Last week we discussed the D.A.N.G.E.R. Report that was recently released by the National Association of Realtors® (NAR). NAR commissioned Stefan Swanepoel and his T3 group to prepare the report on threats facing the real estate industry. D.A.N.G.E.R. here stands for “definitive analysis of negative game changers emerging in real estate”. The report’s results are categorized into 5 major sections of the real estate industry: agents, brokers, NAR, State & Local Associations, and MLS organizations.
The report may be downloaded, free, by anyone at dangerreport.com.
Today we will examine some of the specific dangers that the report says are facing agents and brokers. We will consider two from each category.
One of the significant and likely dangers said to be facing real estate agents is “commissions spiral downward.” The study points out that, internationally, U.S. commissions are on the high side. The following comparisons are given: United Kingdom 1 – 2% ; Singapore 1.5 – 2% ; Netherlands 1.5 – 2% ; Australia 2 – 3% ; Belgium 3% ; Germany 3 – 6%.
Swanepoel comments: “ Consumers are definitely becoming more motivated to find an alternative solution, and a growing new generation of brokers and agents are exploring a legion of new business models and pricing models that will most likely become commonplace in the next 5 – 10 years.” Of the more than 7,500 Realtors® surveyed in the study, a full 89% said that this would have a “major” or “game changer” impact on agents.
Another danger – one that agents may not often think about – is “IRS Forces Exodus of Independent Contractors”. The report points to the IRS as the danger source (“An IRS ruling [could be] handed down that reclassifies the legal status of real estate agents from independent contractors to employees.”), but it could just as well come from the courts. Currently, a number of suits around the country are challenging the Independent Contractor classification for real estate agents.
As Swanepoel puts it, “A scenario in which agents are considered employees would initiate a complete reorganization of the existing revenue model. Most brokerage companies would be unwilling to hire agents that will not generate enough business to cover their costs.” He goes on: “Agents would thus have three primary options: work as an employee for a large company under its operational guidelines, become a broker and work as a sole practitioner, or leave the industry altogether.”
Turning to the dangers threatening brokers, we first note the one at the top of Swanepoel’s list: “Regulatory Tsunami Hits”. He refers here to the activities and proclivities of the Consumer Financial Protection Bureau (CFPB). The CFPB is a creation of the Dodd-Frank act. Swanepoel says, “Only time will tell how much of an impact the CFPB will have on real estate brokers… What we do know is that the failure to comply at any level is not an option, and the penalties for failure will be costly. Those who suggest that real estate service providers are not vulnerable under the Financial Services provisions need to remember that there has been little or no effective RESPA enforcement by HUD over the past decade. Most brokerage companies are either ignorant of the fact or believe they are in compliance with CFPB/RESPA regulations, however most are likely in violation already.”
The danger index for this? 100 = critical. The probability? 5.0 = 100% chance. This is a brokerage train wreck waiting to happen.
Finally, we note the danger to brokerages that “A Consumer Brand Crashes the Party.” The possibility is that “A well-established consumer brand is introduced into the marketplace and a new multi-billion dollar residential real estate brokerage brand is created.”
“It would not be a stretch,” Swanepoel says, “for home improvement giants Home Depot ($133 billion market cap, $79 billion in annual sales) and Lowe’s ($70 billion market cap, $55 billion in sales), to expand into the residential real estate brokerage business.”
NAR did not ask for, nor did the report’s creators provide, tentative solutions for the dangers outlined. That will be up to us. We’d better get busy.