November RIA Roundup: The Real Estate Brokerage Conspiracy
The RIA Roundup is a monthly real estate newsletter with the latest stories, data, and insights curated especially for rental property investors.
In this issue:
Lead Story: The Real Estate Brokerage Conspiracy
Portfolio Updates
In Other News…
Final Thoughts: Ethics & Evictions
This issue presented by Stessa
Lead Story: The Real Estate Brokerage Conspiracy
If you’ve ever bought or sold a home, you know the basic outlines of how real estate agents get paid: the seller pays a commission to their agent (typically 5-6%), and then that commission is split evenly with the buyer’s agent.
It works that way largely because of the National Association of Realtors, the largest professional organization in the country. More than 1.5 million real estate agents pay annual dues to the NAR in order to call themselves “realtors”, a term NAR has trademarked. NAR enforces the “cooperative compensation rule”, by which the seller is required to pay the commission of both agents in the transaction.
We tend to take this commission structure for granted, but real estate commissions don’t HAVE to work this way, of course — and they might not in the future. A major crack has formed in this foundation: in a recent landmark legal challenge brought in Missouri, a jury ruled that the “cooperative compensation rule” represented a conspiracy between NAR and brokerages to keep agent commissions artificially high. They ordered NAR and two brokerages, Keller Williams and HomeServices of America, to pay $1.8B in damages. And this may be just the beginning — more legal challenges are in the pipeline in other states, and the issue could potentially attract anti-trust scrutiny from the Department of Justice.
The decision will be appealed. Even if those appeals fail, it could be years before brokerages are actually forced to change how agent commissions work. Still, the decision in this case is an earthquake for the industry, and could fundamentally change how all real estate is bought and sold nationally.
If this rule falls, how might commissions work in the future? Buyers could pay their agents directly, and negotiate those fees upfront. Sellers may question the traditional 5-6% fee, and negotiate this down with their agent. A seller might us the offer to pay a buyer’s commission as part of their marketing or negotiation strategies.
All roads point toward the same outcome, though: a lower total commission paid on the sale of a home.
Some argue this makes perfect sense. Despite major technological improvements in the industry that have made the real estate market increasingly transparent, real estate commissions have stayed pretty stable at 5-6% of the sales price for decades. Buyers in particular tend to do most of their research on their own nowadays, causing them to question what their agent is doing to earn their commission.
What would this mean for real estate investors? Lower transaction fees means it would be cheaper to buy and sell real estate, which of course would be a benefit to investors. According to classical economic theory, lower transaction fees would also “grease the wheels” of the market and make it more efficient overall.
Incidentally, this isn’t the only recent trouble that NAR has faced. In August, its then-President Kenny Parcell resigned after multiple women accused him of sexual harassment. The CEO resigned more recently, a few days after the verdict in this case. The organization is increasingly facing pushback and scrutiny from its members, and amid all this turmoil several larger brokerages including Redfin, Re/Max, Century 21, Coldwell Banker, and Sotheby’s have severed ties with the organization, no longer requiring their agents to be NAR members.
This fight will likely play out over several years to come. The outcome will be hugely consequential, with the potential to rewrite one of the fundamental rules that governs the entire real estate industry in the United States.
Portfolio Updates
I have three properties currently being turned over for new tenants, which is the most I’ve ever had at any one time:
The small rehab at Property #20 is complete following a long eviction/bankruptcy, and has been listed for rent.
A separate eviction at one unit of my duplex (Property #18) is also complete, and a small rehab is underway here as well.
The tenant at Property #22 did vacate at the end of October, and a large rehab is underway here. The first turn at a new property is always more expensive because I have to bring it up to standard, which in this case includes new hard surface flooring throughout most of the property. The work is already complete — my PM got this done very efficiently in ~2 weeks! — and the property is being marketed for rent.
Getting these three vacancies filled quickly will be critical to eliminate the drag they will cause on my numbers. However, I did receive the promised lost-rent reimbursement for the eviction at Property #20, which helped my numbers significantly in October.
My October Portfolio Report dives into all the details for the most recent month. I’m back into the green for the year, but that likely won’t last because of the costs of those ongoing turns:
And now this!
