WEBVTT 00:00:00.000 --> 00:00:01.700 I want you to close your eyes for a second. Well, 00:00:01.720 --> 00:00:03.080 don't close them if you're driving, obviously. 00:00:03.459 --> 00:00:06.059 But just picture this. Okay. It's a Saturday 00:00:06.059 --> 00:00:08.679 afternoon. The sun is shining. You're cruising 00:00:08.679 --> 00:00:11.960 through a neighborhood. Maybe it's that one specific 00:00:11.960 --> 00:00:14.820 street you've been stalking on Zillow for the 00:00:14.820 --> 00:00:16.780 last three months. We've all been there. You 00:00:16.780 --> 00:00:20.239 turn the corner, and there it is. Staked right 00:00:20.239 --> 00:00:23.579 into the perfectly manicured grass. The sign. 00:00:23.800 --> 00:00:26.699 The for sale sign. The colonial post. The hanging 00:00:26.699 --> 00:00:29.780 placard. Maybe a little coming soon. writer on 00:00:29.780 --> 00:00:33.140 top. It's so iconic. It is practically a piece 00:00:33.140 --> 00:00:35.280 of American pop art to this point. It really 00:00:35.280 --> 00:00:37.280 is. It's the universal symbol of the housing 00:00:37.280 --> 00:00:40.299 market. It's just it signals transition, change. 00:00:40.539 --> 00:00:43.479 Right. And when I see that sign, I have this 00:00:43.479 --> 00:00:46.579 like Pavlovian response. Yeah. I instantly imagine 00:00:46.579 --> 00:00:49.020 walking through the front door, judging the wallpaper, 00:00:49.320 --> 00:00:51.520 smelling that weird vanilla cookie scent that's 00:00:51.520 --> 00:00:53.840 obviously fake. The fake cookie smell. Yes. A 00:00:53.840 --> 00:00:56.259 classic trick of the trade. But mostly I think 00:00:56.259 --> 00:00:58.670 of the person standing inside that door. The 00:00:58.670 --> 00:01:00.990 gatekeeper. The one holding the keys. The real 00:01:00.990 --> 00:01:03.109 estate agent. And I'll be totally honest with 00:01:03.109 --> 00:01:04.870 you, before we started prepping for this deep 00:01:04.870 --> 00:01:07.569 dive, my understanding of that person's job was 00:01:07.569 --> 00:01:11.629 pretty two -dimensional. How so? I see them as 00:01:11.629 --> 00:01:14.000 the person who unlocks the door. points at the 00:01:14.000 --> 00:01:17.540 granite countertops, says open concept five times, 00:01:17.599 --> 00:01:20.859 and then collects a massive check. That is the 00:01:20.859 --> 00:01:23.540 surface level view. Yes. And it's the view most 00:01:23.540 --> 00:01:25.980 people have until they are actually deep in the 00:01:25.980 --> 00:01:28.560 trenches of a transaction and things start to 00:01:28.560 --> 00:01:31.680 get complicated. But looking at this stack of 00:01:31.680 --> 00:01:34.099 research you've pulled together, you've got articles, 00:01:34.299 --> 00:01:37.099 legal statutes from Florida, economic theories. 00:01:37.849 --> 00:01:40.969 I'm realizing I have been fundamentally misunderstanding 00:01:40.969 --> 00:01:45.069 who this person is. Even just the words I use, 00:01:45.170 --> 00:01:48.269 I use agent, broker, and realtor, like they're 00:01:48.269 --> 00:01:51.849 synonyms. I use them interchangeably. You and 00:01:51.849 --> 00:01:54.569 about 95 % of the population, it's completely 00:01:54.569 --> 00:01:56.510 normal. But they are not synonyms, are they? 00:01:56.590 --> 00:02:00.030 Not even close. Using agent and broker interchangeably 00:02:00.030 --> 00:02:01.989 is a bit like confusing a nurse practitioner 00:02:01.989 --> 00:02:04.480 with the chief of surgery. They're both in medicine. 00:02:04.599 --> 00:02:06.939 They both might wear scrubs. But the liability, 00:02:07.299 --> 00:02:09.620 the education, and what they are legally allowed 00:02:09.620 --> 00:02:12.659 to do are vastly, vastly different. And that's 00:02:12.659 --> 00:02:14.400 really what we're doing today. We are going to 00:02:14.400 --> 00:02:17.699 deconstruct the machinery behind that for sale 00:02:17.699 --> 00:02:20.120 sign. We aren't just talking about curb appeal 00:02:20.120 --> 00:02:23.560 and staging. We are talking about the legal definitions 00:02:23.560 --> 00:02:26.819 that determine if that person is your loyal defender. 00:02:27.800 --> 00:02:30.560 Or just a neutral referee. And we are going to 00:02:30.560 --> 00:02:33.039 talk about money, obviously, that massive 6 % 00:02:33.039 --> 00:02:35.680 commission and where it actually goes. Who gets 00:02:35.680 --> 00:02:37.740 a piece of that pie? And we have to talk about 00:02:37.740 --> 00:02:39.680 the Freakonomics stuff. I saw that in the notes 00:02:39.680 --> 00:02:43.300 and my jaw just hit the floor. The idea that 00:02:43.300 --> 00:02:45.340 the person you hire to get you the most money 00:02:45.340 --> 00:02:47.879 for your house might actually be incentivized 00:02:47.879 --> 00:02:50.360 to sell it for less money. It's a very controversial 00:02:50.360 --> 00:02:53.389 theory, but the math behind it is... Well, it's 00:02:53.389 --> 00:02:55.110 compelling. We will definitely get into that. 00:02:55.169 --> 00:02:56.949 It's a real mind bender. So if you're listening, 00:02:57.069 --> 00:02:59.509 scrap in. We're looking at the hierarchy, the 00:02:59.509 --> 00:03:02.009 hustle, and the hidden conflicts of the real 00:03:02.009 --> 00:03:04.090 estate industry. Let's start with the basics, 00:03:04.129 --> 00:03:06.729 though. I really want to clear up this vocabulary 00:03:06.729 --> 00:03:10.389 mess. Agent versus broker versus realtor. Who 00:03:10.389 --> 00:03:13.289 is who? Who's the boss? Okay, let's build this 00:03:13.289 --> 00:03:16.490 from the ground up. The base level of the pyramid, 00:03:16.610 --> 00:03:20.129 the entry point. is the real estate agent. And 00:03:20.129 --> 00:03:23.050 in many states, the legal term on the actual 00:03:23.050 --> 00:03:26.949 license isn't even agent. It's real estate salesperson. 00:03:27.389 --> 00:03:31.180 Salesperson. Huh. That feels... A little less 00:03:31.180 --> 00:03:33.219 prestigious than agent? A little more like a 00:03:33.219 --> 00:03:35.840 used car lot? It's descriptive, though, and that's 00:03:35.840 --> 00:03:37.819 the point. This is an individual who has passed 00:03:37.819 --> 00:03:40.500 a state licensing exam. They've done the required 00:03:40.500 --> 00:03:42.979 course hours, which varies a lot by state, but 00:03:42.979 --> 00:03:45.520 let's say it's roughly 60 to 90 hours of education. 00:03:45.840 --> 00:03:47.419 Okay, so a couple of weeks of classes. Right, 00:03:47.479 --> 00:03:49.620 and once they pass that test, they are licensed 00:03:49.620 --> 00:03:52.080 to negotiate sales agreements and handle all 00:03:52.080 --> 00:03:54.659 the associated documentation. So they can sell 00:03:54.659 --> 00:03:57.419 houses. They can, but, and this is the huge, 00:03:57.479 --> 00:03:59.879 huge caveat that almost everyone misses, They 00:03:59.879 --> 00:04:02.419 generally cannot do it alone. What do you mean 00:04:02.419 --> 00:04:05.000 by that? If I go out and get my license today, 00:04:05.159 --> 00:04:07.139 I can't just print some business cards and start 00:04:07.139 --> 00:04:09.180 selling million -dollar homes. You can print 00:04:09.180 --> 00:04:12.159 the cards, absolutely. But you cannot legally 00:04:12.159 --> 00:04:15.340 collect a commission or sign a listing agreement 00:04:15.340 --> 00:04:18.839 in your own name. A salesperson must work under 00:04:18.839 --> 00:04:21.759 the supervision of a licensed broker. So they 00:04:21.759 --> 00:04:23.959 have to have a chaperone, essentially. Effectively, 00:04:24.000 --> 00:04:26.449 yes. That's a great way to put it. Think of it 00:04:26.449 --> 00:04:28.769 like a big law firm. You have the senior partners. 00:04:28.870 --> 00:04:30.990 Those are the brokers. And then you have all 00:04:30.990 --> 00:04:34.149 the associates. Those are the agents or salespersons. 