In this podcast, Motley Fool analyst Nick Sciple and host Ricky Mulvey discuss:
- How the National Association of Realtors settlement could impact realtors and traditional brokerages.
- The potential effect on Redfin's growth story.
- Why CoStar may be a winner in the shake-up.
Plus, Motley Fool personal finance expert Robert Brokamp and host Alison Southwick discuss a critical piece of financial planning that can help any family.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on March 26, 2024.
Ricky Mulvey: Why am I paying that other agent? You're listening to Motley Fool Money.
I'm Ricky Mulvey joined today by Nick Sciple. Nick, thanks for being here.
Nick Sciple: Great to be here with you Ricky.
Ricky Mulvey: This is a big story. It's going to be the most of today's a segment. The National Association of Realtors is paying a $418,000,000 settlement essentially over the way that it baked fees into homes listing prices. Now Dylan and Matty a hit this a couple of Fridays ago when it was just announced, but you were on a heater about this on our members-only livestream full live on the morning show. I wanted to bring it on Motley Fool Money. The implications are becoming a little bit clear. But Nick, to set the table, how did real estate commissions work before this settlement was agreed to, or happened?
Nick Sciple: Prior to the settlement, which again goes back to a federal antitrust case that the National Association of Realtors and a number of other realtors lost back in the fall. Listing agents who are the agents that work for the seller and home transaction would include in their listing on the multiple listing service where you put homes for sale and what have you, and offers to split their commission with buyers agents whose job is, as it sounds like, the guide, buyers through the buying transaction.
Although commissions have always been negotiable in theory, the real crux of this antitrust case is that they were inflated by rules by National Association of Realtors which required listings on the multiple listing service to include offers of buyers, agents, transactions. Traditionally, overall commissions would be set at six percent and those would be split evenly between the buyer and the seller's agent. The seller, the home seller, the person who owns the home would be the one who pays that six percent commission out of the selling price such that the buyer or the person buying home really didn't see a direct payment from themselves over to their agent.
Ricky Mulvey: I was reading a statement from the National Association of Realtors in one of their main points was, hey, these fees have always been negotiable, but in practice, that wasn't usually the case. Before this sellers were paying the buyer's agent fee, which is a little unusual. How could these commissions now change because of this payout, because of the settlement?
Nick Sciple: Likely going to introduce more competition among realtors for what those commissions end up being. A couple of things in the settlement, first settlement for beds and listing agents from including an offer of compensations to buyers agents as part of the MLS listing different from the rules you'd seen. Previously there's no longer going to be a blanket offer of compensation to buyers agents from sellers agents as part of the listing. As a result, buyers agents are going to need to negotiate with sellers on an individual basis in order to determine their fee.
Also another condition of the settlement it's going to require buyers agents to have a signed agreement in place with potential buyers before that buyer even tours a home that includes a clear description of the fees that the buyer will owe to their agent on the closing of a transaction. The prior model really didn't require any discussion of price when you secured a buyer's agents services, those prices, as I mentioned earlier, would be ultimately borne by the seller. Now, buyers agents are going to be required to have these pricing discussions upfront and potentially home buyers will have to bear the risk of having to come up with the cash needed to pay their agents if sellers don't offer agreed to a commission split.
Ricky Mulvey: Before you even getting a home to look at it, you're going to get a document and you're also going to probably start seeing realtors. Maybe differentiate the types of services they provide between maybe your low-cost, quick transaction realtor and then you're more white glove, higher-cost, old fee model. I think there are few shake-ups to watch and potential implications to know about. The first one is just going to be the effect on realtors in that industry. The National Association of Realtors represents a million-and-a-half members last year, about four million existing homes sold in the United States. This is already a very, I would say, tight industry where you have a per capita small labor force for every home that's sold. What could this settlement due to that industry for the job of being a realtor?
Nick Sciple: I think the short answer to that, the industry likely to get a lot more competitive than it's been in previously. Buyers agents are going to have to compete on price for the first time when they are engaging with buyers and convince buyers why their services are valuable upfront. You compare that to the previous regime where this is a service that was free to the buyer was hitting into the home price. With competition likely to see some compression on fees, particularly on the buyer's agent side of things. I think the listing agent, their value is pretty clear here are still going to need them to get these products sold.
