Downsizing after a divorce was painful but financially smart. I decided to house hack, opening my Victorian Brooklyn brownstone to Airbnb guests and hoping to bring life to my cash-starved bank account and a spark to my stately home.
Well, I got more sparks than I bargained for.
Relocating to a lower floor, I was awoken in the night by clattering and knocking like a ship on the high seas, along with loud groans. I was sure the whole neighborhood could hear. It turned out that my 100-year-old home was being used for more than a simple short-term stay.
Whenever the same repeat guest booked, my grand old manse may as well have been an X-rated film set. Upon the guests’ departure, I immediately looked into making sure they never came back. But according to Airbnb’s rules at the time, if I refused guests at short notice, my online ranking would drop fast—and with it, the prospect of future income.
My Tenants Were Airbnbing Their Apartments Without My Knowledge and Allowing Movie Shoots
It wasn’t my only bad experience with Airbnb. I’d wondered why my long-term tenant disappeared on weekends and why I’d find lockboxes around the exterior railings. It turned out she was working a side hustle without my knowledge, subletting her apartment to short-term guests.
Another time, my neighbor asked me, “What film were they working on?”
“Film?” I responded, confused.
“Yeah, there was a whole film crew here. Actors, lighting, sound guys. Like 20 people,” he said. “I assumed you knew about it.”
I didn’t.
The Shorter the Booking, the Greater the Likelihood of Problems
“In the off-season, bookings drop,” Max Kostyashkin, president of MAK Realty, who short-term rents high-end condos at the famed Fontainebleau Hotel in Miami, told BiggerPockets. “That’s summer in Miami, when the rates go down and the caliber of guests takes a nosedive, too.”
Kostyashkin manages condos owned by associates, investors, and family members. “Instead of weeklong bookings at high rates in peak season, in the offseason, we get one-to-two-day bookings and 50% of our peak rates. That’s when we see more problems.”
Always Have Insurance
Kostyashkin tells this story:
“We had one incident before New Year’s a couple of years ago, when a suite was booked by a group of guys in their mid-20s. Roughhousing must have occurred, because one went through a giant framed mirror, which was secured to the wall with four wooden corners. He claimed he was asleep and that the mirror had fallen on him, which was impossible. He got cut pretty badly and ended up going to the hospital and requiring stitches and wound up with a $4,000 hospital bill.”
“The guest blamed us and tried to get money. We spoke to Airbnb, who agreed that the story made no sense. The guests gave us a bad review, and because the mirror was custom-made and part of a condo in an upscale hotel, it had to get replaced. The room was closed down for a week. As business owners in the hospitality business, we have full-time vacation rental insurance, but ultimately, we lost money through no fault of our own.”
Beware of Vacation Rentals in High-Rise Buildings
Miami is a unique, wildly popular Airbnb market. Vacation rentals are welcomed in certain parts of the city, and a surge of Airbnb-compliant condos is in the works. However, Kostyashkin urges caution to other Airbnb landlords and hosts who think overseeing vacation rentals in a high-rise will be smooth sailing.
“Anything in your rental can affect the whole building,” he says. “Five years ago, one of our guests burned down the room. We’re talking tens of thousands in damages. The entire building had to be evacuated, all 37 floors. Like many Airbnb owners, he was trying to do it on the cheap and never had insurance, so he had to pay the entire bill.”
One Bad Event in Your Neighborhood Can Affect Every Vacation Rental Nearby
A headline-grabbing Airbnb horror story can affect other vacation rentals nearby, resulting in business suffering. The city can get involved, and even banks might become wary of financing other vacation rental projects nearby.
At the time, I was in the middle of financing my own multifamily Airbnb project nearby. My lender also funded the building where the shooting had taken place and warned me against short-term rentals. For a while, I thought they might decline my loan.
The property manager I used installed a sophisticated noise-monitoring system and another that detected the number of cell phones in use in the building as a safeguard against uninvited guests and parties. So far, so good.
Final Thoughts
For every vacation rental horror story, many more investors have cultivated profitable businesses without the hassle of dealing with eviction or having full-time tenants.
If you’re looking for a passive investing experience, while vacation rentals are tougher to do passively, a good vacation rental software like Hospitable can make it much easier. Hospitable can help put your vacation rental on autopilot by automating 90% of guest messages, syncing calendars across all platforms, streamlining cleaning team reminders, and more.
