Explaining the Real Estate Broker Settlement

Under the terms of a settlement agreement between home buyers as represented in a class action lawsuit and four large real estate brokerages, standard rules of engagement will soon change somewhat between real estate brokers and their clients. 

The conventional wisdom described in most news stories – hoped by consumers and feared by the realtor business – is that commissions on residential real estate sales will drop from a traditional 6 percent paid entirely by the seller, to some lower negotiated rate paid separately by sellers and buyers.

Lower transaction fees, especially for something as central to household wealth as real estate, seems like a win for homeowners, possibly at the expense of the realtor business. If real estate brokerage fees have been kept artificially high by an unspoken cooperation by big brokerage firms to cluster fees in the 6 percent range – which is the assertion of the original plaintiffs in the lawsuit – then this ruling and settlement may land the average fee at a much lower range, like a 3 to 4 percent range.

Possibly no change

In conversations with real estate professionals, however, their belief overall is that this settlement will likely lead to very little observable changes, especially in Texas. On the other hand, the settlement may have unintended consequences that actually hurt consumers. Mandated changes will go in effect August 14 or later, so we’re still in speculation mode.

Far from lamenting upcoming changes to her industry from this settlement, realtor Carolyn Rhodes of Kuper Sotheby’s International Realty in San Antonio told me “this is the best thing that has happened to us in 10 years.” She explained her confidence stems from two points. First, the rules of the settlement will mandate written agreements for buyer-side representation, and it will restrict certain types of commission listings by seller’s agents which might have been used to enforce – again in an unwritten way – a 6 percent standard commission. But Rhodes says reforms in Texas in the 1990s and 2000s already mandated buyer-representation contracts, and also already made commissions explicitly negotiable. Far from putting downward pressure on commissions, her theory is that new rules will lead to better disclosure and dialogue about brokers’ fees, which helps her business rather than hurts it. 

Nicole Webb (my wife’s cousin)

Outside of Texas I heard the same thing from Nicole Webb of Realty Executives in Knoxville, TN. She doubts the settlement will have any negative impact on her business. For starters, she says she’s rarely listing a property for a full 6 percent commission (she actually said “never”) so does not think downward pressure on commissions will be any adjustment for her. Next, she’s confident that she talks to clients upfront about how commissions work, what costs they cover in terms of marketing and advertising. And finally, like Texas-based brokers, she would always have had in place a written agreement with clear rules of engagement as a buyers’ broker. (Disclosure: Webb is my wife’s first cousin, once removed). 

Another real estate broker friend I spoke with who asked to remain anonymous expected very little change in her business. As a well-established broker who relies primarily on relationships and deep knowledge of her coverage area, she felt confident that future commissions would reflect value-added work in line with past commissions. Many of those were already negotiated away from the “standard” 6 percent anyway, based on the size or complexity of the transaction. 

The details of the settlement

Regarding the details of the settlements over the past few months, large brokerage firms Keller Williams, Anywhere, RE/MAX, and HomeServices of America were all sued by a group of home sellers. Anywhere and RE/MAX settled before trial, paying $83.5 mm and $55mm respectively.

A jury then ruled against the industry, and a judge ordered the National Association of REALTORs (NAR), Keller Williams, and HomeServices of America to pay damages of $1.8 billion. NAR agreed to pay $418 million, and Keller Williams settled for $70 million. In April 2024 HomeServices of America, owned by Warren Buffett’s Berkshire Hathaway, finally settled for $250 million. 

The NAR settlement

A central feature of the settlement is that when agents list property on the Multiple Listing Service (MLS) database of properties for sale, they’re now much more restricted in how they communicate on this listing about commissions. They can’t require a cooperative relationship between seller and buyer when it comes to commissions. They can’t filter listings by compensation. The intent is to make it more likely that seller’s agents and buyer’s agents are totally separately compensated, and they negotiate their own compensation separately with their own clients. 

Risks for homebuyers

One possible unintended consequence of this settlement, commented on by a few brokers I spoke with, was the risk that some consumers may actually be harmed by the settlement. 

That’s the speculative worry of J Kuper, president of Kuper Sotheby’s. In particular, homebuyers expected to pay for their own buyer’s representative face a problem. Under current rules that pre-dated this settlement, banks who offer mortgages at a real estate closing may not include buyer’s commissions in their loans. The result? Buyers may have to pay the 1 to 3 percent commission at closing, on top of the already-difficult-to-save-for down payment. If banks do not adjust their rules on mortgages in coming months, this could leave home buyers scrambling for extra cash at closing, or incentivize them to forgo representation. Neither is an outcome that will serve home buyers interests well.