But buyer's agent likely to see meaningful fee compression estimates out there. You can see anywhere from 30%-50% overall. Fee compression of 50% that's would take out the buyers agents half of the transaction. You're also likely going to see a bunch of agents drop out of the business. About half of agents sold zero or one homes last year and that's simply just not going to be sustainable in this new regime. If you see fee compression also with fewer agents paying dues, probably would expect membership and the National Association of Realtors to decline along with the organizations influence. This is a group that is one of the biggest lobbying spenders in the U.S. and with less cash to spend on those efforts, likely going to have less influence.
Ricky Mulvey: On the buyer side, I have to imagine if you're going to an open house and you have a buyer's agent with you and they want you to sign something before you even walk in. We haven't entered a purchase agreement yet. Why am I signing this? Maybe maybe I'll call you a little bit later. With that you have the traditional brokerages. There's some of the big brokerages people know like RE/MAX encompass. How do you think this settlement is going to affect those companies?
Nick Sciple: Not great for those businesses either really, for the same reason that I talked about the individual realtors. Many of these companies also had previously prior to the National Association of Realtors settling there part of the case. RE/MAX and others had settled there chunk of the case and are going to pay tens of millions of dollars as part of their settlement. But these businesses make money by getting a split off of the fees that the commissions that their agents produce. If those commissions fall, they of course, get less money. Also, agents pulling out of the market together shrinks the overall pool of folks. They potentially are going to be working for these brokerages, so again, increased competition, likely putting pressure on revenue and that hurts the traditional brokerage businesses.
Ricky Mulvey: Now you're about to hear my bias is a Redfin shareholder, but I'm more curious about how this could hit the online brokerages. A company like Redfin had already been doing lower fee real estate transactions. It wanted to be an alternative to the multiple listing service system. How do you think this hits Redfin, which is already doing the thing that this settlement is implementing.
Nick Sciple: I think Redfin intensifying competition is going to affect them in similar ways, that intensifying competition across the industry puts pressure on the business. However, as you mentioned, Redfin has been set up really from the start with lower fees in mind. You could argue they're in a better position to be prepared for this shift than others, but still Redfin isn't coming into this from a position of strength. This is a business that burns cash.
If you look back at their cash-flow statement from last year, you might see a positive operating cash flow line, but you have to back out a lot of this cash that was generated from exiting the iBuying business. If you just look at the core operating business that still sticks around today is the cash-burning business. There's really some pressure on the business. They had to take on some high yield debt from Apollo in October to extend their maturities. Perhaps the market is coming more toward Redfin's model, but Redfin isn't exactly coming into this from a position of strength and we have intensifying competition from other brokerages. It's not the cleanest story in the world, but perhaps Redfin, better positioned to compete than the other brokerages.
Ricky Mulvey: This is a company where it needs that growth story. It needs explosive sales growth and a really differentiated product. Now that it doesn't have maybe such a differentiated products, that hurts the story for a company that was acting like a 2019, 2020 growth stock.
Nick Sciple: I just think increased competition is going to put pressure on everybody in the space Redfin included. Could this be a tailwind for them to push more folks to their model that offers lower commissions? Sure. But I don't think they're just an unambiguous winter here in this settlement.
Ricky Mulvey: Well, I think there might be a more clear loser from what I've heard you talk about on Fool Live and that's the big real estate platforms like Zillow and realtor.com. Why is that?
Nick Sciple: I think Zillow in particular is in a tough spot here. I'm not the only person that's talked about this. Spruce Point has put out a short report on this company pretty recently, laying out a similar thesis here. But Zillow's revenue model largely depends on selling leads to buyers agents. Their Premier Agent service is really their primary revenue-generating business. As we've discussed earlier, buyers agents are now going to have a much less certainty about what those leads that Zillow is selling to them are worth.
They're going to have to negotiate with homebuyers upfront on price and likely to see fee compression over the longer-term. If you're leads are worth less money then probably, and the folks that are spending that money on advertising and have pressure on their earnings, likely to see less willingness to pay for advertisements on Zillow.