Find the Right Agent, Close the Best Deal
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Barely a day goes by when interest rates are not front-page news, as buyers, sellers, and those looking to refinance anxiously await news of a rate cut in hopes of reducing their mortgage payments. However, not all states are the same regarding the amount of money homeowners stand to lose if they move. That’s because each state has its own mortgage rate averages, which tend to stay around the national average. At the time of this writing, that’s 6.85%.
But despite the clamor for a rate change, most homeowners in the U.S. are not feeling the crunch of high interest rates in their mortgage payments. That’s because 86% of current mortgages are below 6%, with the average rate being 4.1%, according to a report inU.S. News.
The extent of the stranglehold, or mortgage lock-in effect that the homeowner or investor experiences, is based on a borrower’s current mortgage rate versus the rate they would have to pay for another house, should they decide to move. For many Americans, that is around a 3% loss. For example, if your current rate is 4% and the national average is 7%, that 3% differential or rate gap will determine how much it will cost you to move within that state.
According to the U.S. News report, at the time of writing, the average mortgage rate lock-in gap was 3.15 percentage points. Using the national average loan amount of $357,000, the principal and interest payment on a new mortgage at 7.25% would be $2,435 compared to the existing rate of 4.1%, where the payment would be $1,817—an increase of $618 or 34%.
The report revealed some interesting statistics:
Colorado has the widest mortgage rate lock-in gap in the U.S., with a spread of 3.45 percentage points.
Texas has the narrowest mortgage rate lock-in gap, at 2.55 percentage points.
New York and New Mexico are tied for the second-smallest lock-in gaps, at 2.575% differentials.
When buyers apply these rate lock-ins to high-cost-of-living states like Hawaii and California, where buyers sell their existing homes and purchase new ones, their payments can increase dramatically by as much as 60%.
Ways to Mitigate the Rate Lock-In Effect for Real Estate Investors
So, if you want to get around this phenomenon, how do you do it? Here are some strategies for investors.
An assumable mortgage
The Bank of America website says: “A home loan assumption allows you as the buyer to accept responsibility for an existing debt secured by a mortgage on the home you’re buying.
The two processes available to suit your needs are Qualified Assumptions and the Name Change and Title Transfer Requests.”
If a lender such as BOA agrees to a mortgage assumption, the borrower gets to keep the same rate as the previous homeowner for the cost of simply paying a service, often as little as $750. According to the Wall Street Journal, the Federal Housing Administration (FHA) processed just under 3,350 mortgage assumptions in 2023 as of Sept. 30, up from 2,570 the year prior. Over 20% (22.3%) of mortgages are government-backed, making them assumable, meaning 11 million homeowners in the U.S. potentially have assumable mortgages.
The number crunchers at U.S. News ran the data and found Mississippi has the highest rate of assumable mortgages in the country, with 38.7%
Increase rents
Rental increases have been a hot topic of discussion recently, with the Biden administration proposing capping increases at 5% for owners with over 50 units. However, high interest rates and increased insurance costs have given many landlords no choice but to increase rents to offset expenses. Lower interest rates—which aresurely around the corner—could be a panacea to end the hurt.
Decrease property taxes
Appealing your property tax assessment is familiar for real estate investors, especially in light of increased property values. However, only 5% of property owners appeal their taxes, according to the National Taxpayers Union Foundation.
Depending on your location, it’s generally best to go through an experienced lawyer or tax appeal company that does this daily. Having used an intermediary myself, I can attest that the savings can be significant.
Lower your landlord insurance costs
With property insurance costs soaring, many investors are wondering how to lower them. This article demonstrates some methods. Decreasing insurance on a multiunit building can amount to huge savings per year.
Cost segregation
If you are a real estate investor, presumably, you are already taking advantage of depreciation and expenses in your yearly taxes. But are you also taking advantage of cost segregation if you are a multifamily investor?
“A Cost Segregation study is an IRS-approved federal income tax tool that increases near-term cash flow by utilizing shorter recovery periods for depreciation to accelerate return on investment…It can increase potential insurance premium savings and provide support for the property tax appeals process. Additionally, it can help maximize renovations and improvements.”
