The National Association of Realtors settled a class action lawsuit recently (following a $1.8 billion jury award in Missouri) and now the real estate commission of 6% that is baked into a standard single-family home transaction is changing to where the buyer no longer has to pay a commission. Good news for the consumer, right? Wrong. This perversion of justice is about to have massive consequences for all the celebrating folks that think this will lower the cost of home ownership. And it will also have extremely positive results for mobile home parks.
Episode 339: Broker Commissions And The Law of Unintended Consequences Transcript
Like most Americans, I often go down to the mail in my small town in Missouri and have these little cards. They're about class action suits that have happened regarding various consumer products and services. And it says if I sign the card, I may get 21 cents, 39 cents, some kind of meaningless dollar value from joining the class action suit or settlement. And we look at these things typically and I don't even take action. I basically just throw it in the trash. It's not even worth the effort to read the card to sign it to make back only a few pennies of settlement. But the problem in America today is, we're all about suing each other. Lawsuits today in America are a giant industry, which is sad. We have more attorneys in America than all of the other countries in the world combined, which is really not something to be proud of. That's a problem. And as a result, since we have this new continual lawsuit mentality, there sometimes are cases where those lawsuits can change the very orbit of the earth and have massive ramifications for the average consumer, things they never even thought or dreamed of. And such is the case that happened in Missouri back in around October of last year, in which a group of folks in Missouri brought a class action lawsuit against a group of realtors claiming the entire real estate commission structure is unfair in America.
What's at issue is that typically when you buy a stick built home, there's a baked-in 6% commission, 3% to the buyer's agent and 3% to the seller's agent. So people claimed, "Well, this baked-in commission is hurting me as the consumer, punishing me because that means I have to pay commission I don't have to pay. Sure, the seller can pay commission for listing the home, but what if I don't want to use a broker? What if I want to buy it direct from the seller? I want to save my 3%." So that was the general theory and it went to trial and it's my understanding from people who were there that the defense did a terrible job. But regardless of what occurred in the end, the class action folks won and they won a $1.8 billion judgment against the realtors, which in fact now could be trebled up to almost $5 billion. And yes, the numbers are staggering and they're ridiculous. It's much like what you see on TV today where people are all the time filing and getting giant judgments that can never be repaid.
But nevertheless, that then led to an even larger class action settlement against the National Association of Realtors, which they then settled for a little under half a billion dollars to try to be let out of the nightmare. And so now what it will do is it's going to change radically the way the commissions work on single family homes. And here is the problem. The problem is, so now who is going to pay the realtor exactly? Remember that that 6% commission that was baked into the standard single family home price, that was paid by the mortgage company because that inflated the price of the home slightly. But you got to pay that little bit of inflation off over 30 years at whatever your interest rate is. So it's very affordable and manageable by both parties. But under the new system that's been created as a result of this litigation, the seller, they're fine, they're going to go ahead and pay their 3% out at closing, but how does the buyer come up with the money to pay their brokerage commission?
This is the unintended consequence of this new change in the rules of buying and selling single family homes. So let's look at that for a moment. So who's going to cough up the money? Now, you know, if you go out there and you're just so darn good you can buy your home, I guess, on the internet without even looking at it. Well, then, okay, great. If you're just trying to buy a home on, you know, some website like realtor.com or something, and you're just going to go in there and Google a zip code and buy a home and convert it into a rental home, whatever the case may be, if you're that kind of a consumer, well, fine. But most people, they like to look at a number of houses. They want to find the house that fits for their and their family's needs, and they may take a lot of time doing so.
Well, who's paying that person? Right? Because that person under the new plan doesn't get paid. They only get paid by whatever they can reach an agreement with the buyer. Now, what that means is, let's just model that for a moment. The average home in America right now is $400,000. That means there would be a baked-in based on what the lawsuit claimed, $24,000 of commissions, $12,000 paid by a buyer, $12,000 paid by seller. Well, who's coughing up the 12 grand now? You got a problem here. Because that means if you're going to buy that home, now you have to come up with $12,000 cash on the front end. It's not going to be baked into the mortgage anymore. It's not part of the house price.