So I would argue should lead to revenue declines for Zillow if things go as we'd expect, or Zillow currently is the dominant online real estate platform, this is still a business that is loss-making, and is going to need to remake its business model to succeed in the new regime. There's a bit of an innovator's dilemma problem for Zillow as they evolve, trying to go after the new market. They're going to undercut some of their existing revenue models and certainly as a company that's not coming in this from a position of strength, I think this weekend Zillow significantly.
Ricky Mulvey: I think we've got two losers in a split decision, if you will, but you've got one winner for this settlement that you think. And this is one that's a little less clear to me, because they seem to do something similar. CoStar does commercial real estate data and it also operates websites like homes.com and apartments.com, which those websites seem to be a little bit similar to what Redfin is doing. But why do you think under the surface why this company could be a winner from this settlement?
Nick Sciple: As you mentioned, I think CoStar is the big winner here. The other company coming into this from a position of strength. So CoStar, as you mentioned, really dominant in commercial real estate data more recently the past decade plus has run-up playbook of acquiring online real estate websites, building them and turning them into subscription based businesses. Their biggest online real estate portal right now is apartments.com, which they bought in 2015 and have built into the number 1 apartments website.
In the US, CoStar really running the same playbook and residential real estate, which is just a significantly bigger addressable market than where they've played in previously. CoStar bought homes.com in 2021 for $152 million, and since then has invested over a billion-dollars into the platform. Anybody who tuned into the Super Bowl about a month ago, you would've seen ads for homes.com, literally every quarter of the Super Bowl. And those ads have have led to increased traffic on the platform. As of February, homes.com has become the second most trafficked real estate portal, has double realtor.com's traffic and triple Redfin's traffic.
Also, the big differentiator here is homes.com's revenue model is focused on the listing agent as opposed to Zillow's model, which inserts the buyer's agent can in-between the homebuyer and the listing agent. So their revenue model, they call it the Your Listing Your Lead model can connect homebuyers directly to the listing agent again, rather than inserting the buyer's agent as a middleman. And that process, homes.com also uses a subscription model rather than the advertising model you see from these other portals.
And even with the subscription pricing, little bit lower price for the realtor, then you'd see from some of these other platforms, really just began monetizing in February right after the Super Bowl and expects to hit $100 million in revenue run rate by the end of the year. Also unlike Zillow and Redfin and this goes to the coming into this from a position of strength, CoStar is a profitable and cash flowing business with net cash on the balance sheet. If you just look at interest income that CoStar generates, it's more than Zillow and Redfin's entire business do management.
As I mentioned earlier, has a track record of acquiring and building these real estate portals into dominant businesses. They've done it with apartments.com, they've done it with commercial real estate platforms like LoopNet and others. And they're entering this space at a time. As we've just discussed, their competitors are in a weakened position. So I think all of this sets up nicely for CoStar to come in, out-compete the incumbents have a more attractive revenue model to these. Realtors that are seeing a more competitive environment, and I think it sets them up to become the dominant online real estate portal if things go as I expect. As I said, they've already got to number 2, they've only got one more to take down and that's Zillow.
Ricky Mulvey: That's something I didn't know until we're recording, which is that they make more in interest income than the entire businesses of Zillow and Redfin. I appreciate you saying that as I am recording this segment and rethinking my position in Redfin the more we talk, Nick. We've talked about the implications we know and what to watch play out.
But there's still a lot of murkiness. I've read a quote in a Fortune article from Ken Johnson, who is a former broker and current Associate Dean it Florida Atlantic Universities College of Business. And his point is that, there might be a little shake up, but in the end, there's going to be a workaround and that we're just going to keep doing business in a very similar way that we are today, and that's with regard to the realtors. So what are the implications that we're still waiting to see shakeout from the settlement?
Nick Sciple: Sure. The first and foremost, the court hasn't yet approved the final settlement, so we don't know if the court is going to improve things as they are, but let's assume that that it goes through as reported and I think that's likely. The big question is how the competitive landscape changes. How aggressive will agents be in competing on price versus trying to circle the wagons and protect their own, as you mentioned, find a way to work around the rules in order to preserve the existing fee regime?
Second is how quickly those competitive changes are going to hit the market. Is this right away? As soon as the settlement goes into place, this summer becomes active in the summer as this immediately going to be a doggie dog market or is it going to take longer for competition to intensify? You've got lots of realtors coming out there saying, it doesn't mean that much.