J. Kuper of Kuper Sothebys

Steve Yndo has been a long time broker for King William Realty and currently is a developer and commercial broker at Yndo Urban in San Antonio. 

Although his bread-and-butter is not residential real estate, he also foresees complications from the settlement and new rules.

As Yndo says, “The biggest pitfall, the biggest problem might be that if the prevailing deal becomes ‘Hey sellers, you’re now expected to only pay for the seller rep’ and they’re only going to pay those guys half the current prevailing fee, then buyers are kind of on their own.

In concrete financial terms, what Yndo describes goes like this: A first-time home buyer diligently gathers her $60 thousand down payment for her $300,000 dream home. Or $30 thousand down-payment for a 10 percent, or whatever. And the new rule may require her to come up with an additional $6K to $9K at closing to compensate her buyer-side broker. 

So as Yndo speculates: “What first-time buyer is able to pay that fee, unless the practice also becomes that the fee just gets rolled into the deal and as part of the mortgage? Which is more or less how it has always worked. If that doesn’t come about…[Buyers] may go unrepresented, trying to do it on their own.” Since that buyer’s fee isn’t financeable under current rules, there may be a problem in the future. 

J. Kuper’s strong belief is that real estate markets depend more than anything on stability and clarity. The uncertainty around adjusting to the new settlement is what could slow down transactions, not the substance of the settlement itself, which he finds, like his colleague Rhodes, not particularly worrisome. 

In May 2024 not all the details are yet known. A final agreement on new rules of engagement are still being worked out, and will not take effect for real estate transactions until August 17 2024 at the earliest or the months after, adding to uncertainty for real estate industry professionals.

A version of this ran in the San Antonio Express News and Houston Chronicle

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Book Review: The 15-Minute City by Carlos Moreno

Professor Carlos Moreno first presented his “15-Minute City” idea in 2016 at a climate conference. His big idea was that reducing fossil-fuel emissions required a radical redesign of urban life, reducing automobile traffic by making everything much more accessible to smaller neighborhood units.

Part of the power of Moreno’s concept comes from the fact that current Paris Mayor Anne Hidalgo has adopted the 15-Minute City concept as her guiding leadership principle, and she will be mayor until 2026.

Moreno’s new book The 15-Minute City: The Solution To Saving Our Time & Our Planet published May 7th explains this concept in depth and chronicles attempts by leaders of contemporary cities – first 20 cities, then 40 cities, and now many more cities – to imagine and then implement design and zoning changes to improve urban life.

15-Minute-City

Moreno’s argument is that we can and should measure the distance in time it takes city-dwellers to reach essential services like education, work, health, food, and entertainment amenities. Healthier cities try to avoid long commutes and traffic jams, some of which are caused by car-centric planning. We can accomplish this partly by creating the conditions for more walking, biking and public transportation modes. Mixing residential and commercial buildings makes it more likely that people can live in complete neighborhoods where much of life can be reached without getting stuck in traffic.

Moreno’s 15-Minute City is a great example of how a cleverly conceived big idea can drive change when adopted by the right people.The mayors of cities as diverse as Paris, Milan, Cleveland, Portland, Melbourne, Buenos Aires, and even Busan in Korea and Souse in Tunisia have explicitly modeled their urban redevelopment plans on Moreno’s concepts, as explained in his book. 

The convincing appeal of The 15-Minute City, for me personally, has very little to do with environmental impact or as a way to address climate change. I’m not in fact convinced by his arguments on that aspect of it. 

I am convinced instead by the aesthetic and lifestyle improvements that a 15-minute city seem to offer. In the car-centric world of 21st-Century Texas cities, I lament and resent the reliance on cars that our built environment requires. In San Antonio, where I live, we tend to build new residential communities with single access points that connect only to interstate highways. This requires everyone to get in their automobiles, use the interstate like a city street, and then drive three exits down to get to their local grocery store. Congestion is a guaranteed outcome. With this model, time wasted in traffic is inevitable. 

We enjoy a number of walkable amenities and a pedestrian-friendly life in my neighborhood. But I still of course get in my car and drive 15+ minutes to go to the doctor, or to bring my daughter to her soccer team practices thrice weekly. It’s fine, but it could be a lot better. 

