Current State Of Broker Commissions: Part 2

Gary Malin and Neil Garfinkel are back, joining Jamie to discuss how a more inclusive, common sense approach to housing and real estate laws will help all stakeholders in the industry.

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Jamie: This is Jamie Heiberger-Harrison and today we're here on REal Talk with Jamie, together with my amazing co-hosts, Neil Garfinkel, from Abrams Garfinkel, and Gary Malin, from Corcoran Real Estate. Thank you so much for getting back together here so we can continue our great conversation.

Neil: Thanks for having us.

Jamie: Got tons of people following, and watching, and listening, and really enjoyed the last one that we had. Just let's go back to where we sort of ended off. Some things have changed since then. We're not going to get into any discussion about NAR. I know that there's still settlements going on. Can we just cover a little bit as to what the current status is as far as broker's commissions, Gary?

Gary: Here in New York City, REBNY changed its rules in January, so we effectively got a jump start on what everyone else is dealing with across the country. Not everyone's company's settlements are final yet. But effectively speaking, it's decoupling commissions, essentially saying that the listing agent will receive X percentage, the buy-side agent will receive X percentage, that will be spelled out in the listing agreement. Whereas previously it would just say Corcoran would get 6% and then pursuant to the co-broking rules of REBNY we would split that equally unless there was a statement to the contrary. So now it's very specific as to what commission is being paid to each side. So those were the initial changes that were going on. We also created buy-side agreements. But since it wasn't a mandatory requirement, at any point to use those, no one really uses those now, absent a few circumstances. The big change will be when all these laws come into effect that everybody's going to need a buy-side agreement setting forth the compensation, how it will be calculated.

Jamie: Neil, do we know when those laws are going to go into effect?

Neil: Part of the NAR settlement requires the parties that have opted in to make certain changes by August 17th, and because this is a class action suit affecting lots of parties, we anticipate that is a firm date. What it requires is basically saying that the parties that have opted in and the NAR affiliates, there are two things. Number one, MLSs and really any joint organization cannot list the compensation that's being offered on the MLS. That if buyers want to work with a buyer's agent they have to have a buyer representation agreement. With respect to the buyer representation agreement, I personally think it's a great idea, I think it brings transparency to the table. I think it's good for the agents, I think it's good for the buyers.

Now to be clear, those buyer representation agreements they don't have to be exclusives, they could be non-exclusive certainly. They could be one-time showing type of relationships. But I think it's good for the buyers. If we look at the way the environment was before, buyers were free agents, right, they could jump around and so on. I think again, this gives both parties a chance to understand what's expected of each of the parties, and I think that's a good thing. We talked about this last time, this idea that successful agents really now more than ever are going to need to establish their value. They're going to need to establish the value in the transaction both on behalf of the seller and behalf of the buyer.

And my biggest issue right now is that so much of the press is portraying what is going on here in these lawsuits incorrectly. They're screaming about end of 6% commissions and so on. That's not what's happened. This was a decoupling of commissions basically saying that the seller's broker can't share their commission with a buyer's broker, right? You can't force that relationship. That's what this was really about. It wasn't about the commission per se. So it's frustrating to see what's going on in the marketplace because the way it's being perceived or portrayed is really not what the ultimate lawsuit was about.

Gary: On Neil's first point, I just want to jump in for a sec about no longer being able to aggregate commissions. The unintended consequence slash benefit from that is aggregator sites can no longer list all the buy side offers that are there so it makes each individual's company's website more valuable. Because the exception to that rule is each company may list its buy-side commissions if it wants to on its website. What will be really interesting is aggregator sites, one of the most important things that they've always fought for is having all the information in one place that's easily searchable by any of the people coming to their sites. Now all of a sudden key information is no longer available and you must go to each broker's website. To some degree, while that's a benefit, I can understand from a purchaser's perspective, it makes the market less transparent in certain ways and less efficient in certain ways, but it does provide an opportunity for firms to increase their value of their proprietary websites.