Final Thoughts
With 86% of property owners sitting on a 4.1% interest rate, it’s understandable that many would be reluctant to move and lose this low rate. However, moving is unavoidable sometimes, such as in the case of job relocation, divorce, and/or an expanding family. Similarly, real estate investors might have to buy properties based on 1031 exchange timelines or may simply not want to sit on the sidelines until rates drop and then face tough competition from other investors.
In these instances, the goal is to offset the short-term expense of a higher interest rate until you can refinance once rates drop. Whatever state you’re in, releasing your low-rate lock and not incurring a huge expense increase could be possible with some number-crunching and creative thinking.
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Trying to predict the next hot real estate market is like catching an eel with grease on your hands: The moment you think you’ve got a handle on the next hot spot, everyone else has the same idea. Inventory shrinks while prices shoot up, and what once looked good suddenly cools.
However, if you’re prepared to be specific in your search, you can pinpoint the next great investment opportunity for different market segments.
Affordably Priced Markets
According to Realtor.com data, a few markets stand out if you’re looking for an affordable investment but are wary of high interest rates. However, you might have to hurry because—you guessed it—other investors are already waving their checkbooks. Recent data shows investors made up 14.8% of home purchases in the first quarter of 2024 —the highest percentage in the history of the data commenced, dating back to 2001.
“Investors are generally the first to pull out of the market, as seen in 2023, as well as the first to reenter, which we are seeing now,” Realtor.com senior economic analyst Hannah Jones said in a press release regarding Realtor.com’s Q1 economic report.
The investors Jones speaks of are mostly smaller ones, purchasing 10 or fewer homes, which made up 62.6% of investment buys—another groundbreaking number. Interestingly, Jones noted that higher interest rates and home prices caused larger investors to back away, while smaller investors, sensing deals, became more engaged in affordable markets.
The Midwest and South Are Good Bets for Investors
Crunching the numbers, these are the burgeoning, affordable markets where investors are snapping up deals. Not surprisingly, many are in the Midwest, with three of Missouri’s top five cities seeing around 1 in 5 homes purchased by investors in Q1:
Other cities that have seen increased investor activity and are returning to pre-pandemic levels include:
Nine Cities Expected to Grow Over the Next 10 Years
GoBankingRates.com, as revealed on yahoo.com, spoke to a roundtable of Realtors from Keller Williams, Beach Life Premier, Caldwell Banker-Caine, and Berkshire Hathaway HomeServices Verani Realty. Here are their picks for markets that will grow in the next 10 years, plus my analysis of each.
1. Boise, Idaho
With home appreciation of 218% and year-over-year growth of 12% for the last decade, it might make you think that Boise has already gone through its golden years. But, not so, according to the experts, who claim more of the same lies ahead.
Boise’s housing market is expected to continue growing over the next decade due to several factors. For one, the city is experiencing strong population growth, driven by an influx of residents attracted by Boise’s affordable cost of living and high quality of life. Second, Boise’s strong job market, with rising wages and a diversified economy, contributes to sustained demand for housing. In fact, Boise is a mini Silicon Valley and has plenty of tech job offerings, a sign of strong wages and stability.
2. Fort Wayne, Indiana
Fort Wayne‘s median listing price of just under $200,000 is 102% less than the national median, but it has seen a price decline of 7.6% over the last year. Despite this, the fundamentals are there, with overall appreciation, population growth, and low property taxes, making this a solid place to put your cash.
3. Las Vegas, Nevada
What happens in Vegas stays in Vegas unless it’s discussing real estate—in which the whole country is in on the discussion.
Nevada’s low taxes have seen Californians leave en masse for Las Vegas and surrounding areas. The hospitality industry, high rental demand for affordable housing, a growing population, and significant infrastructure investment have made Sin City an ongoing investment hub. With added industries such as healthcare, technology, and entertainment, investors should be OK with betting big on Vegas for years to come.
4. Seattle, Washington
Yes,Seattle is expensive, but it’s remarkably stable. The home of mega-corporations Amazon, Nike, and Starbucks—and now a new wave of tech businesses—has a robust track record of appreciation, with prices high and rising. Home values have doubled in the past five years, growing twice as fast as the national average since 2016. Last year, median home prices showed a 5.9% year-over-year increase, with continued growth expected.