Objections to the Book

This is by no means a perfect book.

First, the book does not provide a proof of his concept in any way. It does not provide rigorous data or analysis on the plan versus other solutions. The book is much more of a manifesto for a better way to approach urban design, as well as a history of what went before his big ideas and what has happened since, to coalesce urban planners around his big idea. 

Moreno’s also neither a great writer (English may be his third language) nor a convincing scholar. He repeats himself and relies on fuzzy descriptions of hopeful ideas from around the world that might hopefully accomplish his big idea, ideas which are still very much in the planning phase. 

I find the 15-Minute City convincing not because of the quality of his evidence or argument, but because I’m predisposed aesthetically to this kind of urban life. It’s a big idea, I like the big idea, and I think we should aim for it. The 15-Minute City is totally different from the way Texas cities are being built right now, and that’s a damn shame.

The Wacko Objections To The Book

One version of good-faith criticism of the 15-Minute City is that urban design emphasizing small, slow, and localized neighborhoods inside a large city could involve convenience, lifestyle, and economic trade-offs. Developers of new neighborhoods and new office parks clearly find it to their advantage to continue to do more of what they’ve already been doing. Traffic engineers clearly find it to their advantage to build faster and bigger roadways for automobile-oriented transportation. I think I could see why they wouldn’t naturally be big fans of Moreno’s ideas.

Carlos Moreno is a very big Jane Jacobs fan

Then there are the bad-faith critics and wackadoodles. Moreno in news reports has mentioned receiving death threats because of his idea. For a nerdy academic concept like this, the threats are probably a sign that he is on to something big and important. 

The 15-Minute City concept is potentially threatening to the status quo of cities as developed since the 1950s. As an idea it’s been twisted by bad-faith critics into some monstrous intrusion into contemporary urban development. Socialism! Europeanism! The death of the automobile!  

Earlier iterations of international climate-friendly zoning ideas have acted like a red cape before a bull. A UN-sponsored agreement from 1992 signed by 178 countries, called Agenda 21, became a conspiracy-theory code word for far right commentators who imagined this as a forerunner of a secret “New World Order.” Attempts to limit the potential profits of developers can be, and has been, spun into some threat to an American way of life. What seems like sensible planning for better life in cities to some can be seen as an attack on private property rights to others. 

While Moreno is certainly European in outlook and interested in small scale, walkable, and bike-friendly neighborhoods, he does not personally represent a vast conspiracy. He is just a guy, a Colombian-born Parisian professor who happens to have come up with a cleverly-marketed way to help city-planners imagine better cities. And as described in his book, he hit the zeitgeist for many cities on different continents led by leaders looking to revitalize small-scale neighborhood life among modern metropolises.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Link to purchase book: The 15-Minute City by Carlos Moreno

Please see related posts

Book Review: The Death and Life of Great American Cities by Jane Jacobs

Book Review: Going Going by Naomi Shihab Nye

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TIKTOK Updates

The official position of members of US Congress is that Chinese-based ByteDance, the owner of TikTok, represents a threat to American security both because of data privacy concerns and the propagandistic potential of the platform. 

A law passed by Congress and signed by President Biden April 24 requires a sale of the American side of the business to a non-Chinese owner by January 19, 2025. Failing that, Bytedance’s popular app will be blocked in the US.

The official position of ByteDance is that they would prefer to shut down the business rather than sell it, and a lawsuit brought May 6th seeks to achieve their aim of blocking the new law in US courts first. 

To an extent largely invisible to old people, (fyi my definition of “old people” in this context is anyone over, say, age 21) TikTok is the culturally dominant force of our times. So this will be interesting

Universal Music’s reaction

When mega pop star Ariana Grande wants to launch a hit song, music promotion business professionals know its best bet is to drop marketing dollars on TikTok creators to push music and dance trends, to create buzz for the new music.

Deoz Wilson, an agent for TikTok influencers at RedXTalent, received some of those dollars from Universal, Grande’s music label, in April. 

He in turn distributed money to the influencers he represents, who he refers to as “creators.” Universal paid $1,000 for example for San Antonio-suburban teen Ryane Roy to create a short dance video to the new Ariana Grande music.