Jamie: Gary, one of the things that I'm noticing already, and I wonder if it's just me or if this is something that your company and other brokerages might be worried about as well which is ... I've noticed that a few deals that I've had, the buy fee is greater than the sell fee. So I was saying to myself, okay, so what's happening here? Is it that the listing agent wants to make it more attractive now so that they'll get the buy deal by offering the 3% and taking less? I mean, what are your thoughts on that?

Gary: I mean, it's still too early to really give any true statistics on what's going on. I think each listing needs to be looked at individually, nothing's the same. There are certain times when someone might've had a listing for an extended period of time and they might be about to lose their listing, let's just say, as an example, and they want to entice people to come to their listing so maybe they'll increase the commission. What I find really interesting about this entire lawsuit and its ramifications ... If you go back and look at any of the headlines, the two main headlines are commissions come down, home prices come down. So what does that mean? If you read between the lines what does it mean, Neil?

Neil: First of all, I don't agree with either.

Gary: No, but I'm asking you ... That's what everyone once said.

Neil: Don't get me started here.

Gary: A broker provides value is my point, that's all.

Neil: Jamie, going back to that, I think that's really interesting, right? Part of the problem again, with these lawsuits is they are ... And you'll have to excuse me but they're assuming that the consumers are dummies, that they are not smart enough to understand how these transactions get done. The truth of the matter is if a seller takes a step back and says, "What is in my best interest," right? I'm okay with the lawsuit saying, "It shouldn't be what's in the best interest of the brokers and how they make money." They have to make money, right? If the seller takes a step back and says, "What's in my best interest?" My best interest is showing this property to as many people as possible, to bringing as many buyers to the table as possible. And quite frankly, having buyers-brokers represent buyers is a good thing. They recognize, and that's exactly what you're seeing. That's why there's a lot of frustration here.

Because I don't think that's the intentions of the lawsuits. And who's going to ultimately make a lot of money here? The lawyers are going to make a lot of money here, what's going to happen here. You've taken effectively efficient marketplace and you're pulling it back in time and that's frustrating. I think ultimately you're going to spend a lot of time breaking up all of these things. But ultimately I think that the parties are going to say, "What's in my best interest?" And that's going to be buyers and sellers. And I think we're going to wind up in a very similar place.

Gary: Well, that's my point. The point is the buyer representative provides a lot of value to the transaction. I tell all my agents that are frustrated about this, or anyone that I've spoken to, and I might have said the same thing to the two of you, it's like if you go to the casino and you're playing blackjack, do you want 13 cards to hit 21 or do you want 52 cards to hit 21? Your odds increase of winning when you have more cards. Your odds of getting the maximum value for your home increase by the more offers and the more people that you bring to the table. So this concept of always focusing on the commission, right, versus the value of my home and how I'm going to extract the most money for my home. People have seemed to have put the cart before the horse.

The simple fact is, you're in complete control as a seller, right? And what you should do is you should bring as many people in as fast as humanly possible. And you'll never know the true value of your asset or your home unless it gets exposed to everyone. And once you have that you can then determine, of all of these offers that have come in, what offer is the best offer for me. Is it simply the highest price? Is it a lesser price with better terms on closings, and no contingencies, so on and so forth? So I think that, unfortunately, the laws sometimes are forcing people into situations that might not necessarily be in their best interest. Because people don't necessarily understand or value the actual work that a broker does.

And I just think it's frustrating because it makes the assumption like Neil said, that people aren't smart enough to advocate on their own behalf. And the simple fact is, commissions have been negotiable for a very long period of time. And in the end, the sellers that win in all these lawsuits are going to get a couple bucks in their pocket, nothing to write home about, nothing to change their lives. And the attorneys who brought these cases are going to walk away with hundreds of millions of dollars.