Seattle’s Median Sales Price (2019-2024) – Redfin
5. Denver, Colorado
Denver has already enjoyed some major appreciation recently, with its median home price currently sitting at a strapping $600,000. However, according to real estate experts, its proximity to major cities such as Boulder, Fort Collins, and Colorado Springs, as well as nature-rich geography, has investors and residents teeming in, with more growth on the horizon.
6. Raleigh-Durham, North Carolina
Known as the Research Triangle, the major universities of the University of North Carolina at Chapel Hill, Duke, and North Carolina State University call Raleigh-Durham home. Home prices here generally follow the national average, and there are plenty of high-paying jobs in healthcare, technology, and pharmaceuticals, with large companies such as IBM, Apple, and Epic Games located in the area. These employment opportunities, matched with reasonable home prices, mean this area has plenty of growth potential.
7. Charlotte, North Carolina
A mild climate, only a few hours away from the beach or mountains, a vibrant job market (particularly in banking), and an affordable cost of living have many experts predicting that Charlotte will only continue to rise. Home prices are expected to increase by around 145% over the next decade.
Charlotte’s Median Sales Price (2019-2024) – Redfin
8. Phoenix, Arizona
Home prices here have risen faster than a Phoenix thermometer’s mid-summer readings. However, tech jobs offered by Uber and Amazon, 200 golf courses, and a vibrant nightlife and restaurant scene all mean Phoenix is still a good bet for further home value hikes of 130% over the next decade— provided extreme weather doesn’t get too extreme.
9. Nashua, New Hampshire
Southern New Hampshire has been one of the beneficiaries of the work-from-home trend, with former Bostonians forgoing skyrocketing home prices and moving within a hybrid-work commuting distance. Experts predict the small but mighty Nashua will see home prices increase by 25% to 50% over the next decade.
Bonus: Three Small Towns to Invest In Within the Next Five Years
If you like the idea of people knowing you at the post office or saying “hi” to you at the grocery store, small-town investing might be more your speed. Small markets are generally more affordable than larger towns and cities and can produce incredible real estate opportunities.
Three small towns, in particular, are highlighted below. These are close to larger cities but certainly rural. With smart due diligence, you can line up great investments over the next few years.
1. Morganton, North Carolina
While the Research Triangle of North Carolina has boomed in recent years, Morganton (population 20,000) may also soon be on people’s radars as a cheaper alternative due to major grants from the U.S. National Science Foundation (NSF). One of those grants is for the North Carolina Sustainable Textiles Innovation Engine, which is set to receive up to $160 million in NSF funding over the next 10 years. Due to its proximity to nearby Asheville and the Blue Ridge Mountains, plus affordability, Morganton is expected to do well.
2. Shelbyville, Tennessee
“As the rising prices in Nashville drive the more budget-conscious homebuyers further out, I expect these locations to be an excellent place to park your real estate dollars over the next few years,” said Joe Hafner, broker and owner at Hafner Real Estate, in this article.
Located about 60 miles from Nashville and 25 miles from Murfreesboro, Shelbyville (population 25,000) should benefit from appreciation over the next decade due to the town’s location of whiskey maker Nearest Green Distillery, which has pumped millions of dollars into the area, making it a charming small town primed for further development.
Areas like this go to show how much of an impact businesses can have on a town and how that cascades into the local housing market. The best investors would seek this lesser-known opportunity out on their own.
3. Accord, New York
If you’re looking for a scenic hamlet in the Rondout Valley of New York, Accord in Ulster County offers views of the Shawangunk Mountains and accessibility from New York City. Filled with local farmer’s markets, artisanal shops, and a seriousfoodie scene, this quaint stop on the way further north to the state capital, Albany, appeals to those seeking a progressive sensibility, accessibility, and an agreeable pace of life.
While Accord is a sleepy small town, Ulster County as a whole offers several real estate opportunities, from cash flowing long-term holds to short-term rentals. This is definitely a spot you’ll want to do some research on.
Best of the Luxury Market
But what if you want to invest in somewhere more upscale? Draper, Utah, is a destination to consider.
If you’re looking for a luxury home with the potential for equity appreciation, according to theWall Street Journal, you could do much worse than parking your cash on Utah’s Silicon Slopes, specifically Draper.
Located near the Wasatch Mountain Range, between Salt Lake City and Provo, Draper has boomed since the pandemic. A new multibillion-dollar project called the Point is being developed on 600 acres of state-owned land, which will mix office buildings, housing, retail, entertainment and more.