00:04:34.149 --> 00:04:35.730 And the associates are doing the day -to -day 00:04:35.730 --> 00:04:38.069 work. Exactly. They do a lot of the legwork. 00:04:38.170 --> 00:04:40.329 They meet with the clients. They draft the documents. 00:04:40.529 --> 00:04:43.649 They host the open houses. But they are operating 00:04:43.649 --> 00:04:46.750 under the legal and financial umbrella of that 00:04:46.750 --> 00:04:49.629 partner of the broker. Because the partner of 00:04:49.629 --> 00:04:51.800 the broker. is the one with liability insurance 00:04:51.800 --> 00:04:53.639 and the legal responsibility if something goes 00:04:53.639 --> 00:04:57.399 wrong. Precisely. The broker is the boss in this 00:04:57.399 --> 00:05:00.339 hierarchy. And to become a broker, the bar is 00:05:00.339 --> 00:05:04.019 so much higher. You usually need verifiable years 00:05:04.019 --> 00:05:06.759 of experience working as a salesperson first. 00:05:07.019 --> 00:05:09.480 You can't just jump straight to broker in most 00:05:09.480 --> 00:05:11.199 places. You have to put in your time. You have 00:05:11.199 --> 00:05:13.019 to put in your time. And then you have to take 00:05:13.019 --> 00:05:15.600 significantly more advanced coursework covering 00:05:15.600 --> 00:05:18.199 things like agency law, property management, 00:05:18.480 --> 00:05:21.800 contracts, finance. And then at the end of all 00:05:21.800 --> 00:05:24.860 that, you have to pass a much, much harder state 00:05:24.860 --> 00:05:27.639 exam. So the broker is the actual legal entity 00:05:27.639 --> 00:05:30.800 that owns the listing then? Technically, yes. 00:05:31.040 --> 00:05:33.620 When you as a homeowner sign a listing agreement 00:05:33.620 --> 00:05:36.379 to sell your house, you might be sitting at your 00:05:36.379 --> 00:05:38.879 kitchen table with Sarah the agent. But if you 00:05:38.879 --> 00:05:41.060 look at the top of that contract, you are actually 00:05:41.060 --> 00:05:43.660 entering into an agreement with XYZ brokerage. 00:05:43.920 --> 00:05:46.459 Sarah is just the authorized representative of 00:05:46.459 --> 00:05:48.600 that brokerage. I like the music industry analogy 00:05:48.600 --> 00:05:50.160 I saw in the notes. I think that really helped 00:05:50.160 --> 00:05:52.740 me. visualize it right think of the agent as 00:05:52.740 --> 00:05:55.639 the rock star or the musician they have the talent 00:05:55.639 --> 00:05:57.639 they have the fans they're the ones on stage 00:05:57.639 --> 00:05:59.480 performing they're the face of the operation 00:05:59.480 --> 00:06:02.459 but the broker the broker is the record label 00:06:02.459 --> 00:06:04.300 they hold the contracts they hold the contracts 00:06:04.300 --> 00:06:06.579 they handle all the compliance they take on the 00:06:06.579 --> 00:06:09.339 legal risk and this is the crucial part they 00:06:09.339 --> 00:06:12.040 process the money The check at the end of the 00:06:12.040 --> 00:06:14.459 deal is almost always made out to the brokerage, 00:06:14.519 --> 00:06:17.920 not directly to the agent. Then the broker takes 00:06:17.920 --> 00:06:20.620 their cut, their split, and pays the agent what's 00:06:20.620 --> 00:06:23.240 left over. Okay, so that clarifies agent and 00:06:23.240 --> 00:06:26.560 broker. We have the talent and the label. Where 00:06:26.560 --> 00:06:29.040 in the world does Realtor fit into this? Because 00:06:29.040 --> 00:06:31.699 I see that big R logo everywhere. Is that just 00:06:31.699 --> 00:06:33.839 a super broker or something? This is probably 00:06:33.839 --> 00:06:36.560 the single biggest misconception in the entire 00:06:36.560 --> 00:06:39.560 industry. Okay. Realtor is not a job description. 00:06:40.199 --> 00:06:42.759 It is not a license level. It is a trademark. 00:06:42.980 --> 00:06:45.740 Wait, what? It's a brand? Yeah. Like Kleenex 00:06:45.740 --> 00:06:48.139 or Xerox. Exactly like Kleenex. Realtor, with 00:06:48.139 --> 00:06:50.540 a capital R, is a registered trademark that refers 00:06:50.540 --> 00:06:52.899 specifically to members of the National Association 00:06:52.899 --> 00:06:57.720 of Realtors, or NAR here in the US. Or CREA in 00:06:57.720 --> 00:07:00.040 Canada, I saw. Or the Canadian Real Estate Association. 00:07:00.259 --> 00:07:02.600 Correct. But the point is, it's a membership 00:07:02.600 --> 00:07:04.899 in a private trade association. So let me get 00:07:04.899 --> 00:07:07.720 this straight. You can be a fully licensed real 00:07:07.720 --> 00:07:11.209 estate agent. legally able to sell a house, but 00:07:11.209 --> 00:07:13.910 not be a realtor? Absolutely. There are hundreds 00:07:13.910 --> 00:07:16.670 of thousands of licensed agents and brokers who 00:07:16.670 --> 00:07:19.009 are not realtors. To become a realtor, you have 00:07:19.009 --> 00:07:21.430 to join the association, you pay annual dues, 00:07:21.670 --> 00:07:24.290 and you have to agree to abide by their specific 00:07:24.290 --> 00:07:27.689 code of ethics, which in some cases is stricter 00:07:27.689 --> 00:07:30.610 than state law. But the public, I mean. I use 00:07:30.610 --> 00:07:32.689 the word realtor to mean anyone who sells houses. 00:07:32.970 --> 00:07:35.350 We all do. We say, I need to call my realtor. 00:07:35.720 --> 00:07:38.579 the nr has done an absolutely incredible job 00:07:38.579 --> 00:07:40.899 with their branding they have spent millions 00:07:40.899 --> 00:07:43.379 and millions of dollars over decades to make 00:07:43.379 --> 00:07:45.600 that word synonymous with the profession in the 00:07:45.600 --> 00:07:48.480 public's mind why legally legally the state doesn't 00:07:48.480 --> 00:07:50.860 give you a realtor license the state licensing 00:07:50.860 --> 00:07:53.420 board gives you a real estate salesperson license 00:07:53.420 --> 00:07:56.860 or a real estate broker license the realtor designation 00:07:56.860 --> 00:08:00.360 is an add -on professional affiliation. So if 00:08:00.360 --> 00:08:02.399 I hire someone who isn't a realtor, am I getting 00:08:02.399 --> 00:08:04.459 a worse agent? Is there a tangible difference 00:08:04.459 --> 00:08:07.339 for me as a consumer? Not necessarily. The state 00:08:07.339 --> 00:08:09.800 license is the same. The legal ability to sell 00:08:09.800 --> 00:08:12.199 the house is identical. The primary difference 00:08:12.199 --> 00:08:15.199 is really about that membership, access to certain 00:08:15.199 --> 00:08:17.980 data tools that the NAR controls, and that specific 00:08:17.980 --> 00:08:21.860 code of ethics. But from a pure, can they legally 00:08:21.860 --> 00:08:25.009 help me buy or sell my house perspective? The 00:08:25.009 --> 00:08:27.290 state license is what matters. Okay. I want to 00:08:27.290 --> 00:08:28.930 zoom out for just a second. We've been talking 00:08:28.930 --> 00:08:30.589 about the U .S. structure this whole time. I 00:08:30.589 --> 00:08:33.029 know we have listeners all over the world. Is 00:08:33.029 --> 00:08:37.230 this broker -agent split a universal thing? Like, 00:08:37.269 --> 00:08:39.649 is it the same in the U .K., for example? It 00:08:39.649 --> 00:08:41.490 is actually quite different, and the difference 00:08:41.490 --> 00:08:43.690 really highlights what American agents actually 00:08:43.690 --> 00:08:45.850 do. In the U .K., they are called estate agents. 00:08:46.110 --> 00:08:48.179 Sounds a little fancier. It does sound fancier, 00:08:48.259 --> 00:08:50.559 but their role is arguably much more limited. 00:08:50.740 --> 00:08:53.679 In the UK, the estate agent is primarily a marketer. 