Neil: And Gary, just to be clear, this is not a law, it's not laws, These are cases that are generating results, right? Look, they were very smart attorneys. The idea of decoupling commissions, okay. The idea that the seller could negotiate with a buyer's broker and seller's broker directly ...fine, that was good. And what REBNY did was smart. When REBNY said, "Look, seller will negotiate with their seller's broker. And if they choose to they can offer commission to a buyer's broker as well." I thought that was was a really good decision. Effectively what we've seen though is it's been a snowball, this case has turned into a snowball. I think there's a lot of unintended consequences.

So the real question becomes okay, this is what I've been talking about. Just the everyday agent, right, what can they do? And the answer is they can't control any of this stuff, right? So what they have to do is controlling being the best agent they could be. And the best thing they could do today is go and read the agency disclosure form. And read or understand what's the best way to talk to sellers, and buyers, and establish their value. If they're going to focus on anything today it's making sure they're up on what's going on. But more importantly, conveying that because that's all they can control. None of us here can control what is going on in this bigger snowballing of events that are occurring. That's my best statement which I've been saying as much as I can.

Jamie: Well, we know that this area is going to still come down the pipe. As you said, Neil, it's just case law. The case law will be what everyone's going to pretty much follow until something else happens later on and then they challenge it and then it changes again. Let's talk a little bit about what we do know. There was a very big rally downtown last month. Gary, you were very involved in it. Can you tell us a little bit what happened downtown?

Gary: First and foremost, I want to commend the entire brokerage community that showed up, as well as REBNY for getting everyone together. I mean, unfortunately, there's such anti-real estate sentiment nationally but more importantly locally here. Everyone wants to blame the real estate brokerage community for the high cost of housing. I've been trying to explain to people that if you look at what happened in 2019, and all the rent laws that came down, and what the intended goals of those laws were, there's so many more unintended consequences that have happened when you have individuals who rally on anti-real estate sentiment versus logic.

So what's going on now is the city council is reintroducing a bill, they call it the Fair Act, to essentially say, "He or she who hires you should pay you." If a landlord hires you to rent his or her property they should offer you the commission, not the tenant. And if the tenant hires you they should pay you, not the landlord.

What it fails to understand is the true realities of the way our business operates. They truly underestimates the time, effort, and attention agents put into their jobs. If someone calls on an ad that I created that even though I have a listing from an owner and I created the ad, I took the pictures, I put up the staging, I did all of this stuff, I met you at the apartment, I negotiated on your behalf, I put the application together for you, I got transferred all the monies back and forth between you and the owner, I got the lease done, I helped you move in, you hired me, right? But it's this fiction of who gave you the listing. And it's unfortunate because they fail to recognize that 50% of the apartments that are available online to rent right now are no-fee. So there's a full-service model, there's a no-service model, and there's something in the middle.

And just like Neil said earlier about clients, tenants are smart people, they all get to negotiate on their own behalf. They've always been negotiable, they maintain being negotiable. And I just find it unfortunate when the city council doesn't want to listen to reason, they don't want to speak with the brokerage community, they don't want to understand the actual impact of changes to the laws. They simply want to rally against anti-real estate, and affordable housing. And Neil and I could spend 75 more hours on how to fix affordable housing here in New York City, make it better, make it more impactful, more effective.

So we all went down to City Hall. I personally testified in front of the council, as did many other agents and leaders of the industry, just to explain to people that when the day is done, if you make a landlord incur cost and he or she did not have before, they're going to pass those costs along. Beyond that fact, they don't work seven days a week, they don't work the same hours that real estate agents work. It fails to understand that we have a very efficient, transparent, and negotiable market that does work. And they should let the free market decide what someone's worth and what's not someone's worth.

You see who they brought up from the community at large to defend this bill. They brought up one broker, I believe he was from Brooklyn, I could be wrong. His essential statement was, "I don't really care about this bill one way or the other because I don't need money and I don't plan on working that much longer anyway." So that's the one broker that they brought to the table. They didn't call Corcoran, they didn't call Douglas Elliman, they didn't call Brown Harris, they didn't call Compass, they didn't call a multitude of other firms to sit down and say, "Listen, we have a problem, let's work together." So what I find unfortunate is legislation for the sake of legislation and it's done in a vacuum.