Roy is a 15 year-old just finishing up ninth grade this month, who also happens to make tens of thousands of dollars per year as an influencer on online platforms. Roy built her online business originally on TikTok with a combination of dance and relatable lifestyle and fashion short videos.

Ava Lewis, another suburban San Antonio teen and real-life friend of Roy’s who has built her own following on TikTok and joined Wilson’s team of influencers last year, also received payment for promoting Ariana Grande’s new music on TikTok.

Ryane_roy
Ryane Roy, TikTok teen Influencer

The possibility of a ban has forced businesses large and small to react. 

Back in February, Universal briefly pulled the rights to play its music from the platform. They had  complained that TikTok paid them insufficient amounts for royalty rights, although the emerging possibility of the ban probably played a part in their decision as well. Their marketing budget then shifted to other platforms like Instagram.

A TikTok ban of course also threatens the businesses of young entrepreneurs like Wilson, Roy, and Lewis.

Roy reacts

Ryane Roy earns money from a wide variety of revenue streams, including views on YouTube Shorts, shopping links on Amazon & Instagram, brand endorsements, music promotions, as well as paid videos on the celebrity Cameo site. While she has 285 thousand subscribers on YouTube and 153 thousand followers on Instagram, her 1 million followers on TikTok still drive the business. 

“What people don’t realize is social media exposure through TikTok is many small business owners’ only  source of income, and banning TikTok would be potentially taking this away from them,” says Roy.

While Roy believes the TikTok ban is both wrong and potentially very harmful to businesses like hers, she’s also adjusting to any eventuality.

“Because of the TikTok ban threats, I have been consistently promoting my YouTube and Instagram often to ensure continuity,” something she has been working toward for more than a year.

Wilson, manages Roy, Lewis, and another Texas-based influencer named Leigha Rose Sanderson, as well as a stable of other creators, and has had to adjust as well. 

Wilson said “for us, our agency is adapting to the reality [of a potential TikTok ban.] We encourage our influencers to be more active on Instagram Reels and Youtube Shorts. We don’t know if the ban will become real, but we have a Plan B. 

Wilson’s business was also built based on the audience-gathering potential of the TikTok algorithm in particular. As much as YouTube and Instagram are useful, they are currently no match for TikTok, in terms of driving audience views and driving the culture. Wilson says “Of course there is also Instagram and YouTube, but the reason why TikTok became so popular and successful is because anyone can become famous on their platform, because of their algorithm.”

The joke in my own family is that I sometimes become aware of music and dance trends on Instagram “Reels” which is the Meta company’s attempt to compete with TikTok. Inevitably, however, the content on Reels that Dad is aware of is weeks or months behind the trends on TikTok, at least according to my kids. That’s fine for a laugh at the older generation, but for a company like Universal it’s absolutely untenable. 

Deoz_Wilson
Deoz Wilson owns an agency and also has his own TikTok presence

Wilson explains that music industry giants like Universal cannot afford to miss the chance to hit the teen zeitgeist for music trends, which happens much faster on TikTok than any other platform. 

Bowing quickly and inevitably to the power of TikTok to set the trends, Universal decided in April to reauthorize its music catalog on the platform. Wilson reports that bigger music budgets are now back, from Universal and another client Warner Music, for boosting performers among the slate of creators he represents, like Ryane Roy and Ava Lewis.

Presidential politics are also at play. As President, Trump had previously threatened to shut down TikTok. In the past year he has reversed his position. His re-election would likely help TikTok survive the current ban.

So, powerful forces may save TikTok via lawsuit or political pressure. On the other hand, powerful companies like Meta (with Instagram), Snap (with Snapchat), and Alphabet (with YouTube) would be logical beneficiaries of the ban and might be happy to see it knocked out, to their benefit.

Here’s an interesting experiment you can try with the teens in your life: You may consider them wildly uninformed about political or cultural things that you find important, but they are remarkably well-informed on the issue of TikTok’s banning by Congress. ByteDance and its supporters have made the issue impossible to ignore for the 170 million Americans on the platform. This is being portrayed by ByteDance in terms of freedom of expression, First Amendment rights, artistic creative freedom, and the trampled rights of businesses that have made TikTok their home. Maybe ask a teen in your life what they know about this, just to see if they have strong opinions? Spoiler alert: They do.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts:

San Antonio-area teen makes serious money with her business based on TikTok

TPR Podcast: The Austin-area TikTok and Instagram influencer making a serious gross profit – on Slime.

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