00:08:53.700 --> 00:08:56.139 A marketer. Yes. Their job is to value the property, 00:08:56.360 --> 00:08:58.200 take the nice photos, write the description, 00:08:58.460 --> 00:09:00.299 put the listing in their shop window and online, 00:09:00.559 --> 00:09:03.279 and find a willing buyer. But once an offer is 00:09:03.279 --> 00:09:05.879 accepted, their job is mostly done. They step 00:09:05.879 --> 00:09:08.759 back. Who does all the paperwork then? The contract, 00:09:08.940 --> 00:09:12.700 the closing? The lawyers. Or solicitors and conveyancers, 00:09:12.759 --> 00:09:15.840 as they call them. In the U .S., your real estate 00:09:15.840 --> 00:09:18.179 agent is the one filling out the 20 -page purchase 00:09:18.179 --> 00:09:21.240 contract. They are checking boxes about financing 00:09:21.240 --> 00:09:24.200 contingencies and inspection timelines. Right. 00:09:24.320 --> 00:09:26.820 In the U .K., the agents generally don't touch 00:09:26.820 --> 00:09:29.779 the legal transfer documents. That is all handled 00:09:29.779 --> 00:09:32.500 exclusively by the solicitors for the buyer and 00:09:32.500 --> 00:09:34.820 the seller. So in the U .S., the agent is kind 00:09:34.820 --> 00:09:38.220 of a... A hybrid, like a marketer slash amateur 00:09:38.220 --> 00:09:40.440 lawyer. Amateur lawyer might get us in trouble 00:09:40.440 --> 00:09:43.080 with the Bar Association, but functionally. Yeah. 00:09:43.240 --> 00:09:45.889 Yes. That's a pretty good description. They are 00:09:45.889 --> 00:09:48.750 filling out legally binding contracts. That is 00:09:48.750 --> 00:09:50.950 why the education on contract law and the broker 00:09:50.950 --> 00:09:53.549 supervision are so critical here. And in the 00:09:53.549 --> 00:09:56.049 UK. In the UK, because the lawyers handle all 00:09:56.049 --> 00:09:58.590 the heavy legal lifting. The barrier to entry 00:09:58.590 --> 00:10:00.750 to become an estate agent has historically been 00:10:00.750 --> 00:10:03.549 much lower. Sometimes no specific license was 00:10:03.549 --> 00:10:05.570 required at all, depending on the specific time 00:10:05.570 --> 00:10:07.990 period and regulation changes. It's more of a 00:10:07.990 --> 00:10:10.700 pure sales and marketing job. That probably explains 00:10:10.700 --> 00:10:12.279 why the commission structures are so different, 00:10:12.340 --> 00:10:14.080 too, which I know we'll get to. But speaking 00:10:14.080 --> 00:10:16.320 of lawyers, there was this fascinating loophole 00:10:16.320 --> 00:10:18.639 you mentioned in the notes about California. 00:10:18.820 --> 00:10:21.799 Oh, right. The attorney loophole. Yeah. So if 00:10:21.799 --> 00:10:23.659 I'm a licensed attorney in California, can I 00:10:23.659 --> 00:10:25.820 just wake up one day and decide to be a real 00:10:25.820 --> 00:10:28.139 estate broker and manage a whole office of agents? 00:10:28.360 --> 00:10:31.059 Pretty much. In states like California, if you 00:10:31.059 --> 00:10:34.299 are a licensed attorney in good standing with 00:10:34.299 --> 00:10:37.299 the state bar, you can skip all the prerequisite 00:10:37.299 --> 00:10:40.080 coursework and the... you know, the two years 00:10:40.080 --> 00:10:42.120 of salesperson experience that everyone else 00:10:42.120 --> 00:10:44.039 needs. You just bypass the whole system. You 00:10:44.039 --> 00:10:46.259 can just walk in, sit for the broker exam, and 00:10:46.259 --> 00:10:48.240 if you pass, boom, you are a real estate broker. 00:10:48.340 --> 00:10:50.379 You can open your own firm the next day. It seems, 00:10:50.399 --> 00:10:52.700 I don't know, almost unfair to the people who 00:10:52.700 --> 00:10:55.120 spent years selling houses to earn that spot. 00:10:55.419 --> 00:10:57.299 Well, the logic from the state's perspective 00:10:57.299 --> 00:11:00.000 is that law school puts you through the ringer 00:11:00.000 --> 00:11:03.940 on contracts, agency law, property law, and fiduciary 00:11:03.940 --> 00:11:07.100 duty. The state basically assumes that if you 00:11:07.100 --> 00:11:09.879 can pass the bar exam, you probably have a solid 00:11:09.879 --> 00:11:12.700 enough grasp of a purchase agreement. But knowing 00:11:12.700 --> 00:11:16.120 contract law and knowing how to price a bungalow 00:11:16.120 --> 00:11:20.059 in a rapidly shifting market are two very, very 00:11:20.059 --> 00:11:22.039 different skills. They absolutely are, which 00:11:22.039 --> 00:11:24.240 is why just because a lawyer can do it doesn't 00:11:24.240 --> 00:11:26.659 mean they should. We joked about the lawyer trying 00:11:26.659 --> 00:11:28.740 to bake cookies for an open house. That's not 00:11:28.740 --> 00:11:32.240 their core competency. But legally, the state 00:11:32.240 --> 00:11:34.980 gives them the keys to the castle. OK, so we 00:11:34.980 --> 00:11:37.720 know who the players are. We have the agent who 00:11:37.720 --> 00:11:40.139 is really a salesperson. We have the broker who 00:11:40.139 --> 00:11:42.659 is the boss. And we have the realtor, which is 00:11:42.659 --> 00:11:44.980 the brand. A great summary. Now let's talk about 00:11:44.980 --> 00:11:46.860 the thing that everyone actually stresses about. 00:11:47.440 --> 00:11:49.740 The money. The commission. It is the elephant 00:11:49.740 --> 00:11:52.779 in every room, every negotiation. In the U .S., 00:11:52.779 --> 00:11:54.840 the standard has historically been and still 00:11:54.840 --> 00:11:57.940 largely is somewhere around 5 % to 6 % of the 00:11:57.940 --> 00:12:00.059 final sale price. Correct. That's the typical 00:12:00.059 --> 00:12:02.000 range you'll see. I want to just contextualize 00:12:02.000 --> 00:12:03.360 that for a minute. If I'm selling a house for 00:12:03.360 --> 00:12:05.919 $500 ,000, which, you know, in some markets gets 00:12:05.919 --> 00:12:07.940 you a mansion and others gets you a studio apartment, 00:12:08.120 --> 00:12:12.120 but let's use $500 ,000. 6 % of that is $30 ,000. 00:12:12.860 --> 00:12:15.539 It is a massive check. For most people, it's 00:12:15.539 --> 00:12:17.820 the single largest fee they will ever pay for 00:12:17.820 --> 00:12:20.679 any service in their entire lives. And my immediate 00:12:20.679 --> 00:12:23.960 knee -jerk reaction is, are you kidding me? $30 00:12:23.960 --> 00:12:27.279 ,000. All you did was list it on the internet 00:12:27.279 --> 00:12:30.269 and host... two open houses where you ate my 00:12:30.269 --> 00:12:32.690 snacks. I hear that frustration. I really do. 00:12:32.830 --> 00:12:35.850 And it's a valid feeling. But we do need to break 00:12:35.850 --> 00:12:39.090 down where that $30 ,000 actually goes because 00:12:39.090 --> 00:12:41.110 the agent standing in your kitchen isn't just 00:12:41.110 --> 00:12:43.639 pocketing 30 grand. Okay. Walk me through the 00:12:43.639 --> 00:12:45.980 math. Let's follow the money. Okay, so you pay 00:12:45.980 --> 00:12:48.679 $30 ,000 at closing. Typically, that gets split 00:12:48.679 --> 00:12:50.700 right down the middle immediately. Half goes 00:12:50.700 --> 00:12:52.980 to the listing side. That's the brokerage representing 00:12:52.980 --> 00:12:55.320 you, the seller. And half goes to the buying 00:12:55.320 --> 00:12:58.519 side, the brokerage who brought the buyer. Okay, 00:12:58.580 --> 00:13:00.919 so my agent's brokerage is now down to $15 ,000. 00:13:01.179 --> 00:13:04.039 Right. But remember, the agent works for a broker. 00:13:04.519 --> 00:13:06.759 The record label. The broker has to get paid. 00:13:06.879 --> 00:13:09.899 They take a cut to pay for the office, the insurance, 00:13:10.059 --> 00:13:12.059 the marketing, the brand, the legal support. 00:13:12.860 --> 00:13:15.399 That split varies wildly, but let's be generous 00:13:15.399 --> 00:13:17.679 and say it's a 70 -30 split. The agent keeps 00:13:17.679 --> 00:13:21.429 70%. So now we are down to what? Roughly... $10 00:13:21.429 --> 00:13:25.850 ,500? Exactly. And out of that $10 ,500, the 00:13:25.850 --> 00:13:28.309 agent now has to pay for all their business expenses. 