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In Other News…
Real Estate & Business, Domestic News
Inflation cools further. Inflation continues to fall, though it’s still running a bit above the Fed’s (somewhat arbitrary) 2% target. Still, most market-watchers think the Fed is done raising rates, and may even start cutting them next year.
Mortgage rates fall. In response to this, mortgage rates have fallen more than half a point in the last few weeks.
Fannie Mae lowers down payment requirements for multi-family properties. The change applies only to owner-occupied properties where the owner serves as a resident landlord, and allows for down payments as low as 5% instead of the 15-25% previously required.
A new study shows that timing the stock market is impossible. Buying and holding stocks for the long term (preferably in low cost index funds) is the best strategy, according to the exhaustive new study. (Timing the market doesn’t work with rental properties either.)
WeWork files for bankruptcy. This completes the long saga of a real estate company that hoodwinked “sophisticated” investors and the world into believing they were something other than a real estate company. But they were always just a real estate company, and not a very good one if your measuring stick is profitability. Still, WeWork is the largest leaseholder in NYC and London, so this is another blow to office landlords who are already struggling due to the rise of remote work.
The “overemployed” fight RTO. The ongoing RTO (return-to-office) push is particularly worrisome for new class of worker: those who are secretly holding multiple jobs at once. (This is a fascinating and thought-provoking read.)
Major labor strikes end, producing gains for workers. The United Auto Workers struck a deal to end their strike. The deal, which among other things provided for a 25% pay increase over four years, was (narrowly) approved by their membership. The actor’s strike is also over, meaning that both writers and actors are back to work after securing pay raises and other protections from Hollywood studios.
“Crypto king” is found guilty on all counts. Sam Bankman-Fried, founder of the crypto exchange FTX, was found guilty on all counts in his federal trial, and faces up to 110 years in prison for wire fraud, conspiracy, and money laundering. During his spectacular rise, he carefully crafted a public persona as both an eclectic genius and one of the good guys in the freewheeling scammy world of crypto. Turns out he was neither. Meanwhile, another crypto king (how many can there be?) has just fallen: Changpeng Zhao, CEO of Binance, the world’s largest crypto trading platform, resigned and pleaded guilty to money laundering.
Government shutdown narrowly averted (again). Newly-elected House Speaker Mike Johnson passed a continuing resolution to fund the government at current levels and avoid a government shutdown, relying mostly on Democratic votes to do so. If that sounds familiar, it should: it’s EXACTLY what former Speaker Kevin McCarthy did just six weeks ago, which led to his being ousted by hardline members of his own caucus. No ouster is imminent this time, so it seems totally worth it that they went through all that.
New York Congressman uses campaign funds to get Botox. The House Ethics committee released its report on George Santos, Republican of New York, who we learned last year had made up most of his personal backstory from whole cloth. The report was scathing: among its juiciest morsels, Santos seems to have spent campaign funds on Botox, luxury clothing, and porn. You have to tip your cap to him – nobody is doing it like this guy, I say, nobody! (Except maybe NYC mayor Eric Adams, who is under investigation by the FBI? We shall see…)
Abortion and marijuana ballot measures pass in Ohio. Ohio voted to enshrine reproductive freedom into their state constitution. They also voted to legalize recreational marijuana use, something that 70% of Americans now agree with. (In 1969, that number was just 12%.)
Republican Presidential field narrows. Former Vice President Mike Pence and Senator Tim Scott both suspended their Presidential campaigns, disappointing virtually nobody.
The financial truth about Truth Social is disclosed. Donald Trump’s social media platform Truth Social is losing a ton of money. Since launching last year, the company has lost $73M on sales of $3.7M. (Nope, not a typo!)
International News, Science & Technology
It’s gettin’ hot in here. September 2023 was the hottest September ever (by a LOT), and this year is on track to the be the planet’s hottest on record. One climate scientist described this year’s ocean and air temperature anomalies as “gobsmackingly bananas”. I’m not an expert, but that doesn’t sound great.
They’re bringing bak the Hindenburg. No, really. Pathfinder 1, a prototype electric airship from Sergey Brin-backed company LTA Research, took its maiden test flights.