For me, I don't like the Shakespeare quote, and he thinks the lady death protests too much. I think there's a little bit of a denial out there. I think all it takes us a few folks that effect and start gaining market share and you're going to see competitive intensify for lack of a better word. So I think in the long term we're going to see fee compression. I think there's going to be a lot of bluster from agents as they try to protect their business model. But sooner or later I think competitive pressure is going to take over and we're going to see the compression.
Ricky Mulvey: It's hard to stand still when the tide is changing. But Nick Sciple, I appreciate your time, insight and thanks for breaking this down with me.
Nick Sciple: Absolutely, anytime.
Ricky Mulvey: Before the next segment, I'm going to do a quick add. Broodstock steal the spotlight in the financial media. But something way more boring is behind a whole lot of wealth creation. Dividends, the regular payments that company sends shareholders. Dividends can make companies a little more disciplined on capital allocation and provide investors long-term streams of income. Some of The Motley Fool Analysts behind Stock Advisor, our flagship investing service, put together a list of three dividend stocks to buy this year.
We're sending this report to Motley Fool Money listeners for free just as a thank you for checking out the show with no purchase necessary. Just go to fool.com/2024 dividends and we'll email it directly to your inbox. I will also include a link in the show notes. One of the best financial things that you can provide for your family, it's not a stock, it's not a piece of property, It's not even an investment. Alison Southwick and Robert Brokamp have more.
Alison Southwick: This week I was approached by essentially two kids and a trench coat pretending to be an adult. My daughter was the legs while the other kids shook my hand and did her best adult impression with Small talk like, how is your mortgage? The stock market am I right? Even kids know that being an adult means keeping track of many tedious financial details and apparently talking about it with each other.
This also includes so many different accounts, insurance policies, legal documents, but also the professionals you hire important passwords and combinations and just all your stuff. Have you ever taken the time to create a single document that has all the information about everything you own? Now, because that's only the kind of thing to kids pretending to be an adult would do. But don't fret. We're here to help with a comprehensive checklists for your full-sized, totally real adult life.
Robert Brokamp: The inspiration for this idea comes from a fellow by the name of Bob Hassmiller, who is a longtime Motley Fool member. And way back in 2006, he wrote on our discussion boards that his father, who actually was a lawyer, died without a will or any other estate planning. Bob believed that this creates such difficulties. First, mom, that contributed to her dying less than a year later. What his board post, Bob, who handled most of the finances for the family.
Explain that, every year he updated what he called a letter from your dead husband and it was a document that his wife Sue, could read if something happened to him, and it would tell sue everything she needed to know to carry on without him financially, who'd contact where to find the legal documents, how to access all the accounts and plenty other details. We thought it was such a good idea that we ask Bob to write a series of articles about his process and his letter, and to this day, Fools still bring up those articles and ask where to find them.
Now this is where our story takes a really sad turned tragically when Bob was out riding his bike back in 2016, he was struck by a car and he passed away ten days later. I need only recently retired. To me, it was just such a supreme injustice that this guy who did so much to prepare so well for his and his wife's retirement, would actually get to enjoy so little of it. But the constellation is that I know Bob's wife do exactly what to do to settle his estate and how to manage your finances without him. That's the start of the story. But when my wife and I created our own letter and we did it jointly because we manage our finances together.
We really create the document for our kids and our executors. As we did it, we discovered that creating something like a personal financial inventory actually has all kinds of other benefits, such as all your important financial information is just the one place instead of scattered all over the place. In the process of creating it, you may rediscover accounts or other aspects of your finances that frankly, you just forgotten about, or at least you or your spouse, if forgotten about. Going through the process, could lead to potentially fruitful discussions and questions such as you look at all your accounts, you think, well, maybe we should consolidate all our accounts.
As you're looking at your insurance, you question, well, do we need this much insurance or maybe we need more? Or is it time to now update or a state plan or get one in the first place. Related to that, once you've gone through this process, you'll have created a handy document that you can use when you meet with pros such as an estate planning attorney, financial planner, and account because they're going to want to know everything about your finances.