00:13:28.409 --> 00:13:30.950 The professional photography, maybe some staging, 00:13:31.210 --> 00:13:34.950 the marketing flyers, the signs, the lockbox, 00:13:35.049 --> 00:13:37.129 gas money, their own health insurance, their 00:13:37.129 --> 00:13:39.909 licensing fees, and of course, self -employment 00:13:39.909 --> 00:13:42.710 taxes. Okay. I'm starting to feel a tiny, tiny 00:13:42.710 --> 00:13:45.639 bit of sympathy. But it's still a lot of money 00:13:45.639 --> 00:13:47.419 for a transaction that might only take a few 00:13:47.419 --> 00:13:49.840 weeks from start to finish. It absolutely is. 00:13:50.019 --> 00:13:52.740 But here is the economic justification you'll 00:13:52.740 --> 00:13:55.080 always hear from the industry. It's a contingency 00:13:55.080 --> 00:13:57.620 fee. Meaning they only get paid if the deal actually 00:13:57.620 --> 00:14:00.600 works. Exactly. An agent might work with a buyer 00:14:00.600 --> 00:14:03.120 for six months, show them 50 different houses, 00:14:03.379 --> 00:14:05.879 write 10 offers that get rejected in bidding 00:14:05.879 --> 00:14:08.539 war, and spend hundreds of hours and hundreds 00:14:08.539 --> 00:14:11.600 of dollars on gas. If that buyer then gets frustrated 00:14:11.600 --> 00:14:13.519 and decides to just sign a new lease on it, an 00:14:13.519 --> 00:14:16.360 apartment instead. The agent gets nothing. Zero. 00:14:16.419 --> 00:14:19.019 Zero dollars for six months of work. So the high 00:14:19.019 --> 00:14:21.639 fees on the deals that do close are essentially 00:14:21.639 --> 00:14:23.860 subsidizing all the time and effort they put 00:14:23.860 --> 00:14:26.759 into the deals that fall apart. Precisely. It's 00:14:26.759 --> 00:14:29.360 a risk premium. You're paying for the successful 00:14:29.360 --> 00:14:32.379 outcome, not the hours worked. But, and this 00:14:32.379 --> 00:14:35.559 is a huge but, there is a legal technicality 00:14:35.559 --> 00:14:37.679 about when that money is technically earned that 00:14:37.679 --> 00:14:40.440 almost nobody knows about. It's a common law 00:14:40.440 --> 00:14:42.639 principle called the ready, willing, and able 00:14:42.639 --> 00:14:45.080 rule. This sounded really scary when I read it 00:14:45.080 --> 00:14:48.340 in the notes. Break this down for me. Okay. Most 00:14:48.340 --> 00:14:51.600 people assume, quite logically, I pay the commission 00:14:51.600 --> 00:14:54.379 when the house sells, meaning when the keys are 00:14:54.379 --> 00:14:56.759 exchanged and the title transfers. Right. No 00:14:56.759 --> 00:14:59.059 sale, no money. That's the deal. In practice, 00:14:59.179 --> 00:15:01.779 that is usually true. Most listing agreements 00:15:01.779 --> 00:15:04.320 are written that way now. But under common law 00:15:04.320 --> 00:15:06.860 in many states, a broker has technically earned 00:15:06.860 --> 00:15:08.740 their commission the moment they bring you a 00:15:08.740 --> 00:15:12.100 buyer who is ready, willing, and able. Define 00:15:12.100 --> 00:15:14.779 those three terms for me. Ready means they want 00:15:14.779 --> 00:15:17.340 to buy now. Willing means they agree to your 00:15:17.340 --> 00:15:20.500 price and all your terms in the listing. Able 00:15:20.500 --> 00:15:22.980 means they have the cash or a firm mortgage approval 00:15:22.980 --> 00:15:25.899 to actually complete the purchase. Okay, so let's 00:15:25.899 --> 00:15:28.200 play out a nightmare scenario here. I hire an 00:15:28.200 --> 00:15:30.840 agent. They bring me a fantastic buyer. Full 00:15:30.840 --> 00:15:33.620 asking price, all cash offer. The buyer's perfect 00:15:33.620 --> 00:15:37.000 on paper. The dream scenario. But then I look 00:15:37.000 --> 00:15:38.899 out of my backyard and I get emotional. I think, 00:15:38.919 --> 00:15:41.360 you know what? I can't leave this place. My kids 00:15:41.360 --> 00:15:44.820 grew up here. And I tell my agent, I'm sorry. 00:15:44.960 --> 00:15:46.840 Pull it off the market. I've changed my mind. 00:15:46.860 --> 00:15:50.120 I'm not selling. In that very specific scenario, 00:15:50.360 --> 00:15:53.299 under the strict letter of the law, you could 00:15:53.299 --> 00:15:56.379 still owe the broker that full $30 ,000 commission. 00:15:56.720 --> 00:15:59.419 Even though I kept my house? Yes. Because the 00:15:59.419 --> 00:16:01.419 broker did the job you hired them to do. You 00:16:01.419 --> 00:16:03.379 hired them to find a buyer. They found the buyer. 00:16:03.580 --> 00:16:06.100 The fact that the transaction didn't close because 00:16:06.100 --> 00:16:09.220 of your choice, your seller's remorse, doesn't 00:16:09.220 --> 00:16:11.740 void the work they performed. That is absolutely 00:16:11.740 --> 00:16:14.039 terrifying. Has that actually happened? Do brokers 00:16:14.039 --> 00:16:16.480 really sue their former clients for that? It 00:16:16.480 --> 00:16:19.960 does happen. It's rare because suing your clients 00:16:19.960 --> 00:16:22.639 is obviously terrible for business and your reputation. 00:16:23.120 --> 00:16:25.639 Usually, they'll just walk away angry and say, 00:16:25.740 --> 00:16:28.960 don't ever call me again. But legally, they often 00:16:28.960 --> 00:16:31.279 have a claim. It really highlights that the service 00:16:31.279 --> 00:16:33.539 isn't moving you out. The service you're paying 00:16:33.539 --> 00:16:37.090 for is finding the match. Wow. That completely 00:16:37.090 --> 00:16:39.690 changes how I view that listing contract. It's 00:16:39.690 --> 00:16:43.029 a matchmaking fee. At its core, yes. Now, because 00:16:43.029 --> 00:16:45.350 there is so much money floating around in these 00:16:45.350 --> 00:16:47.889 commissions, there's a lot of federal regulation 00:16:47.889 --> 00:16:50.169 to try and keep things clean. We have to touch 00:16:50.169 --> 00:16:53.230 on RESPA. RESPA, the Real Estate Settlement Procedures 00:16:53.230 --> 00:16:56.730 Act, sounds very dry. But I gather it's incredibly 00:16:56.730 --> 00:16:59.230 important. It's the reason your agent can't say, 00:16:59.350 --> 00:17:01.029 hey, you should use this mortgage guy. He's the 00:17:01.029 --> 00:17:04.089 best. And then secretly get a $500 envelope of 00:17:04.089 --> 00:17:05.950 cash from that mortgage guy later that week. 00:17:06.009 --> 00:17:08.789 So kickbacks? Right. Before Respell was enacted, 00:17:09.029 --> 00:17:11.210 the industry was apparently rife with kickbacks 00:17:11.210 --> 00:17:14.450 and undisclosed referral fees. Agents would steer 00:17:14.450 --> 00:17:16.750 clients to specific, sometimes more expensive 00:17:16.750 --> 00:17:19.289 lenders or title insurance companies just to 00:17:19.289 --> 00:17:20.990 get a cut of the action. And Respell made that 00:17:20.990 --> 00:17:23.990 illegal. It made it illegal. It ensures that 00:17:23.990 --> 00:17:26.710 if an agent recommends a service provider, they 00:17:26.710 --> 00:17:28.849 are theoretically doing it because it's a good 00:17:28.849 --> 00:17:32.549 service for you, the consumer, not because they 00:17:32.549 --> 00:17:35.210 are on that provider's secret payroll. It's about 00:17:35.210 --> 00:17:38.170 transparency. OK, so illegal kickbacks are out, 00:17:38.230 --> 00:17:40.789 but that doesn't mean the agent's incentives 00:17:40.789 --> 00:17:44.390 are perfectly pure. And this brings us to the 00:17:44.390 --> 00:17:47.190 really juicy part of this whole thing. The Freakonomics 00:17:47.190 --> 00:17:50.880 argument. Steven Levitt. 2005. He really, as 00:17:50.880 --> 00:17:52.640 you said, threw a grenade into the real estate 00:17:52.640 --> 00:17:54.960 world with this one chapter. I remember when 00:17:54.960 --> 00:17:58.240 this came out, it completely shattered the core 00:17:58.240 --> 00:18:01.380 idea that the agent is your partner. Because 00:18:01.380 --> 00:18:04.319 logically, I always thought my agent gets a percentage. 