Proptech and the Realtors Commission Settlement: What’s Next?

In mid-March, the National Association of Realtors settled a series of lawsuits brought by home sellers, resulting in the NAR paying $418 million in damages and amending its commission rules for real estate agents.

The settlement has led many industry experts and the media to proclaim the death of the traditional 6 percent commission. What that means for proptech in the residential space remains to be seen.

The post-6 percent world might not look that different from what it has been, said Michael Martin, co-founder and co-CEO of Avenue 8, a San Francisco-based residential brokerage services and technology platform for agents, teams and brokerages.

“I think ‘seeming’ demise is the key word,” said Martin, whose company offers a software subscription component and also takes a percentage of the commission, as would a brokerage firm. “It’s really too early to understand what the downstream effects of the settlement are going to be on commissions. I say that for two reasons. One, is that these commissions have always been negotiable. Despite negotiation being available, the reason why they maintain the levels that they have historically, whether that’s 5 or 6 percent, is that it’s really driven by market force.

“And I think there’s consensus that both buyers and sellers still want to have representation by good agents, and that those market forces will prevail. So I think it’s TBD in terms of what the quantified impact will be, if any, on the actual commission number.”

Most real estate agents in New York City are not members of the NAR, added Martin, whose company operates there. “In New York, we’ve had the decoupling for a bit now. The RLS [the Real Estate Board of New York’s Residential Listing Service] put in rules last year that now have different levels of commission structuring on the buy and sell side. And we’ve seen no change in the commission rates. I believe those forces will continue to prevail.”

Traditionally, agent-broker splits have been about 70-30 or 60-40, with the agent retaining the greater amount, he noted. “That’s arguably worse economics than driving an Uber or Lyft. Unlike Uber and Lyft, these agents have control over their customer negotiation, they’re doing all their own lead generation, and are increasingly becoming their own brands through social media. They’re not waving the brokerage flag to get business. No one’s calling you because of the broker toolkit. They’re calling you because of referrals or because they found you on Instagram or wherever it might be.”

That means agents as an independent group likely aren’t going anywhere, Martin said. That in itself offers opportunities to proptech. 

“I think the settlement is reaffirming that right now agents more than ever are being very thoughtful around where every dollar is going and beginning to do real reflection on whether they are getting value out of their existing brokerage relationship,” he said. “And I think that in a post-settlement landscape, they’re going to be much more inclined to find partners that can provide high value at a lower cost versus the traditional incumbents who are really trying to hold on to the business models they’ve had for the last 40 years.”

Jing Pu is CEO of Edgewise, a Miami-based end-to-end software platform focused on new construction as well as residential real estate in general.

“Essentially, what we do is automate workflows and help the digitization process for homebuilders, developers, and also real estate brokerages themselves,” said Pu. “The new home industry is actually a very interesting vertical to look at, because they’ve been working in this kind of post-6 percent world for many years now. It’s a very instructive example to look at if one wants to have a sense of what’s going to happen to the broader industry.”

Founded in 2017, Edgewise is the first online reservation system where homebuyers can digitally buy homes direct from developers, using fixed-price transactions. Buyers and sellers can also negotiate directly through the platform, Pu explained. The company is agnostic as to whether a seller has a seller’s agent or a buyer has a buyer’s agent, he added.

“Our basic philosophy is that we offer our technology to sellers, real estate developers, and brokerages,” Pu said. “They can use our technology however they like. Some sellers are very successful when they hire brokers to sell their homes, while others sell directly. And there’s a variety of different buyer journeys that can happen.”

Given the new commission environment, Pu expects to see a hybrid process in which agents will play a piecemeal role in terms of the buyer’s experience, with a new compensation structure emerging from the change and technology playing a greater role.

“We have received a lot of additional requests from both current and potential new customers, and we’re in the process of having conversations to see what new business models might emerge,” said Pu.

Even before the NAR settlement, proptech startups such as Homebourse, a Miami-based software platform where buyers can purchase new construction properties online, were addressing the need for greater ease and efficiency in the home buying process, said Istvan Fehervari, Homebourse’s founder and CEO.

“We focus on the new development market,” said Fehervari. “We gather and showcase new development projects — right now only in southeast Florida, but we are planning to expand. We have many tools for the parties to transact online. Buyers can make offers online, get contract offers from the developers, and sign the deals.”

The software also offers developers an AI agent that can be trained to know everything about their project, along with a 24/7 sales support team, said Fehervari.

Homebourse doesn’t charge the buyer. It does charge the seller on a sliding scale for its services, resulting in a drastically reduced commission structure, Fehervari said. “If you want to imagine it as a percentage of the selling price, it’s always less than 1 percent to zero-point-something percent.”

However, Fehervari is skeptical about major changes in the residential commission structure happening rapidly.

“I really don’t expect things to change as quickly as everyone in the news anticipated.” he said. “If we take a closer look, the settlement means that commissions are still negotiable. NAR never set the commission rates before. So I think that something’s going to change, but, in my opinion, it will be slower than the articles and the headlines. I don’t expect to see 2 or 3 percent commission rates in July. And that’s fine.”

As Avenue 8’s Martin puts it, technology actually has been an active partner with agents since Trulia and Zillow hit the market earlier in the century. Inefficiencies and a lack of transparency for the consumer drove those initial partnerships, which foreshadow what might happen going forward — with some caveats.

“Ultimately, clients are going to benefit from an agent that’s less distracted and bogged down by processes, but one who is able to meet the client where they are,” said Martin. “This is a big difference in how businesses work today versus back in the day. So part of the value proposition that agents used to have of being gatekeepers of information is no longer the case.

“But bear in mind this is 20 years since we’ve had the landscape of listings open up to the consumer. Despite that, there’s still this commission structure in place, which, again, I think is a function of more competitive markets and sort of just general market forces. There’s still going to be lots of consumer technology applications for consumers to experience a property virtually or to be able to more easily manage the process of disclosures and other document transaction management. All this is going to speed up the flow of the transaction and make it a better user experience. After all, if you think about what a brokerage really is these days, it’s not a bunch of offices, but a regulatory counterparty in the transaction.”

Philip Russo can be reached at prusso@commercialobserver.com.