And by the way, this also serves as a handy checklist during tax time because you can go through the list of your accounts and make sure you have all the tax documents you need. And then, of course, as with Bob's letter from your dead husband, this will be a crucial document for a trusted relative or two to have if and when you become incapacitated or you pass away. Because otherwise, how else will they know about everything you own? How to locate it, and what to do with it?
Alison Southwick: Now this can be a pretty big undertaking depending on how complicated your financial life is or how organized you already are. But this is one of those things that future you will really, really thank you. Not just future you, but future loved ones are going to look back on this and say, oh, thank you for making this easy on me. Here are six steps for you to pull together your financial inventory and be kind to your future self. First piece of advice is don't go it alone. Get as many people in that trench coat as you need to make sure that you're aligned.
Robert Brokamp: But I tell the story of Bob riding his letter from your dead husband. I think in create the impression that Bob did all the work and his wife Sue would only know what was going on if and when Bob passed away, but they actually regularly reviewed it together. One of his articles that Bob wrote for us, he wrote that Sue would, "Hound him to update the letter if he's late." And they revisit the letter once a year, usually around the beginning of the year. Then you have older kids, you might also consider reviewing with them or at least parts of it, especially if you're getting on in years. I mean, after all, your kids are going to be the ones who eventually be reading the document inheriting all your assets after you're gone. There'll be helpful for them to be able to ask you any questions while you're still able to answer them.
Alison Southwick: Next piece of advice is to decide on your format because you're document should be easy for you and your loved ones to use and to regularly update.
Robert Brokamp: This could be a word document, it could be a spreadsheet. It could be both. That's what my wife and I do. But really whatever works for you, and if you're looking for templates to follow many financial services firms like Schwab, TIA, T. Rowe Price offer free PDFs that you can download. Other firms probably offer them as well, but those are just some that I came across it do an online search for terms like personal asset inventory template. You'll likely find some examples. If you Google checklist for writing your own letter from your dead husband, you should find a free PDF that Bob, some other Fools and I created several years ago.
Alison Southwick: Here comes to tough part. You have to actually sit down and write down your full financial inventory and instructions on how others can access the various accounts. This includes key people who can help in the event that you are gone.
Robert Brokamp: This really is the meat of the document and here's what to consider including, so obviously your accounts, bank accounts, investment accounts, retirement accounts, and who they'll go-to. We've talked in a previous episode about the importance of beneficiary designations for retirement accounts, for bank accounts and brokerage accounts. You could do payable on death or transfer on death designations. People who've include copies of those forms just so it's clear who should get what. It allows you to review those once a year, your insurance policies, your policy numbers, contact information, and the length of the terms. In other words, when's the policy is going to expire. Then again, you decide whether you have enough or maybe you could get rid of some of those policies.
Contact info of trusted professionals. So these are people you work with or people you think your family should work with if something were to happen to you. So again, financial planner, tax accountant, attorney. This also could include HR folks for benefits. At work, you might have a flexible spending account. You might have an HSA account. You might have life insurance provided by the company, and you want to be able to have someone at the company to be contacted if something were to happen to you.
Then of course, the location of important legal documents. Some people choose to include this personal inventory or this letter, whatever you want to call it, with their will and trust documents, durable powers of attorney living well, healthcare directive. Some people keep it separate, but basically the bottom line is it a state plan is useless if no one can find it. So you have to let people know where to find it. Just a couple of more items here. First of all, anything that you own that is of particular value, collectibles, jewelry, artwork, heirlooms. You first of all, make sure you have enough insurance for those.
A lot of homeowners insurance policies won't cover particularly expensive things, but you also want your relatives to know about their value. You might have something that looks just like a regular book and a regular vase, but it's actually worth a lot of money or it has a lot of sentimental value was once owned by your great, great grandmother or something like that. Then other locations of valuables such as a safe. Then if you have a safe, he needs to give someone that combination.
Safe deposit boxes, storage units, hidden stashes of cash. Both my parents do this for some reason. They hide bills of cash around the house and I was curious how usual this is and it turns out it's actually pretty usual. A survey from American specified that 43% of Americans hide cash around the house. So you want to let people know where to find it so that your heirs don't throw away a clock, not knowing that that's where you stashed your extra cash.
Alison Southwick: Now that you've written down your inventory of assets, it's time to lay out your liabilities.