Carbon capture plant opens in California. One of the country’s first carbon capture plants began operations. It can remove 1,000 tons of CO2 from the atmosphere each year. Humans are currently adding about 40,000,000,000 tons of excess CO2 to the atmosphere annually, so let’s see…only 39,999,999,000 to go!
Biden signs executive order on AI. The new order is the start of a push to regulate the emerging technology, something even its boosters welcome. Meanwhile, here’s something actually useful that AI is doing: predicting the weather better than existing forecast models.
Arts & Culture, Sports, and All the Rest
Matthew Perry dies at 54. The star of the iconic sitcom Friends died. The cause of death has not yet been officially determined, but he struggled with drug addiction most of his life.
Rosalynn Carter dies at 96. The former first lady was married to President Jimmy Carter for an astonishing 77 years, and played an active role in his long post-Presidency that focused on humanitarian causes.
Clocks fall back. We completed our twice-yearly ritual of moving our clocks forward and back, and I completed my twice-yearly ritual of getting real pissed about it.
The Marvel magic may be gone. After more than a decade of dominating the box office, the most recent release in the Marvel Cinematic Universe fell very flat. Which makes sense to me: I’ve been a fan of many of the movies, but I’m pretty tired of them at this point.
Turkey Day on a budget. An average Thanksgiving dinner will cost 4.5% less this year than last year. Time to start worrying about DEflation!
Simulator golf league will launch. The new virtual golf league backed by Tiger Woods and Rory McIlroy will hold its first event in January. It sounds pretty terrible to me, but then I remember that lots of people enjoy watching other people play video games – so how much worse could this be? Press-time update: the start of the league has been delayed by a full year due to the collapse of the inflatable roof structure at the custom-built venue for the league.
Final Thoughts: Ethics & Evictions
In the last few months, I’ve had to evict two tenants from my properties. Evictions are an unwelcome financial hit to rental property investors, but of course this is nothing compared to how unwelcome it is for the tenant. Not only are they forced to leave their home, but it can be more difficult for them to rent a new place due to the eviction on their record — and of course due to the financial strain that caused the eviction in the first place. The impact of an eviction can be devastating, and last years.
I also recently had a coaching client change course and decide not to pursue rental properties because they were uncomfortable with the ethics of being a landlord.
All this has gotten me thinking about this core question: is the business of owning rental properties ethical?
I think there are two lines of critique that are worth considering here. First, there’s the overall housing shortage and housing affordability problems that are endemic all over the country. Put plainly, it’s simply too difficult for too many Americans to afford adequate housing. This is a serious societal problem with tendrils that reach into every other area of civic life. What role do landlords like me play in creating or perpetuating this problem?
Second, there’s the disproportionate impact of the housing crisis on poor Americans, who are disproportionately non-white. This feature of American life has a long history, of course, that includes the decades-long practice of redlining in the mid-20th century through which mortgages and financial services were denied to specific poor and minority neighborhoods. That practice has been illegal for more than 50 years, but the racial homeownership gap is as large today as it has ever been. Do rental investors like me exacerbate this problem?
Let’s look at each of these two (related) questions in turn.
Housing Affordability
Landlords take a lot of heat for the cost of renting. This is understandable, in a sense — from a tenant’s perspective, their landlord is the only public face they can associate with their rent, or with a rent increase: “My forking landlord is raising my rent!” In this construction, landlords are the wicked oligarchs, and tenants the victim of their greed and extortion.
Let’s set the record straight: landlords do not determine market rent. And landlords can’t get away with charging more than market rent, or their tenants would live somewhere else.
So what DOES determine market rent? For the most part, supply and demand. I experienced this first-hand as a renter in New York City over the last several years. When the city emptied out during the height of the pandemic, I renewed my lease at more than a 10% discount at a time when there were more than 50 units available for rent in my building alone. By the following year, everything had changed — residents were returning in droves and there were only 2 units available for rent in my building, so I was forced to submit to a whopping 24% increase on my renewal. This sounds extreme, and it was — but the truth is there were no cheaper options available to me that would work as well. The market rent had changed due to rapidly increasing demand.
I’ve also experienced this as a landlord. If I list a house with an asking rent that is too aggressive, it will be difficult to find a tenant, and I’ll eventually have to lower the price. If I list it below what I think the market value is, it will get tons of attention from prospective tenants and rent very quickly. I’ve seen both situations many times. I don’t know all the forces that determine market rent in a specific area, but I know one thing: it has nothing to do with ME, and I have no power to change it.