Great schools, a 30-minute commute to large cities and airports, and a striking natural landscape have seen home prices soar over the last few years. As of 2023, the annual median home price was $749,895. The area’s major development will be similar in the upcoming years. However, the risk of wildfires and landslides could increase home insurance costs, along with home prices.
Streamlining Your Real Estate Investments
As you explore these up-and-coming markets, it’s good to consider how you’ll manage your growing portfolio. This is where property management software like Hemlane can be a game-changer, especially those venturing into new and unfamiliar markets.
Hemlane is designed to simplify property management tasks, from tenant screening and rent collection to maintenance coordination. For investors targeting multiple markets across different states, Hemlane’s ability to manage properties remotely can be valuable. Its nationwide network of local agents and maintenance professionals ensures you have boots on the ground, even if you’re investing from afar.
Moreover, Hemlane’s clear financial reports show you how your investments are performing
across various markets, allowing you to make data-driven decisions about where to focus your efforts next. Whether you’re just starting with a single property in Fort Wayne or managing a diverse portfolio spanning from Boise to Charlotte, streamlining your operations with the right tools, you can focus on finding your next big opportunity.
Final Thoughts
With interest rates expected to fall significantly in the next 24 months while inventory increases, homebuying could soon be back in fashion after a turgid few years. However, investors need to buy smart for long-term appreciation and hedge against another downturn.
Many of the towns and cities mentioned here are not major metros but offer accessibility and the potential for growth in their own right due to investment. They are also affordable and could cash flow once rates drop.
However, if you have the money and are looking for appreciation rather than rentals, major cities such as Las Vegas, Phoenix, and Seattle or a tech hub like Draper might be an excellent place to park your money.
This article is presented by Hemlane
Hemlane is transforming the property management landscape with its innovative, tech-driven approach. What sets Hemlane apart is not just its technology but also its exceptional customer-facing team, which handles tenant calls, late rent disputes, tenant communications, lease negotiations, and provides access to a network of vetted vendors, allowing landlords to be more hands-off. Hemlane’s user-friendly interface and integrated approach empower property owners and managers with real-time insights and better communication with tenants, setting new standards for efficiency, transparency, and effectiveness in the property management industry.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
In a move designed to make it more difficult for Chinese companies to build factories in the U.S., the Treasury Department has proposed a new rule that would make it harder for foreign citizens to buy land near military bases. The government plans to add more than 50 military installations across 30 states to a list of locations deemed sensitive to national security. The new rule would enhance a 2018 law that allowed the Committee on Foreign Investment in the United States (CFIUS) to block foreign land purchases if they are within a certain proximity of a base.
All Foreign Real Estate Transactions in Sensitive Areas Could Be Under Scrutiny
While residential investors and commercial companies occupy different real estate sectors, the proposed rule doesn’t differentiate between the two when examining real estate transactions by foreign investors near sites it deems sensitive.
Chinese citizens represent by far the largest segment of non-North American buyers of U.S. real estate (13% of all U.S. real estate sold to non-U.S. citizens in 2023 was to Chinese citizens), amounting to $13.6 billion in value.
Democrats and Republicans in Congress are united in their concerns over Chinese investments in the U.S., viewing them as a threat to national security. Trump made headlines during his administration’s tariffs on Chinese imports. The Biden administration has likewise imposed tariffs on Chinese electric vehicles and solar panels.
“CFIUS plays an integral role in U.S. national security by thoroughly reviewing real estate transactions near sensitive military installations, and this proposed rule will significantly expand its jurisdiction and ability to accomplish this vital mission,” Treasury Secretary Janet L. Yellen said in a statement.
Part of a Widening Move Against Chinese Corporate Real Estate Investment in The U.S.
The rule could further complicate real estate investment in the U.S. by the Chinese, which has been steadily growing since the pandemic amid the problems currently facing the domestic Chinese real estate market. Although the Biden administration is quick to point out that the proposed new rule applies to all foreign countries, there’s no doubt that Chinese companies have been placed in the spotlight by the U.S. government, with President Biden recently issuing an order forcing a Chinese-backed cryptocurrency firm to pull out of a property it owned near a Wyoming nuclear missile base. A $2.4 billion manufacturing facility that Gotion, a Chinese electric vehicle battery producer, is building in Green Charter Township, Michigan, is also thought to be under scrutiny.