00:18:04.460 --> 00:18:06.519 If I sell my house for more money, they make 00:18:06.519 --> 00:18:08.750 more money. So we both want the highest possible 00:18:08.750 --> 00:18:11.430 price. We are on the same team. That is the fundamental 00:18:11.430 --> 00:18:13.730 assumption that the entire industry is built 00:18:13.730 --> 00:18:16.089 on. Our interests are aligned. But Levitt said 00:18:16.089 --> 00:18:17.849 that's not quite right. He pointed out that while 00:18:17.849 --> 00:18:19.890 the direction of the incentive is the same, you 00:18:19.890 --> 00:18:22.470 both want more money, the magnitude of that incentive 00:18:22.470 --> 00:18:24.589 is wildly different. Show me the numbers on that. 00:18:24.859 --> 00:18:27.779 OK, let's go back to your $500 ,000 house. You 00:18:27.779 --> 00:18:30.359 are the seller. Your goal is to get the absolute 00:18:30.359 --> 00:18:32.380 top dollar. Let's say an offer comes in today 00:18:32.380 --> 00:18:35.660 for $500 ,000. It's a solid offer. But your agent 00:18:35.660 --> 00:18:37.700 thinks, you know, if we wait another two weeks, 00:18:37.740 --> 00:18:39.680 do another open house, maybe we can squeeze out 00:18:39.680 --> 00:18:43.599 another $10 ,000 and get $510 ,000. I would absolutely 00:18:43.599 --> 00:18:47.440 want to wait. $10 ,000 is a lot of money to me. 00:18:47.720 --> 00:18:50.380 That pays for my movers, some new furniture, 00:18:50.519 --> 00:18:52.900 maybe a family vacation. It's a huge deal. For 00:18:52.900 --> 00:18:56.680 you, the seller, that $10 ,000 is massive. But 00:18:56.680 --> 00:18:58.720 now let's look at it from the agent's perspective. 00:18:58.859 --> 00:19:01.259 For them, what's the financial difference? That 00:19:01.259 --> 00:19:05.180 extra $10 ,000 at a 6 % commission rate is $600 00:19:05.180 --> 00:19:07.819 in total commission. Okay. But remember, that 00:19:07.819 --> 00:19:09.980 gets split with the other side. So the listing 00:19:09.980 --> 00:19:12.920 side's commission goes up by $300. Right. Then 00:19:12.920 --> 00:19:16.299 the broker takes their cut. So the agent, personally, 00:19:16.579 --> 00:19:19.700 might end up putting, what, maybe an extra $150, 00:19:19.819 --> 00:19:22.700 maybe $200 in their pocket. So for the exact 00:19:22.700 --> 00:19:25.279 same amount of work, I get $10 ,000 and they 00:19:25.279 --> 00:19:28.259 get, let's say, $150. Exactly. So Levitt poses 00:19:28.259 --> 00:19:31.839 the question, is it worth it for the agent to 00:19:31.839 --> 00:19:35.220 keep the file open, do more work? take on more 00:19:35.220 --> 00:19:38.099 stress and risk the current deal falling apart, 00:19:38.339 --> 00:19:41.039 all for the price of a decent dinner out. When 00:19:41.039 --> 00:19:43.200 you put it that way, absolutely not. They'd rather 00:19:43.200 --> 00:19:45.619 just close the deal today, take the sure thing, 00:19:45.779 --> 00:19:48.240 get their commission and go find a new client 00:19:48.240 --> 00:19:51.180 to work with. That is the core conflict. Levitt 00:19:51.180 --> 00:19:53.779 argues that agents are fundamentally incentivized 00:19:53.779 --> 00:19:56.559 to sell quickly, not necessarily for the highest 00:19:56.559 --> 00:19:59.200 possible price. Their incentive is turnover. 00:19:59.759 --> 00:20:01.799 And he didn't just guess this, right? He actually 00:20:01.799 --> 00:20:04.039 had data to back this up. That's what made it 00:20:04.039 --> 00:20:06.859 so powerful. He got his hands on a huge data 00:20:06.859 --> 00:20:08.819 set of thousands of real estate transactions 00:20:08.819 --> 00:20:11.380 in the Chicago area. And he did something very 00:20:11.380 --> 00:20:14.680 clever. He compared two sets of data, homes sold 00:20:14.680 --> 00:20:17.279 by agents for their clients and homes sold by 00:20:17.279 --> 00:20:18.880 agents when they were selling their own personal 00:20:18.880 --> 00:20:21.599 property. Oh, that is brilliant. A perfect control 00:20:21.599 --> 00:20:24.259 group. What did he find? He found that when agents 00:20:24.259 --> 00:20:26.740 sell their own houses, they behave exactly like 00:20:26.740 --> 00:20:29.269 you'd expect a seller to behave. They leave them 00:20:29.269 --> 00:20:32.069 on the market significantly longer, about 10 00:20:32.069 --> 00:20:34.349 days longer on average, and they sell them for 00:20:34.349 --> 00:20:37.150 significantly more money, about 3 % more. Wow. 00:20:37.289 --> 00:20:40.210 So when it's their own $10 ,000 on the line, 00:20:40.230 --> 00:20:42.789 they hold out. When it's my $10 ,000, they're 00:20:42.789 --> 00:20:44.730 telling me, take the offer. It's a great market. 00:20:44.809 --> 00:20:47.359 Don't be greedy. That is the powerful implication 00:20:47.359 --> 00:20:50.660 of the study. It suggests they are maximizing 00:20:50.660 --> 00:20:53.380 their own turnover rate and hourly wage, not 00:20:53.380 --> 00:20:55.839 your final profit margin. So based on that, should 00:20:55.839 --> 00:20:58.140 we all just fire our agents and sell our houses 00:20:58.140 --> 00:21:00.319 ourselves? Is that the takeaway? Well, hold on, 00:21:00.400 --> 00:21:02.259 because the research also shows the other side 00:21:02.259 --> 00:21:05.240 of the coin. A later study from 2008 looked at 00:21:05.240 --> 00:21:08.799 FSBOs for sale by owners and people who use these 00:21:08.799 --> 00:21:12.019 unbundled limited service listings. And it found 00:21:12.019 --> 00:21:13.960 that even with that built in conflict of interest, 00:21:14.220 --> 00:21:16.700 people who used full service brokers generally 00:21:16.700 --> 00:21:19.460 ended up with a higher net sale price than those 00:21:19.460 --> 00:21:21.799 who tried to go it alone or with limited help. 00:21:22.000 --> 00:21:23.700 So the agent might push you to sell a little 00:21:23.700 --> 00:21:26.980 too fast, but they are still way better at marketing 00:21:26.980 --> 00:21:29.339 and negotiating than I am. Right. The conclusion 00:21:29.339 --> 00:21:32.140 is that an imperfect expert is usually better 00:21:32.140 --> 00:21:34.890 than a complete amateur. The agent gets the home 00:21:34.890 --> 00:21:37.789 on the MLS, which is critical for exposure. They 00:21:37.789 --> 00:21:39.650 know how to stage it. They know how to handle 00:21:39.650 --> 00:21:42.329 the flood of calls. They know how to negotiate 00:21:42.329 --> 00:21:45.109 the inspection repair requests. So I might lose 00:21:45.109 --> 00:21:48.670 out on that last 3 % of value because of their 00:21:48.670 --> 00:21:52.220 incentive to sell fast. But without them... You 00:21:52.220 --> 00:21:54.200 might have lost 10 or 15 percent because you 00:21:54.200 --> 00:21:56.140 take photos with your iPhone in the dark and 00:21:56.140 --> 00:21:57.480 didn't know how to price it correctly in the 00:21:57.480 --> 00:22:00.180 first place. That's a fair balance. It's not 00:22:00.180 --> 00:22:02.380 that agents are evil. It's just that the economic 00:22:02.380 --> 00:22:06.259 structure itself favors volume over maximum value 00:22:06.259 --> 00:22:08.660 for them. Exactly. It's a systemic issue, not 00:22:08.660 --> 00:22:11.019 necessarily a personal moral failing of your 00:22:11.019 --> 00:22:14.359 specific agent. It's just math. Now, speaking 00:22:14.359 --> 00:22:18.339 of moral failings and legal duties, this is the 00:22:18.339 --> 00:22:20.440 part of the research that honestly confused me 00:22:20.440 --> 00:22:22.359 the most. And it's maybe the most important. 