Robert Brokamp: Yeah, and this is basically the money you could be your mortgage, credit card, stuff like that. And I think that's just good to review every year anyhow, just to make sure your manager managing your debts properly. It'll be good for your executor because that's one of her or his jobs is to pay off your debt before the stake could be settled. But also think about any auto-billing you're doing. I think this is crucial to review every year. If you haven't done that in a while, I'm sure that when you look at all the ways that you are being auto-billed, you'll find a few ways where you think, I don't want to stop paying for that.
Also think about other important bills that must be paid or should be canceled if you're no longer around, I mentioned storage units. If someone doesn't know you have a storage unit and they're not paying that bill, you know what happens, eventually all that stuff will get auctioned off. Then finally, not only your liabilities, but maybe someone else liabilities and the terms of anyone who owes you money, maybe you lend money to a friend or relative, not a formal arrangement, but you should document that so you make sure that your heirs get that money back.
Alison Southwick: Now that you've laid out all of your assets and your liabilities, now it's time to explain your financial road-map, which basically like your intent behind the financial decisions that you made.
Robert Brokamp: How you do this will depend on your situation. If you're married, this could be just a place to write-down your goals and your plan for how you'll get there and then update your progress every year. A great reason to discuss this with your spouse if you're married. If you're riding this document partially for a spouse who's not very involved in the finances. Use this section to explain your strategies, investment philosophies, and recommendations in case you're not around to implement them.
This also could be helpful if you have young kids and someone unexpectedly has to be in charge of managing the money that you leave to them. I have a friend who at the beginning of every year reviews all his investments in a document and talks about his investment philosophy in a sense that to a select number of people including me, because he wants me to be the person who helps us kids invest their money if something were to happen to him and his wife.
Alison Southwick: If I remember right, another thing to include in this section is people to not take financial advice from this, remember that correctly?
Robert Brokamp: Yes. I mean, the great thing about Bob's letters, it was a real letter and it was very frank and he was like like, if something happens to me, listen to this person, do not listen to this person. Even though that person is going to try to give you advice, it's very funny.
Alison Southwick: Finally, you need to decide on where to store this laundry list of your financial life.
Robert Brokamp: Yeah, this what's tricky because this document will have a lot of sensitive information, so you don't want to just leave it lying around in your desk. On the other hand, has to be a place or two where people you trust can find it. So I'll just tell you what my wife and I did. So we print it out to copies and included them with copies of our estate planning documents, put them into two separate hiding places, took a picture of those hiding places and set those pictures and exploitation one to one of my sisters and wanted to one of her sisters, and as our kids have now entered adulthood, we've let them know where to find them as well.
Some people keep these documents in a safe, which is fine, but then you got to make sure that important people have the combination. I'm not a big fan of leaving this type of stuff in a safe deposit box at a bank. It's very difficult for people who aren't the owner to access a safe deposit box. Plus frankly, bank branches close all the time, banks merge or get bought out. It's just going to be a hassle if you own a safe deposit box. Then finally with this, you might want just speak with your attorney. Some law firms will store documents for you though it's actually becoming less common nowadays, but I'm sure your attorney will have some suggestions.
Alison Southwick: Hi, Bro. How about you bring us home with your final closing thoughts here.
Robert Brokamp: Yeah. After you've created this document and I know it's going to take a lot of time. It's probably going to take a few days, maybe over the course of a couple of weeks. But once you've created it make sure you updated annually or after a major life event, like moving a job change, changes as family composition and things like that. But once you've created it, updating it is actually pretty easy. In fact, most years you'll just make only a few tweaks if any at all. And finally, I'd just like to close with some words from Sue Hassmiller, Bob's wife who has had a successful career as a nurse and a professor. She worked for the red cross, the Robert with Johnson Foundation and the National Academy of medicine.
After Bob's deaths, she published a book entitled "Resetting", an unplanned journey of love, loss and living again. In that book she wrote about Bob's letter and how it helped her gain a financial footing after his death because instructions were like. 'A perfect recipe for mom's apple pie.' She also wrote that the letter quote, was the only way he could safely and lovingly let me know every single detail of every single thing I would ever need to know financially and much more. I hope, dear Fool podcast listener, that you will do the same for the people that you love.
Ricky Mulvey: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
