Business Breakdowns
· Geoff Collette
[00:00:00] S1: There are a few major players to understand that dictate the structure of the industry and play an influential role on how business is conducted. So you've got the National Association of Realtors, or NAR, which is the largest trade group in the entire country. It's got about 1.5 million members. To access MLS, the Multiple Listing Service, the essential database that agents rely on to share listings and work together, you must be a member of local, state and national Realtor associations. That mandatory membership effectively ties agents into rules that actually make the trade group more of a regulator for the industry than many other industries. That's really critical to understand. And just a couple other sort of relevant data points. The MLS is not a national system. It's a patchwork of over 500 local databases. About 80% of them are controlled by Realtor associations. For a long time there was actually a built-in compensation offer where a listing agent would actually show the offer to the buyer's agent, the commission that they would receive as part of a transaction. That was just how the industry worked. So a buyer wasn't actually paying their agent outright. And then the last players to understand are the consumer-facing portals such as Zillow, realtor.com. They get their listings data from MLS and then turn that into customer-facing experiences. They're generally monetizing leads to buyer's agents. And the key thing to understand about all of this is this system basically supported tens of thousands of independent brokerages to compete and created a dynamic where there's been very limited consolidation. The top 22 brokerages in the country control about 25% of the volume. Around 60% is done by firms with under $1 billion in gross transaction value. And just as another frame of reference, commercial real estate is very different. It doesn't operate under this structure. And there you see a handful of large firms that are much more dominant.
· Matt Reustle
[00:00:00] S0: Yeah, it's interesting with the 6% commission fee, or maybe that's the cap of the commission rate that could be paid on a residential purchase. Is the governing body NAR in that case? Where does that originate from? And we can get into a little bit more of the nuances to it.
· Geoff Collette
[00:00:00] S1: I think there's a little bit of a misnomer around the 6%. The average commission in the US hasn't been at that level for quite some time. I think from 2011 through 2020ish it gradually came down from around 5.3% to closer to 5%. Interestingly, it ticked up a little bit in 2023. The listing side has remained 3%. That's standard in most markets. Whereas the buy side has been really more the area of pressure. And so there's been changes that have occurred that were headline-grabbing in 2024 that really impacted the way commissions are set. They're always set by the agents. But there was essentially a landmark case, Sitzer-Burnett, that challenged the system that I described earlier in terms of that offer compensation within MLS. And basically there was a settlement that occurred that created changes that happened starting in August of 2024 now, where that offer of compensation doesn't exist in MLS, and importantly, there are written agreements that need to be entered into between the buyer and the buyer's agent that have created some dynamics that are influencing some of the market share dynamics I hit on earlier. But really what we're seeing as an output of this is not necessarily what people expected. I think the commission rates have remained very stable, as have the buyer representation. What's occurring is a shift towards more professionalism. It's hard to exactly tease this apart because the industry's been in this trough period, but buyer's agents are really having to articulate their value to their client in a way that they really didn't have to before and compete to win on business. Generally speaking, if you're representing a seller, you're providing them with a listing presentation, you're competing with other folks who are articulating their value in a way that wasn't historically done on the buy side. Now that is much more relevant and accordingly, if there are brokerages that can convey value to the agent and to the client in this new setting, then that is also a powerful dynamic that's creating more market share shift to the most professional agents. And just a couple interesting tidbits to end on here: it's remarkable that 70% of agents who pay MLS dues and were affiliated with a brokerage in 2024 did zero transactions. So it's really been a market that is shifting in certain ways.
· Geoff Collette, Matt Reustle
And I think firms like Compass are in a position to potentially absorb market share along the dynamics I described. But also it's more obvious to brokerages that companies like Compass can actually enhance their value proposition and the combination of them can be compelling. [00:00:00] S0: It's very interesting on the agent side to hear that 70% data point because I think it tells the story of what many people think of, which is a great agent is worth their money multiple times over. But the large majority, I think, are viewed as commodities. And I don't know that it's that hard to argue against that on the buying side. Specifically, one point of clarification: the previous model, if I'm the buyer of the house, I buy the house, I don't think about commissions. It was the seller who entered an agreement with the listing agent, and then that listing agent negotiates with the buying agent to split or decide on that commission. Under the new model, if I'm buying the home, I'm entering an agreement upfront about what commission I will pay on that. And then the seller's doing essentially the same thing on their side.
· Matt Reustle, Geoff Collette
[00:00:00] S0: It's very interesting on the agent side to hear that 70% data point because I think it tells the story of what many people think of, which is a great agent is worth their money multiple times over. But the large majority, I think, are viewed as commodities. And I don't know that it's that hard to argue against that on the buying side. Specifically, one point of clarification: the previous model, if I'm the buyer of the house, I buy the house, I don't think about commissions. It was the seller who entered an agreement with the listing agent, and then that listing agent negotiates with the buying agent to split or decide on that commission. Under the new model, if I'm buying the home, I'm entering an agreement upfront about what commission I will pay on that. And then the seller's doing essentially the same thing on their side. [00:00:00] S1: The cooperation dynamics that still enable the seller and the payment of the commission to not be a burdensome factor for the buyer actually still exists in the vast majority of situations. That was an open question, that dynamic. It's still very cooperative in that way. It's really just that there was the potential for steering around whether or not you're going to pay the buyer's agent a certain amount. And so I think at the end of the day, the buyer's commission could potentially be closer to 2% than 3%. And there are dynamics where there's just more negotiation that's happening versus things not even being front of mind on the buy side.
· Geoff Collette, Matt Reustle
[00:00:00] S1: The cooperation dynamics that still enable the seller and the payment of the commission to not be a burdensome factor for the buyer actually still exists in the vast majority of situations. That was an open question, that dynamic. It's still very cooperative in that way. It's really just that there was the potential for steering around whether or not you're going to pay the buyer's agent a certain amount. And so I think at the end of the day, the buyer's commission could potentially be closer to 2% than 3%. And there are dynamics where there's just more negotiation that's happening versus things not even being front of mind on the buy side. [00:00:00] S0: Yeah, I think you've teased this out and it's something we were discussing before, which I did not quite appreciate is the importance of listings as a core asset or core differentiator within this space. Can you riff on that a little bit more about the importance of that within the Compass model and how they just operate differently when it comes to not only getting listings, but marketing those listings and everything that goes into their approach, which might look different than other brokers?