States Took Matters Into Their Own Hands Before the Proposal
The newly proposed rule comes on the back of individual states passing their own laws concerning foreign real estate investing, with Florida prohibiting most Chinese individuals without a green card from purchasing residential property. Many states expanded local bills and laws aimed to block Chinese individuals and companies from acquiring and setting up factories and businesses, warding them away from the U.S. economy and buying homes.
Montana Gov. Greg Gianforte signed a bill in 2023 prohibiting the sale or lease of agricultural land, critical infrastructure, and homes near military assets in the state to entities from six countries that the U.S. designates as foreign adversaries, including China. Texas, Alabama, and Louisiana have attempted similar proposals with less success.
Under the new proposal, the Biden administration would be able to review all real estate transactions within 100 miles of Joint Base Cape Cod, located in Sandwich, Massachusetts, meaning deals near Boston and Providence, Rhode Island, could also be scrutinized.
Similarly, real estate transactions within 100 miles of Wright-Patterson Air Force Base in Dayton, Ohio, would cover the burgeoning Columbus industrial and residential real estate market.
“There is a real responsibility on behalf of governors and state legislatures to look out for the safety and protection of our citizens,” Virginia Gov. Glenn Youngkin, who blocked Ford Motor Company from setting up a battery venture in his state with China-based Contemporary Amperex Technology (CATL), said in the Wall Street Journal.
Youngkin also signed bills to curb Chinese land purchases and use of TikTok on state devices. “China has a very clearly stated objective:and that is to dominate the world and do that at the U.S.’s expense,” Youngkin said.
Foreign Buyers Are Paying More for U.S. Real Estate
According to recent NAR data, U.S. real estate is a coveted commodity for foreign investors and buyers, who generally pay 20% more than they did the previous year. Foreign buyers’ median purchase price is $475,000, whereas the U.S. median is $442,525.
The Fallout
Not surprisingly, Chinese communities in the U.S. are incensed at what they deem to be discriminatory action and contravene the Fair Housing Act. Chinese citizens in Florida sued the state in May 2023, arguing that the new property law that Gov. Ron DeSantis (R) signed that’s taking effect on July 1 is discriminatory.
“The Florida law is already having a ‘chilling effect,’” Jason Pugh, a managing attorney at Pugh Law Office in Orlando, told the American news website Axios. “We need such nationwide efforts [referring to a bill proposed by two Democrats] to combat the growing tide of anti-Asian legislation. I think other red states like to follow the lead of Florida and Texas in trying to do things that are ‘innovative,’ so I suspect we will see more of this going forward.”
Final Thoughts
Anytime a nation is singled out as an “adversary” to the U.S. government, there is inevitable blowback on law-abiding U.S. citizens whose families originate from that country. The U.S., after all, is a country of immigrants. Amid heightened geopolitical tension, the U.S. government must protect its interests while protecting the rights of individuals who want to invest in its real estate legitimately.
There might be a tendency to think that denying non-American citizens the opportunity to buy real estate in some way limits the purchasing power of American citizens of the same ethnic background, and thus, it becomes a contentious issue for some. However, all U.S. citizens can buy real estate in the U.S. Scrutinizing overseas companies that have, in the past, been deemedto be adversarial to a nation’s interests or preferring real estate to be owned by nationals is nothing new and happens in many countries around the world.
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Just when real estate agents thought the worst was behind them, the Department of Justice (DOJ) is considering further changes to their commission structures.
The result could be buyers deciding to forgo agents entirely, driving down commissions and forcing intermediaries out of the industry. After much speculation, the government is deciding whether the March agreement goes far enough, and if they should push for a further change to the costs associated with buying and selling a home.
According to theWall Street Journal, the DOJ has been involved in two industry lawsuits. It also sent a formal letter to the California Association of Realtors inquiring about legal forms agents use during home sales and asking real estate companies about their listing protocols.
The DOJ Wants to Cut Out Workarounds
The DOJ is particularly concerned about workarounds agents might employ to circumvent the March settlement, which receives its final approval from a federal judge in November. The intervening months will allow the DOJ to reconsider whether the settlement goes far enough in reducing commissions.