So if property owners aren’t to blame, why does housing seem to get ever more expensive? The single greatest factor contributing to the high cost of housing in many areas is the lack of housing supply. I wrote in depth about America’s persistent housing shortage in a previous RIA Roundup, so I won’t rehash all of that data here. But in summary: it’s partly a function of the caution of homebuilders in the decade after the Great Recession, but it’s also due to widespread NIMBY-ism at the local level. The big problem of housing affordability has a surprisingly simple solution: build lots more housing, especially denser multi-family housing, as fast as possible. Yet this is fiercely resisted by many communities whose residents block development to maintain their neighborhoods as they are (and to support their home values, and thereby their wealth.)
Some of these NIMBYs may be well-meaning, and not fully understand the cumulative impact of their actions. Many of them may even support affordable housing measures, housing subsidies, and other policies to help people afford their homes. But here’s the hard truth: those who stand in the way of more housing units being built are much more to blame for the high cost of housing than landlords are.
The Racial Divide
Though explicit discrimination in housing and lending is now illegal, it is nonetheless true that housing affordability disproportionately affects non-white families, and the racial homeownership gap is larger than it was in 1960. The underlying cause for this is the wealth gap: Black families have, on average, only 10-15% of the wealth of white families.
That deeply troubling fact is much bigger than just housing, which means the solutions must also be bigger than just housing. Addressing the wealth gap is a generational challenge, and I won’t pretend to have the answers, but I personally support continued experimentation with creative policy solutions that might address the racial wealth gap (and the struggles of poor people generally) such as universal basic income and a land-value tax, among other possibilities. It stands to reason that if the racial wealth gap were closed, the racial homeownership gap would also close, as would the disproportionate share of housing challenges currently borne by non-white families.
But what about those evictions? Well, if a tenant can’t pay rent, there must be some legal process for an owner to regain possession of the home, as painful as that may be for the tenant. But there are ways to avoid evictions that I (and my property managers) always try first, such as a “cash for keys” arrangement whereby I pay the tenant to leave the property without an eviction. This can be better for the tenant because they avoid the eviction on their record, and it’s also better for me because I get the house back, and can re-rent it, sooner. Also, we always try to connect the tenant to sources of local rental assistance funds — this allowed one of my tenants last year to avoid an eviction and get current on rent, while I got paid nearly all the back-rent owed. That tenant is still in the property more than a year later, paying their own way, which is a huge win-win. So evictions are necessary, but they’re a last resort.
The Bigger Picture
One further point: the ethics of rental properties don’t necessarily compare favorably to other investment classes. For example, stocks are tricky, because there are some businesses you might prefer not to support for a huge variety of reasons. Stock divestiture movements have gained steam in recent years, aiming to pressure large institutional investors to dump certain stocks, such as fossil fuel companies to use one example. I own stocks, but not individually. Instead, I do what many investors do nowadays and own a total stock market fund, which means I own small pieces of every publicly traded company — both those I would choose to support, and those I would prefer not to. Like it or not, there are ethically dubious downstream implications to my owning a total stock index fund, as passive and harmless as that action may seem.
Other asset classes (precious metals, fine art, cattle, you name it) each comes with their own unique ethical concerns and considerations.
In fact, there may not be a perfectly virtuous way to invest…or to do anything for that matter. Perfect virtue may be completely unattainable in our complex, interconnected world, where one action can have so many unintended consequences. This ethical complexity was a core theme of The Good Place (which I consider to be one of the greatest TV comedies ever made — very funny and smart, but also poignant and, in the end, profound. And I told you that earlier gif wasn’t an accident, I’m about to bring it home!)
Anyway, Ted Danson was right about the tomatoes, starting at 1:38 of this clip:
Every investor needs to draw their own conclusions about all this. But for me, in the final analysis, the business of rental properties is ethical enough when it’s done fairly. I provide my tenants a clean, safe, and functional place to live, charge them a fair price, and deal with any maintenance issues promptly.
In other words, I try not to be an ash-hole.
Happy investing,
Eric
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
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