So instead of being able to pay it off over a 30 year of nice little tiny, tiny, tiny installments, it's an upfront fee. Now, to the rich person buying the $400,000 house, that may not be a problem. They can probably write the check for 12 grand just the same as they're going to write the check for the down payment. But what about the person who's buying the lesser expensive home who doesn't have that kind of cash? Proportionally $100,000 home, you'd now have to pay a $3,000 fee to your buyer's agent for them to go around and show you the homes and help negotiate the purchase. Do you have it? The average American today has almost no money. 70% of Americans don't even have $1,000 total to their name. How in the world are they going to pop up the $3,000 fee in that instance to buy the house?
They have enough trouble coming up with a down payment. When you really think about what's going to occur with this change, it is completely asinine that any consumer group brought this case. Now you know the attorneys were rooting them on. They were cheerleading in the background, "Yes, you must do this. We must equalize the playing field for single family," 'cause they just wanted the money they would get from the class action, millions of legal fees, et cetera. But man, what were the consumers thinking? What a terrible, sad day for the single family home industry when this goes through because it will deprive most people of having someone who is skilled, a realtor who is qualified to show them the wide selection of homes available and help them pick the right one.
And the average consumer is terrible at negotiating and now they no longer have a professional negotiator on their side. They're just kind of just doing it themselves, which means they'll overpay by thousands and thousands of dollars. So what's the ramification of this new idiocy on the mobile home park industry? Well, you already know the answer. Mobile homes are typically sold in the complete absence of realtors. The only states I've ever seen a realtor sign in the yard of a mobile home are in Florida, California and Colorado. If you have a mobile home in Missouri, I guarantee you there's not a Century 21 or RE/MAX agent involved with that transaction whatsoever. So we will remain unaffected in our industry at a time when single family homes have even greater punishment. Now as mobile homes have risen in value, in some states today a brand new home set under HUD standards may cost $80,000. That's approaching the cost of some single family homes in those same markets.
However, that $100,000 home in that market now will have an additional $3,000 cash up front, Mr. Buyer out of your pocket, whereas the mobile home won't. So it will really change the competitive look of the structuring between looking at mobile homes and stick built housing. It will also no doubt cause a whole lot of frustration and unhappiness in general with the American public and single family homes. Not only have they seen a horrible lack of supply in many markets, markets where if you go into realtor.com and put in the zip code you may only find one home or two homes in that entire market for sale, but additionally people have already suffered through now the highest mortgage rates in 40 years and they're just generally going to get burned out on it. America has become for the most part a growing nation of renters. That seems to be where we're heading. The American dream of home ownership is becoming eventually probably in the minority. I imagine at some point we will cross the line where more Americans rent than own, which is kind of a sad state of affairs.
And it's issues like this, this class action suit, that are definitely going to put those wheels in motion as people find continual roadblocks to some simple, simple things. It's amazing to me that we can write off student debt and all these other items where there really was no value created at all. But in the case of the realtor, who is such an integral part of helping match consumers to the correct home, did we just dismiss their worth completely? The estimate is there's roughly half a million realtors who will seek other employment thanks to this ruling. Think about that. Think about how staggering an impact on the economy that would be, and particularly think how much that will damage the reputation and the desirability of buying a single-family home. Now the only good news out of this mess is that it doesn't fall into, at this point, commercial transactions. The lawsuit was only based on residential ones.
And I don't know any park owner out there who thinks there is any problem with the commission structure. We happily always pay commissions to any realtor that brings us a deal. We happily pay commissions to any realtor who negotiates that purchase of the mobile home park. So fortunately our industry will be spared on that side. But it's never, never endlessly frustrating to me that the nation makes incredibly bad decisions without thoroughly thinking through what in the world position they're doing. And as always, the mobile home park owners win. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.