Business Breakdowns
· 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?
· Geoff Collette
[00:00:00] S1: This is an area that has gotten increased focus more recently. Ultimately inventory's power in residential real estate. It's what drives everything from agents to platforms like Zillow. Without inventory, there isn't business to conduct. What's relevant to what you're asking about is Compass has taken a stance on pre-marketing. This fits back into the industry construct that we were talking about earlier in terms of NAR MLS rules around listings. And to level set a little bit, there's research that shows that there's real demand for off-MLS marketing. The Illinois MLS had on average 21% of its volume that eventually went to the full market go through its internal private listing network that's available to all agents and brokerages. And there's reasons why consumers want to be able to do this. Their home may not be ready to be shown yet. They want to understand price. In today's market, around 40% or so of listings are dropping their price on MLS and the portals like Zillow. It's tracking days on market, it's tracking price drops. Compass is taking a position that it wants to be very homeowner-friendly and facilitate this in a manner that provides flexibility to customers. Even Zillow's studies have found that 31% of sellers want to try pre-marketing efforts. And so what Compass has done starting last year is create a program around this. It's called the three-phase marketing strategy. It's meant to give sellers control and also buyers to have some early access to homes. And that can be relevant in a market where there's been a dearth of inventory that's come up more recently. But the three phases are as follows. There's the private exclusive phase. The aim is really to validate pricing and make adjustments before going to the public and MLS without being exposed to those metrics I mentioned earlier. That's accessible to Compass agents as well as their buy-side clients as well as other brokerages. There's just been rules that have been constructed in the industry that prevent a certain amount of marketing as it pertains to this phase of marketing. But Compass has a book that's available at all of its offices that make it such that those listings are available to anyone that's aware of them.