00:22:23.059 --> 00:22:25.579 We need to talk about agency. This is the legal 00:22:25.579 --> 00:22:27.839 maze. I always just assume that if I call an 00:22:27.839 --> 00:22:29.980 agent to help me buy a house, they work for me. 00:22:30.019 --> 00:22:32.440 They're on my side. Like a lawyer works for a 00:22:32.440 --> 00:22:38.440 client. But the history of this is weird. It 00:22:38.440 --> 00:22:40.720 is bizarre. If we go back in time, before the 00:22:40.720 --> 00:22:43.859 consumer rights movements of the 1990s, really, 00:22:44.000 --> 00:22:47.240 before the mid -60s, even real estate was an 00:22:47.240 --> 00:22:50.480 entirely seller -centric world. Okay. What does 00:22:50.480 --> 00:22:52.730 that mean? The multiple listing service, the 00:22:52.730 --> 00:22:55.289 MLS, was created so that brokers could cooperate 00:22:55.289 --> 00:22:57.670 and share their listings with each other. A great 00:22:57.670 --> 00:23:00.630 innovation. But legally, everyone involved in 00:23:00.630 --> 00:23:03.509 the transaction was considered a sub agent of 00:23:03.509 --> 00:23:05.490 the seller. Wait a second. So if I was a buyer 00:23:05.490 --> 00:23:09.269 in, say, 1980. And I found an agent who I liked. 00:23:09.390 --> 00:23:11.750 And she was driving me around in her car, showing 00:23:11.750 --> 00:23:13.950 me houses. That agent who you thought was your 00:23:13.950 --> 00:23:16.210 agent was technically, legally working for the 00:23:16.210 --> 00:23:18.170 seller of whatever house you were currently looking 00:23:18.170 --> 00:23:20.029 at. You're kidding me. But I'm in the car with 00:23:20.029 --> 00:23:21.750 them. I'm telling them my whole life story, my 00:23:21.750 --> 00:23:24.250 financial situation. I'm saying, I love this 00:23:24.250 --> 00:23:25.930 house. I'd pay anything for it. I have an extra 00:23:25.930 --> 00:23:29.150 $50 ,000 in the bank, just in case. And legally, 00:23:29.329 --> 00:23:32.109 that agent had a fiduciary duty to go tell the 00:23:32.109 --> 00:23:35.359 seller, hey, good news. This guy has an extra 00:23:35.359 --> 00:23:38.200 50K in the bank and he's desperate. Don't take 00:23:38.200 --> 00:23:40.440 his first offer. That is insane. I'm spilling 00:23:40.440 --> 00:23:42.859 my guts to a double agent. It was a huge, huge 00:23:42.859 --> 00:23:45.259 problem. Buyers didn't understand it at all. 00:23:45.319 --> 00:23:46.920 They thought the nice person driving the sedan 00:23:46.920 --> 00:23:49.660 was their friend and confidant. But legally, 00:23:49.819 --> 00:23:52.160 all loyalty flowed to the seller because at the 00:23:52.160 --> 00:23:53.720 end of the day, that's where the commission was 00:23:53.720 --> 00:23:56.779 coming from. So how did we fix this mess? Because 00:23:56.779 --> 00:23:58.640 I assume that's not the case anymore. It can't 00:23:58.640 --> 00:24:02.599 be. It evolved slowly. First, consumer groups 00:24:02.599 --> 00:24:05.980 pushed for the creation of buyers agency. States 00:24:05.980 --> 00:24:08.599 started passing laws saying, OK, you can explicitly 00:24:08.599 --> 00:24:11.220 represent the buyer and have a fiduciary duty 00:24:11.220 --> 00:24:13.720 to them. That was a massive step forward. You 00:24:13.720 --> 00:24:15.859 sign a contract that says you are my agent. You 00:24:15.859 --> 00:24:18.839 work for me, the buyer. So now I have my champion 00:24:18.839 --> 00:24:21.380 and the seller has their champion. It's a duel 00:24:21.380 --> 00:24:25.019 at dawn. Much clearer. In theory, yes. But then 00:24:25.019 --> 00:24:27.259 you immediately run into the dual agency problem. 00:24:27.619 --> 00:24:30.460 What happens if you, the buyer, want to buy a 00:24:30.460 --> 00:24:33.099 house that is listed by my brokerage, maybe even 00:24:33.099 --> 00:24:35.460 by me personally? Then you end up representing 00:24:35.460 --> 00:24:39.200 both sides. That is dual agency, and it is a 00:24:39.200 --> 00:24:42.400 legal and ethical minefield. How can I possibly 00:24:42.400 --> 00:24:45.180 get the highest price for the seller, A &E, the 00:24:45.180 --> 00:24:47.079 lowest price for the buyer at the same time? 00:24:47.140 --> 00:24:49.839 I can't. It's logically impossible to serve two 00:24:49.839 --> 00:24:51.779 masters. It's like a lawyer trying to represent 00:24:51.779 --> 00:24:53.759 both the husband and the wife in a divorce. It 00:24:53.759 --> 00:24:56.559 just can't work. Exactly. Some states still allow 00:24:56.559 --> 00:24:59.740 it with disclosure, but it's very risky. So some 00:24:59.740 --> 00:25:02.440 states led by Florida and Colorado in the 90s 00:25:02.440 --> 00:25:04.660 came up with a really radical solution. They 00:25:04.660 --> 00:25:07.420 basically said, let's stop pretending. Stop pretending 00:25:07.420 --> 00:25:10.480 what? Stop pretending you are a loyal fiduciary 00:25:10.480 --> 00:25:13.680 advocate in most cases. They created a new default 00:25:13.680 --> 00:25:16.440 role called the transaction broker. Transaction 00:25:16.440 --> 00:25:18.900 broker. It sounds very bureaucratic and neutral. 00:25:19.039 --> 00:25:21.180 It is. That's the whole point. In Florida, for 00:25:21.180 --> 00:25:22.980 example, this is now the default relationship. 00:25:23.160 --> 00:25:26.200 By law, it is presumed that all licensees are 00:25:26.200 --> 00:25:28.779 transaction brokers unless you sign a very specific 00:25:28.779 --> 00:25:32.299 piece of paper to establish a single agent relationship. 00:25:32.720 --> 00:25:35.680 Whoa. So if I call an agent in Florida, by default, 00:25:35.759 --> 00:25:38.200 they are not my advocate. Correct. By default, 00:25:38.279 --> 00:25:40.549 they are not your advocate. Explain the difference. 00:25:40.670 --> 00:25:43.809 What does a traditional advocate do versus what 00:25:43.809 --> 00:25:46.569 this new transaction broker does? Okay, let's 00:25:46.569 --> 00:25:49.390 use a concrete scenario. You are buying a house. 00:25:49.569 --> 00:25:52.549 You do an inspection. The inspector finds evidence 00:25:52.549 --> 00:25:55.630 of mold in the attic. Gross. Okay, not good. 00:25:55.910 --> 00:25:58.690 If your agent is a single agent, a traditional 00:25:58.690 --> 00:26:01.809 fiduciary advocate, their job is to go to war 00:26:01.809 --> 00:26:04.299 for you. They pull you aside and say, this is 00:26:04.299 --> 00:26:07.019 unacceptable. This is our leverage. We are going 00:26:07.019 --> 00:26:10.160 to demand they professionally remediate it or 00:26:10.160 --> 00:26:11.960 we are going to demand they drop the price by 00:26:11.960 --> 00:26:14.779 $20 ,000. Do not tell them you still want the 00:26:14.779 --> 00:26:17.380 house. Act like you are ready to walk away. They 00:26:17.380 --> 00:26:19.579 are coaching you to win the negotiation. I like 00:26:19.579 --> 00:26:21.380 that agent. I want that agent on my team. Right. 00:26:21.660 --> 00:26:24.039 Now let's picture the same scenario with a transaction 00:26:24.039 --> 00:26:26.799 broker. They are a neutral facilitator. They 00:26:26.799 --> 00:26:29.900 find the mold. Their job is to facilitate the 00:26:29.900 --> 00:26:32.789 deal, not to advantage one side. They receive 00:26:32.789 --> 00:26:35.190 the inspection report. They hand it to you and 00:26:35.190 --> 00:26:37.309 they hand it to the seller side. They say, here 00:26:37.309 --> 00:26:39.569 is the mold report. The parties need to come 00:26:39.569 --> 00:26:42.609 to an agreement. And that's it. They cannot strategize 00:26:42.609 --> 00:26:45.150 against the seller. They cannot advise you to 00:26:45.150 --> 00:26:47.869 push harder or tell you the seller is desperate. 00:26:48.089 --> 00:26:50.430 They'll probably take a lower price. They are 00:26:50.430 --> 00:26:52.849 essentially a referee making sure the paperwork 00:26:52.849 --> 00:26:55.490 is correct and the deadlines are met. That is 00:26:55.490 --> 00:26:58.230 a massive, massive difference. One is your coach, 00:26:58.269 --> 00:27:01.509 your gladiator. The other is a glorified courier. 