Jamie: Is it a proposal not yet signed? Where do we stand on that?

Gary: I mean, that was the meeting to discuss it and talk with all constituents at an open hearing at City Hall. Now it has to be brought to I think the speaker. And then that individual determine one way or another which direction it goes. It hasn't been enacted yet. It's still going to be discussed. We're trying to get meetings with city council members to see if we could sit down and talk and find more common-sense approaches to these things.

I'll give you two very simple common sense approaches that the 2019 rent laws failed to understand, and it didn't make it better for tenants. If you don't have any credit ... Let's say you're coming in from overseas as a student, previously you could have paid extra rent or extra security to get your apartment. They prevent that from happening now. So if you want to do that you have to buy an insurance policy. So when they talk about affordability they just added a cost that didn't exist before.

If you have bad credit ... Let's say you had bad medical problems, went through a divorce, got laid off, whatever your reasons are, valid, justifiable reasons for what happened, but you rebuilt your life, you rebuilt your circumstances, you have money, and you wanted to apply for an apartment, and the owner would normally have taken extra rent upfront or extra security. Once again, the law says, "No, you can't do that go buy an insurance policy to cover yourself." Oh, you have a pet in New York City, you can't put up a pet deposit you have to pay more rent.

So they made the market far more expensive because of the 2019 rent laws. And not only that, it's less efficient. And there's tens of thousands of apartments, as you know Jamie, that are sitting on the sidelines that no one can rent because they can't afford to renovate them. When you don't involve a community that's actively involved in the industry, to talk about sensible solutions you come out with this which creates more problems versus assistance.

Neil: Unintended consequences, it happens all the time. So many of these laws are passed for optics reasons. Again, they don't include the feet on the street, the people that are dealing with this every day. And as a result of that again, you have all of these unintended consequences and we see it happen over and over and over again. All of these laws that get passed that ... We say, "Well, did you think about this? Did you think about how this was going to happen?" And invariably that's just never the case.

Gary: It's unfortunate because you have a lot of these TV shows that are out there these days that portray all real estate agents as making millions and millions of dollars and living glamorous lives. And I think that, unfortunately, the city council fails to recognize that tenants are brokers too, or agents too, and the vast majority of real estate agents are not making these millions of millions of dollars. And not only that, they also incur costs and expenses to do their job.

I mean, you could work with someone for four or five, six weeks, and spend a lot of money in cabs, and other things with them, and do a lot of these things and then they decide to rent that apartment without you. So you lost money, you lost time, and you don't make a lot of money. But the city council thinks that every real estate agent simply just opens the door, closes the door, and makes tens of thousands of dollars for each transaction with little to no work. But the people in the industry know that that's farthest from the truth. And when you try to expose that and explain that to them they essentially tell you that they know more than you do.

Neil: So number one, right, they're not employees. They're out there, they work on commissions. This is not an easy business.

Gary: No.

Neil: Gary, the truth of the matter is shame on us a little bit too or shame on them. That's my whole point is that the agents need to understand that they are devalued and that people think their job's easy, and we know that that's not the case. It's up to the agent to be sure that the consumer doesn't think that and that they do provide the value. And that everyone again, they work really, really hard and they don't make a lot of money in most instances. We have to change that perception. We absolutely have to change that perception.

Gary: But the problem, unfortunately, is that the city council doesn't care about anything other than optics. And they don't engage any of us to actually understand. It's simply that it's a platform to raise their political clout versus actually have effective things. When you ask these people, "Do you honestly think that 2019 rent laws serve their intended purposes?" They'll tell you "Yes." But everyone knows that it didn't help anybody.

You can't talk to someone who doesn't want to listen to the other side of the opposition. So no matter how much we have done over the last few years, with assistance of REBNY, to really educate these council members on what brokers do, their answer is, "We don't care." Their answer is, "This is what's fair, this is what needs to happen, and we know better than you do." And my whole point with them, when I testify, is don't take choice out of the market, let the consumer decide what is best for him or her.

