve the commission issue would actually be in the hands of the FHA and those that currently control FANNIE and FREDDIE. Imagine a new FHA and conventional loan rule that would permit any lender to allow up to some % of non-recurring closing costs of the Buyer to be wrapped up into the loan. If the Buyer negotiates whatever commission the Buyer is willing to pay the Buyer’s Broker and knows from the start exactly what amount the lender will permit to be included in any loan amount, then the Buyers will all get price transparency and the ability to negotiate the Buyer Broker fee. No more tying and no more steering. As a Buyer’s Broker my fee would not be controlled by whatever the Listing Agent negotiated with the seller but would instead be in my own hands to negotiate directly with my own buyer. Isn’t that better for Buyer Brokers than the current system?
The concern here is that buyers will not hire buyer agents if they have to pay them out of pocket. Buyers are often the most cash-poor people in the world when they’re trying to buy a house. One of the major benefits of having the seller pay the buyer’s agent through cooperation and compensation is that the commission is effectively made part of the price of the home sold, which means the buyer can include it in the mortgage. So if we’re going to eliminate the practice of sharing commissions by law or regulation, then the suggestion is that we need a way to let buyers wrap closing costs, including commissions, into the loan.
Here’s the thing: underlying that concern is the idea that buyers need representation by a real estate agent to prevent getting screwed. For lower income and middle-class families, especially first-time homebuyers, that is undoubtedly true. For the rich, not so much. Because they’re rich and assumed to either know what they’re doing, or be able to pay experts who can advise them.
For example, our securities laws “protect” retail investors by prohibiting them from investing in securities of privately held companies; that’s why companies have to “go public” and register with the SEC and jump through all kinds of hoops to disclose risks and so on before they can take the public’s money. If you’re wealthy enough, however, (over $200K in annual income, or $1 million in assets) then you can invest in pre-IPO companies as a Schedule D Accredited Investor. The SEC assumes that you’re capable of protecting yourself from getting screwed over by unscrupulous scam artists. You can hire lawyers and financial advisors and others who can tell you if that tech company selling pre-IPO stock is legit or not. And frankly, if you do get screwed… well… you’re rich; you can afford to take the hit. Some widow on a pension can’t.
So as a thought experiment, consider modeling the real estate brokerage industry after the legal industry. REALTORS, after all, are very fond of comparing themselves to lawyers as fellow professional service providers. The Sixth Amendment clearly provides a right to a lawyer in criminal cases:
In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defense.
We believe that anyone accused of a crime absolutely needs the help of a lawyer. We believe that so much so that we’re willing to pay for that lawyer out of public funds. Thousands of public defenders work every day on behalf of clients who cannot afford to pay them. If buyers really need the assistance of a real estate agent in order not to get screwed on the biggest and most important purchase of their lives, perhaps we should consider the same: pay for the buyer’s agent out of public funds.
The rich can afford to hire their own buyer’s agents; they have always been able to do that, no matter what the method of compensation. But perversely, the rich are precisely those people who can most afford to get screwed over in a transaction… because they’re rich.
It’s the lower and middle class buyers who most need competent representation, and they’re the least able to afford it. So if we’re going to eliminate cooperation and compensation, rather than figuring out a way for middle class buyers to borrow the money and pay interest on it, perhaps we should consider simply paying for that representation out of the public purse, as we do public defenders.
This is where things start to get difficult for us in the industry. Just who are these people who have enough money to buy a home, something that is increasingly out of reach for many American families, but are at the same time too poor to pay for representation? It’s hard to classify anyone who is a move-up buyer in this category; they already own a home. They will have the proceeds from the sale of that home to parlay into their next home.
Obviously anybody buying luxury properties isn’t one of these people. Even in insane markets, it’s hard to have a lot of sympathy for the 26-year old making $300K as a data scientist for some tech company, even if she can’t afford the $3.2 million median priced home in Palo Alto.
So we’re left with, for all intents and purposes, first-time home buyers who are buying something within 10-20% of the median priced home in that market, or cheaper.
But then we have to do further means testing. Is this young first-time homebuyer couple getting the downpayment from the Bank of Mom and Dad? Or is this a veteran utilizing VA loans and spending every dime he has for the down payment? Is there no difference between the single investment banker trying to buy a condo worth $200K and the single mother with two kids trying to buy a fixer-upper worth $200K?
Then you have the issue of the fee itself. Public defenders do not make a lot of money. These are not jobs that top flight law school graduates go after, unless they are from wealthy families and don’t need the money, and have a real public service mindset. The average salary for a public defender in New York City is $65,900 as of this writing; the average salary for a first year lawyer in private firms is $149,070.
There’s no world in which public REALTORS would make the same money that a privately-paid REALTOR would make. There’s no scenario under which the government would pay a REALTOR 3% to represent the buyer; it’s more like $500 flat fee per file. Which means that just like criminal defendants, those who are in most need of competent counsel are most likely to get the least competent (or at least, if we’re being charitable, least overwhelmed) counselors, except in rare cases such as pro bono work by a big firm who is paying junior people to take on clients for the sake of experience and for the sake of doing good.
I frankly don’t know how to square this circle in the political and economic environment we live in today.
The Impact on Public Policy and Regulation
We don’t know how the Biden FTC, now under new executive order to regulate the real estate brokerage and listings industry, will proceed. The fear in the industry is that the FTC will eliminate cooperation and compensation, the bedrock on which the residential real estate industry has been built. One way out would be to allow the buyers to capitalize the transaction fees into the mortgage, as my commenter above suggested. The trouble with that suggestion is what I’ve been discussing: the rich do not need the help.
Frankly, it would be idiotic for the rich to pay interest on buyer agent fees, unless they are able to arbitrage the low interest rate on mortgages by putting that cash into higher-earning assets. So it is difficult, if not impossible, to defend sellers paying the buyer agent in luxury transactions.
So we move down the economic ladder to middle class and lower income buyers. And we run right into all of the needs-testing issues, as well as the inability to answer, “Well, if poor people really need brokerage services, why don’t you charge less to them?” The thought experiment of the public REALTOR, mirroring the public defender in legal profession, shows the difficulty.
What is the path forward then? We’ll tackle that in future posts as I think about the interconnectedness of residential real estate, what possible regulations might hit us, and what strategies maximize possibilities.