00:27:01.650 --> 00:27:04.630 Yes. And most people in states like Florida and 00:27:04.630 --> 00:27:07.230 Colorado have no idea this fundamental shift 00:27:07.230 --> 00:27:09.750 happened. They still think the agent driving 00:27:09.750 --> 00:27:12.960 them around is their But legally, that agent's 00:27:12.960 --> 00:27:16.259 primary duty is to the deal, not to them. So 00:27:16.259 --> 00:27:18.859 why did states do this? Was it just to avoid 00:27:18.859 --> 00:27:21.180 lawsuits over dual agency? That was the primary 00:27:21.180 --> 00:27:23.759 driver, yes. It effectively eliminates the conflict 00:27:23.759 --> 00:27:25.700 of interest in dual agency because the agent 00:27:25.700 --> 00:27:27.859 never promised undivided loyalty in the first 00:27:27.859 --> 00:27:30.160 place. Their only promise is honesty and fair 00:27:30.160 --> 00:27:32.779 dealing to both sides. It greases the wheels 00:27:32.779 --> 00:27:34.960 of the transaction, but it absolutely strips 00:27:34.960 --> 00:27:37.460 away the advocacy component. This brings up a 00:27:37.460 --> 00:27:40.180 huge question for me then. If the agent is just 00:27:40.180 --> 00:27:42.680 a referee, if they're just handling paperwork 00:27:42.680 --> 00:27:45.200 and facilitating communication, why are we still 00:27:45.200 --> 00:27:48.259 paying them a 6 % commission? That is the multi 00:27:48.259 --> 00:27:50.640 -billion dollar question that the industry is 00:27:50.640 --> 00:27:53.859 grappling with right now. If I'm just a facilitator, 00:27:53.920 --> 00:27:58.420 am I providing $30 ,000 worth of value on a $500 00:27:58.420 --> 00:28:01.440 ,000 home? And this leads us perfectly into the 00:28:01.440 --> 00:28:03.799 alternatives because a lot of people are starting 00:28:03.799 --> 00:28:06.769 to ask that very question. They are. And technology 00:28:06.769 --> 00:28:09.690 has been the great enabler here. The biggest 00:28:09.690 --> 00:28:12.089 and most common alternative is the flat fee listing. 00:28:12.640 --> 00:28:14.700 How does that work? Is it as simple as it sounds? 00:28:14.920 --> 00:28:17.140 It's pretty straightforward. You find a licensed 00:28:17.140 --> 00:28:19.900 broker who offers this service. You pay them 00:28:19.900 --> 00:28:24.400 a small flat fee up front, say $500. And in exchange, 00:28:24.759 --> 00:28:27.200 all they do is take your property data and photos 00:28:27.200 --> 00:28:29.299 and put your house into the multiple listing 00:28:29.299 --> 00:28:31.779 service. So their only job is to get me onto 00:28:31.779 --> 00:28:34.200 Zillow and Redfin and all the other sites that 00:28:34.200 --> 00:28:36.539 pull from the MLS. Exactly. Because as an individual, 00:28:36.700 --> 00:28:39.099 you can't get on the MLS. You need a licensed 00:28:39.099 --> 00:28:41.299 broker to do it. So you're essentially paying 00:28:41.299 --> 00:28:48.269 a... And then what? Who answers the phone when 00:28:48.269 --> 00:28:50.829 a buyer wants to see the house? You do. Your 00:28:50.829 --> 00:28:52.970 name and your phone number go right on the listing 00:28:52.970 --> 00:28:55.750 as the point of contact. Agents with buyers will 00:28:55.750 --> 00:28:58.269 call you directly. Unrepresented buyers will 00:28:58.269 --> 00:29:00.210 call you directly. And I have to show the house 00:29:00.210 --> 00:29:03.250 myself. You host your own open house. You schedule 00:29:03.250 --> 00:29:05.710 all the private showings. You negotiate the price. 00:29:05.950 --> 00:29:08.569 You handle the awkwardness of telling someone 00:29:08.569 --> 00:29:12.890 their lowball offer is insulting. Ugh. I can 00:29:12.890 --> 00:29:15.470 see why people are willing to pay the 6%. Negotiation 00:29:15.470 --> 00:29:17.910 is deeply uncomfortable for most people. It is. 00:29:17.970 --> 00:29:20.769 And you're hitting on a key, often overlooked 00:29:20.769 --> 00:29:24.650 value of an agent. They are an emotional buffer. 00:29:24.829 --> 00:29:27.470 Explain that. When a buyer walks into your home 00:29:27.470 --> 00:29:29.890 that you've lovingly decorated and says, wow, 00:29:30.029 --> 00:29:31.650 this kitchen is hideous. I'm going to have to 00:29:31.650 --> 00:29:33.970 gut this whole thing. And you are the owner standing 00:29:33.970 --> 00:29:36.809 right there. You get offended. You get defensive. 00:29:37.029 --> 00:29:39.190 You might kill the whole deal out of pure spite. 00:29:39.309 --> 00:29:41.579 True. My grandmother picked out those towels. 00:29:41.700 --> 00:29:44.980 Get out of my house. Exactly. A good agent absorbs 00:29:44.980 --> 00:29:48.359 that emotional blow. They translate the kitchen 00:29:48.359 --> 00:29:51.960 is hideous into the unemotional negotiating point 00:29:51.960 --> 00:29:55.259 of the buyer is looking for a modernization credit 00:29:55.259 --> 00:29:58.039 in the price. They keep the emotion out of the 00:29:58.039 --> 00:30:00.880 transaction. When you do a flat fee listing or 00:30:00.880 --> 00:30:04.140 a full FSBO, you lose that critical buffer. What 00:30:04.140 --> 00:30:06.240 about the legal risk of doing it yourself? I 00:30:06.240 --> 00:30:08.019 imagine that's pretty high. It's significant. 00:30:08.539 --> 00:30:10.759 Real estate contracts are not napkin doodles. 00:30:10.859 --> 00:30:13.579 In most states, there are dozens of pages of 00:30:13.579 --> 00:30:16.180 mandatory disclosures. Lead paint, flood zones, 00:30:16.480 --> 00:30:20.039 property defects, HOA documents. If you, as a 00:30:20.039 --> 00:30:22.759 DIY seller, forget to check a box or fail to 00:30:22.759 --> 00:30:24.700 disclose that the basement leaks every time it 00:30:24.700 --> 00:30:27.339 rains hard, you can be sued for fraud years after 00:30:27.339 --> 00:30:29.079 you've sold the house. So you save the commission 00:30:29.079 --> 00:30:31.349 on the front end But you take on all the liability 00:30:31.349 --> 00:30:33.390 on the back end. Correct. And that's why many, 00:30:33.450 --> 00:30:35.089 many people who start out trying to sell their 00:30:35.089 --> 00:30:36.890 homes themselves eventually give up and hire 00:30:36.890 --> 00:30:38.710 an agent. They realize it's a full -time job 00:30:38.710 --> 00:30:41.029 and a legal minefield they are not equipped to 00:30:41.029 --> 00:30:43.930 navigate. Now, I want to pivot briefly to the 00:30:43.930 --> 00:30:46.269 people themselves. We've talked about the agent 00:30:46.269 --> 00:30:50.190 as a concept. But who are these people? Is it 00:30:50.190 --> 00:30:52.339 hard to become one? This is a point of major 00:30:52.339 --> 00:30:55.359 contention within the industry itself. The barrier 00:30:55.359 --> 00:30:58.299 to entry in terms of upfront education and cost 00:30:58.299 --> 00:31:01.000 is relatively low compared to other high -income 00:31:01.000 --> 00:31:03.140 professions like being a doctor or a lawyer. 00:31:03.339 --> 00:31:05.079 You don't need a college degree? In most states, 00:31:05.160 --> 00:31:08.119 no. You need to be 18. You need to pass the state 00:31:08.119 --> 00:31:10.460 -mandated course and exam. And you need to have 00:31:10.460 --> 00:31:13.039 a reasonably clean criminal background check. 00:31:13.259 --> 00:31:15.759 But it's not just pass the test once and you're 00:31:15.759 --> 00:31:18.420 done for life. Right. I saw notes about ongoing 00:31:18.420 --> 00:31:21.369 education. No, thankfully. There is continuing 00:31:21.369 --> 00:31:24.470 education, or CE, required to maintain your license. 00:31:24.730 --> 00:31:27.369 It varies by state, but let's take California 00:31:27.369 --> 00:31:29.730 as an example again. In California, you have 00:31:29.730 --> 00:31:32.470 to complete 45 hours of approved education every 00:31:32.470 --> 00:31:34.569 four years to renew your license. What are they 00:31:34.569 --> 00:31:36.430 learning in those classes? Is it about how to 00:31:36.430 --> 00:31:39.529 sell better? No, not really. The state doesn't 00:31:39.529 --> 00:31:41.690 care if you know how to close a deal. The state 00:31:41.690 --> 00:31:44.210 cares about consumer protection. The mandatory 00:31:44.210 --> 00:31:47.450 courses are almost always on topics like ethics. 