You've made decisions now that take choice out of tenants hands on the old laws that were impacted in '19 and you're about to do it again. And it's not going to solve your problem. And then when it doesn't solve your problem you're not going to come back and say, "Oh, you know what? A mistake was made we need to fix this." You're just going to double down and say that it worked. It's tough when people don't understand things yet don't want to have effective compromise or dialogue. It's a sad situation.

Neil: When anything overgeneralizes things it's not a good thing. So they're overgeneralizing the real estate agent. They make tons of money let's take it out of them. Similarly, they overgeneralize landlords. They portray landlords as owning thousands of units, the wealthy, the rich, but the truth of the matter is that most landlords probably own one or two family properties, or they live in those properties, or they own a couple of units and they've invested all of their life savings to do that. And so you overgeneralize there, you've hurt the landlords as well. And overgeneralization is really a bad thing. And that's exactly what's happening here.

Gary: Right. And it's unfortunate in the bigger sense because the simple fact of the matter is that owners take a lot of risk when they purchase properties and/or develop properties. And there's no guarantee of a return, there's no guarantee of anything. And there's substantial cost that people incur to bring housing to the marketplace. What you're seeing go on because of all these laws and all these changes ... Is what you're not seeing is housing being built. And the simple fact is there's an affordability problem because there's an inventory problem. As opposed to addressing the inventory problem, and how people can work together to solve that, they just demonize the brokerage community.

Jamie: And it's going to make the inventory problem even worse. I mean, that's the reality. I don't want to say the word interesting because it's not that interesting it's actually very disturbing that all of these things, all of these changes are coming on the heels of some of our pretty bad years, right? These last two years have not been great and it's like just crunch everybody more. Give everyone all the more reason for people to be keeping places off the market.

I want to just bring something up because I think this probably happens all the time, Gary. When you think about the brokers right now that may have had listings sitting there for one, two, and three years on the high-end market, right, and then you have some of those deals are now selling because they've come down so much because now they just absolutely had to. This is just a whammy each way because it's like they're getting punished because now they're selling. From everywhere. It's just making everything that much more difficult to even get a deal done because you have people's brokerage fees are getting squeezed. I don't know. Are you seeing that happening in your deals that are going on?

Gary: Look, it's an unfortunate set of circumstances: COVID and its aftermath, interest rates and its aftermath. The industry as a whole, it's obviously, in a difficult spot. There's a lot that gets said. But the simple fact of the matter is we don't control the housing market, right, as brokers. And you guys, obviously, the deals you do are only a reflection of how well or not as well as the market is doing. It just feels as though they look for a solution to pander about why things are so expensive versus understanding the underlying issues. And I always feel there's cycles in every market. Markets go up, markets go down, and then they go back up again. It's all based upon demand, it's all based upon the economics, and the markets adjust themselves. And I just feel like a lot of the legislation lately just feels like it's very much an overreach to control something that wasn't a problem, it wasn't an issue.

The market was efficient, it was transparent, it was negotiable, and people understood it. And it worked well. And people were out there really providing amazing, amazing service. And I think it's like in any industry there's always a few bad actors, right? A bad attorney, a bad accountant, a bad hedge fund guy, a bad real estate agent. And as opposed to realizing yes, that happens and yes, that's unfortunate. Yes, we wish that that didn't happen. But that doesn't mean that everybody else in those industries that's doing amazing work should be sort of lumped into this category.

Once again, it sort of Neil's concept of overgeneralization. There's an anti-real estate sentiment out there and they just think we're an easy target. It's unfortunate. If you look at TurboTax, right, you could get free tax when you filed or you could hire are their representatives. You have free choice. Let the free choice decide. In the end that's the way you get the best value.

Neil: What sells is an us versus them mentality, right? So there's this perception of well, it's tenants versus the landlords and the brokers, right? Everyone gets pitted against each other and that's our divisiveness. The truth of the matter is that brokers just want to do deals. Landlords would like to rent their properties, they'd like to make a couple bucks, and tenants would like a place to live. They're creating just ways to sell stories. And a lot of people are advocates of that. And I would like to think that there's opportunities as opposed to an us versus them mentality which we see in so many different ways. No, let's just come together and try to figure this out. To penalize one group at the expense of another is not the right solution.

Gary: Unfortunately, everyone is so unbelievably polarized, right? People are either on position A or position B and they absolutely refuse to see that position C would serve both parties and actually work but you don't get everything you want. It's like I've always said in life, the best negotiation, most times, is when everyone walks away a little bit unhappy. I got enough, you got enough, I didn't get everything, but in the end the broader solution now works and it actually helps push things forward. This divisiveness is not pushing things forward, like Neil is saying, it's actually making it worse because people just want to dig into a position simply to dig in.

And when you shut off opposition and you shut off other people to provide an opinion and a thought process that deviates from yours, no good ever comes from that. You need to be able to absorb everything and you need to listen to as many people as possible that are actually transacting, whether it's you guys as attorneys, whether it's us as real estate agents, or us as people that are running brokerage businesses. We all see things from different vantage points. And if there was collective conversations there's no doubt things could be a much more palatable for everyone and actually solve the problems that people would like to have solved.

Jamie: Good point. It's a very good point. I'm sure Neil experiences this as well. There's nothing more infuriating than working on a deal, and it could be the lawyer on the other side that really doesn't understand the legal issues that are going on. It's bad for everybody, it makes everybody look bad. For me, it happens a lot on the landlord-tenant side. If I end up with an attorney on the side that has no idea about the rules ... I just had a deal like this where the seller's attorney ... It made it so much harder the fact that they didn't understand.

They didn't know what they had, they didn't know what to do. Whenever there's a tenant in place I'm always saying, "It's never going to go well, it's just not." I shouldn't say never. It's a very small chance it's going well where people are just leaving. Addressing the tenant issues before you even list. That's when you do it. You don't do it when you have the accepted offer. What can we expect timeline-wise on the rental fees?

Gary: Sometime later this year. I don't know specifically. There is a process that has to still go through the council. If they vote on it and give it to the mayor the mayor can veto it and then it could go back to the council and they can vote on it again. I'm doing everything I can with REBNY to try to get meetings and try to find palatable solutions, if there are any. My guess is, whatever direction this is going in, it'll take a couple more months if not longer.

Jamie: Neil, any words of wisdom you can say to the lawyers who will watch this, the brokers will watch this. How should they best navigate the uncertainty ahead so to speak.

Neil: For agents, in particular, it's now is really very important that they understand what's going on out there. They can convey their value. I just can't say it enough. If they don't, if they're not up to speed, they're going to have a problem competing in this marketplace, presenting, or being able to describe what's going on and so on. I know Gary and Corcoran spend a tremendous amount of time educating and they'll continue to do that, and that's what we do as well. That's what you do, Jamie. But to just think oh, it's going to be things as usual and I'll make my money. No, that's not a good strategy right now to assume that everything is going to be okay.

Gary: Hope's not a plan, Neil.

Jamie: Hope is not a plan.

Neil: Hoping is not a strategy that's for sure.

Jamie: No, no. Living on a prayer, right?

Neil: Yeah.

Jamie: All right. Well, this was good stuff. I hope that we'll be able to get together again next month, hopefully, have more news, better news, some finalities in all of this.

Gary: I just want to know, Neil, the next time we get together, I want to know what your lowest golf score over the next 30 days was.

Neil: Okay. It hasn't been good. That's for sure.

Gary: Bye, guys.

Jamie: I'll see you all soon. Thanks a lot.

Neil: Enjoy. Bye.

Jamie: Take care. Bye.

Important Links

• Corcoran

• REBNY