00:31:48.160 --> 00:31:51.220 fair housing law, and trust fund handling. Trust 00:31:51.220 --> 00:31:54.279 funds. What does that mean in this context? It 00:31:54.279 --> 00:31:57.500 means handling other people's money. When a buyer 00:31:57.500 --> 00:31:59.960 gives you an earnest money deposit check for 00:31:59.960 --> 00:32:03.400 $10 ,000, there are incredibly strict rules about 00:32:03.400 --> 00:32:05.559 where that money has to go. It has to go into 00:32:05.559 --> 00:32:08.920 a special protected trust account. You can't 00:32:08.920 --> 00:32:11.099 just put it in your personal wallet or your business 00:32:11.099 --> 00:32:14.039 checking account. Absolutely not. Mixing that 00:32:14.039 --> 00:32:16.220 client money with your own money, a practice 00:32:16.220 --> 00:32:19.039 called commingling, is the single fastest way 00:32:19.039 --> 00:32:21.319 to lose your license and potentially face criminal 00:32:21.319 --> 00:32:24.480 charges. So the CE is constantly drilling these 00:32:24.480 --> 00:32:27.119 rules into them. So the education is really all 00:32:27.119 --> 00:32:29.299 about protecting the public from harm. Exactly. 00:32:29.380 --> 00:32:32.380 And fair housing is another huge component. Constantly 00:32:32.380 --> 00:32:34.480 training and testing agents to prevent discrimination. 00:32:35.059 --> 00:32:37.099 Ensuring agents aren't illegally steering people 00:32:37.099 --> 00:32:39.079 into or away from certain neighborhoods based 00:32:39.079 --> 00:32:41.839 on their race, religion, or family status. Which 00:32:41.839 --> 00:32:43.680 is a whole... other dark history of the real 00:32:43.680 --> 00:32:45.680 estate industry, we could do a deep dive on another 00:32:45.680 --> 00:32:48.700 day. A very deep and very dark history. Yes. 00:32:48.779 --> 00:32:50.960 I want to mention one specific figure that was 00:32:50.960 --> 00:32:52.839 in the notes just to show the other end of the 00:32:52.839 --> 00:32:54.700 spectrum. We talked about the five hundred dollar 00:32:54.700 --> 00:32:57.859 flat fee broker, which seems very transactional. 00:32:58.039 --> 00:33:00.539 But then there's someone like Alice Mason, the 00:33:00.539 --> 00:33:03.680 real estate queen of New York City. She passed 00:33:03.680 --> 00:33:07.000 away recently, but she was legendary. From what 00:33:07.000 --> 00:33:09.039 I read, she wasn't just selling apartments. She 00:33:09.039 --> 00:33:11.960 was curating buildings. She was a social architect. 00:33:12.319 --> 00:33:14.700 That's the perfect way to describe it. She famously 00:33:14.700 --> 00:33:18.180 threw these lavish dinner parties where she would 00:33:18.180 --> 00:33:20.700 strategically seat her clients next to the board 00:33:20.700 --> 00:33:22.960 members of the exclusive co -op buildings they 00:33:22.960 --> 00:33:25.000 wanted to get into. So it wasn't about the apartment. 00:33:25.440 --> 00:33:27.500 It was about getting past the board interview. 00:33:27.740 --> 00:33:29.740 She understood that at the highest end of the 00:33:29.740 --> 00:33:32.079 market, real estate isn't about three bedrooms, 00:33:32.160 --> 00:33:34.740 two baths. It's about social admission. It's 00:33:34.740 --> 00:33:37.740 about power and access. And she was the ultimate 00:33:37.740 --> 00:33:40.609 gatekeeper. It just really shows the incredible 00:33:40.609 --> 00:33:43.470 range of this profession. On one end, you have 00:33:43.470 --> 00:33:46.450 a data entry task for $500. On the other end, 00:33:46.529 --> 00:33:49.789 you have a socialite power broker moving hundreds 00:33:49.789 --> 00:33:52.390 of millions of dollars of equity over cocktails. 00:33:52.650 --> 00:33:55.470 And the 6 % commission model is often applied 00:33:55.470 --> 00:33:58.349 to both, which is why the industry is so fascinating 00:33:58.349 --> 00:34:02.210 and so heavily criticized. The value provided 00:34:02.210 --> 00:34:05.559 can vary so dramatically. So we have covered 00:34:05.559 --> 00:34:07.900 a ton of ground here. We've gone from the lawn 00:34:07.900 --> 00:34:10.480 sign to the courtroom, from the 6 % commission 00:34:10.480 --> 00:34:14.300 to the $150 incentive problem. If we boil this 00:34:14.300 --> 00:34:16.119 all down for the listener, the person who might 00:34:16.119 --> 00:34:17.760 be thinking about buying or selling a house next 00:34:17.760 --> 00:34:20.420 year, what is the headline? What's the key takeaway? 00:34:20.679 --> 00:34:23.380 I think the headline is know who is sitting across 00:34:23.380 --> 00:34:26.119 the table from you. Don't just assume. Don't 00:34:26.119 --> 00:34:27.920 assume they are your friend. Don't assume they 00:34:27.920 --> 00:34:30.019 are your fiduciary advocate. Ask the question 00:34:30.019 --> 00:34:33.010 directly and ask to see it in writing. Are you 00:34:33.010 --> 00:34:35.590 my single agent representing only me with fiduciary 00:34:35.590 --> 00:34:38.809 duty? Or are you a transaction broker? And understand 00:34:38.809 --> 00:34:41.929 the economic incentives. Yes. Understand that 00:34:41.929 --> 00:34:43.949 if they are pushing you to take an offer quickly, 00:34:44.070 --> 00:34:47.010 it might be genuinely good advice in a changing 00:34:47.010 --> 00:34:49.750 market. Or it might be the economics of their 00:34:49.750 --> 00:34:53.789 $150 raise talking. You have to be the CEO of 00:34:53.789 --> 00:34:55.969 your own transaction. That's a great way to put 00:34:55.969 --> 00:34:58.110 it. The agent is a critical consultant, maybe 00:34:58.110 --> 00:35:01.320 your project manager, but you are the CEO. You 00:35:01.320 --> 00:35:04.019 make the final call. Exactly. You are the one 00:35:04.019 --> 00:35:07.000 with the most at stake. Here is my final thought, 00:35:07.139 --> 00:35:09.079 a little provocation to leave everyone with as 00:35:09.079 --> 00:35:11.900 we wrap up. We are seeing technology get better 00:35:11.900 --> 00:35:14.480 and better every single day. We have Zillow. 00:35:14.480 --> 00:35:17.079 We have Redfin. We have AI that can now draft 00:35:17.079 --> 00:35:19.960 legally sound contracts. And as we've discussed, 00:35:20.179 --> 00:35:22.699 we have this major legal shift in many states 00:35:22.699 --> 00:35:25.719 toward. The transaction broker. The neutral referee. 00:35:26.059 --> 00:35:29.019 Right. The de -emphasis on advocacy. So if the 00:35:29.019 --> 00:35:31.099 agent is no longer legally required to fight 00:35:31.099 --> 00:35:33.579 for us, and if the computer can now find the 00:35:33.579 --> 00:35:35.860 house for us and even write the offer for us, 00:35:35.960 --> 00:35:38.199 are we moving toward a world where the real estate 00:35:38.199 --> 00:35:40.300 agent is just an extremely expensive administrative 00:35:40.300 --> 00:35:43.179 assistant? Yeah. Someone we pay $30 ,000 to unlock 00:35:43.179 --> 00:35:45.920 a door and manage a calendar. That is the existential 00:35:45.920 --> 00:35:48.900 question that keeps brokerage CEOs up at night. 00:35:49.000 --> 00:35:52.420 What is our value in a world of AI and facilitators? 00:35:52.539 --> 00:35:55.619 And if they aren't your gladiator, is that 6 00:35:55.619 --> 00:35:59.550 % fee? Fee structure that was designed in a pre 00:35:59.550 --> 00:36:01.389 -internet world of paper binders and driving 00:36:01.389 --> 00:36:04.949 around, is it still justified? Or is it a relic 00:36:04.949 --> 00:36:07.409 of a bygone era that is about to crumble under 00:36:07.409 --> 00:36:09.610 the weight of technology and new legal realities? 00:36:09.869 --> 00:36:12.329 The market usually corrects major inefficiencies 00:36:12.329 --> 00:36:14.550 eventually. It just takes time for the disruption 00:36:14.550 --> 00:36:16.650 to take hold. Something to think about the next 00:36:16.650 --> 00:36:19.190 time you drive past that for sale sign and smell 00:36:19.190 --> 00:36:21.630 the phantom vanilla cookies. Thanks for diving 00:36:21.630 --> 00:36:23.230 deep with us today. It was a pleasure. Always 00:36:23.230 --> 00:36:23.630 fascinating.