Under the current settlement, analysts predict that changes could lead to a 30% reduction in the $100 billion that Americans pay in real estate commissions every year—with the buyer’s agent’s 2.5% to 3% being reduced.
Consumer advocates fear that influential buyer’s agents might steer their clients to properties where they are receiving a commission and away from homes where they are not or warn sellers that their listings might not receive the same traffic from buyers if their agents are not compensated. Also, while there might not be a formal agreement to compensate buyer agents, other types of compensation tactics could be used.
“NAR—and I personally—oppose any attempts to circumvent the settlement,” National Association of Realtors president Kevin Sears said in a letter to members. “We expect the DOJ to continue making inquiries into industry practices.”
On the other hand, the Consumer Federation had contacted the DOJ about an early draft of proposed changes to the California Realtor Association forms that they felt warranted concern.
“I am not optimistic that the state associations are going to come out with any form that is fair to consumers,” Stephen Brobeck, a senior fellow at the Consumer Federation of America, told the Wall Street Journal.
As a sign of what could portend nationwide, the DOJ opposed a different settlement in a lawsuit against a Massachusetts MLS, stating that it didn’t go as far as the government agency would have liked.
Tipping the Scales
The DOJ has a long history of investigating and intervening in the residential real estate business, with lawsuits brought under both Democratic and Republican governments. The final decision is up to the judge, but it’s thought that the DOJ’s opinion could tilt the scales.
“It sort of changes the perspective of the judge’s ruling on the settlement agreements that have been reached in the case,” Chuck Cain, senior vice president of the national agency division at FNF Family of Companies and a real estate attorney, toldHousingWirein April. “Prior to the Court of Appeals decision, he may have just accepted everything, but now, with the DOJ in the mix, he may decide to delay approval to wait and see what happens with the DOJ.”
“The one thing I think it [the DOJ] may object to is the amount of the civil remedy,” Cain added. “They may want the actual amount to be higher [than the currently proposed $418 million] to send a message.”
What Is the DOJ’s Endgame?
“The DOJ fervently wants NAR to issue a rule that prohibits any coupling of commission paid by a seller to its listing broker and any commission that might be sought by a buyer’s broker for procuring the buyer,” Frances Riley, a real estate attorney at Saul Ewing LLP, told HousingWire. “NAR’s settlement of the class actions did not achieve this goal; thus, there will be further investigation by DOJ of NAR and likely litigation.”
What Does This Litigation Mean for Real Estate Investors?
With all these changes afoot, there are a lot of implications for real estate investors. Here’s a look at a few of them.
Less in commissions could mean more profits
For real estate investors looking to cut transaction costs for buying and selling real estate, the less they have to pay to agents, the more they get to keep, so it can only be good news. However, in reality, agents’ commissions have always been negotiable. For full-time investors who bring agents ongoing deals, low fee structures are often a customary move, which agents are happy to agree to because of regular business.
Prices could drop, but out-of-pocket expenses could increase
A change in agenting structures could drop home prices. However, if buyers have to pay agents out of pocket, closing costs could increase. In an ideal world, the two would cancel one another out. However, there are too many variables, such as supply and demand, to expect this to happen.
Investor/agents might have to recalibrate their businesses
For investors who double as agents and represent other buyers and sellers, the news could be bittersweet, depending on how much of their business comes from agenting versus investing.However, many buyers cannot afford to pay an agent after forking out money for a down payment and other closing costs.
Motivated sellers offer buyers concessions to help them get over the finish line when buying a home. It remains to be seen exactly how much the workarounds will be affected by the DOJ’s modifications to the settlement.
For most investors, volume and getting deals closed is more important than trying to stack profit onto each transaction. Agents who also invest will still have access to the MLS and, if they flip houses, can still make money from the sale, forgoing their agent’s fee and possibly sweetening the deal for a buyer’s agent.
Final Thoughts
Real estate agents are unlikely to get much sympathy from the public about making less in commissions. In an election year, public sentiment goes a long way, and while the DOJ is supposed to be politically impartial, it is still a government agency that can make a tremendous difference in an overheated, largely unaffordable housing market.
On the flip side, while streaming real estate shows such as Netflix’s Owning Manhattan portray agents of luxury listings making six-figure commissions, the reality is that it is not representative of most agents’ income. With prices and interest rates high and inventory low, many agents are struggling to scrape by and need every commission check. Many are dropping out and seeking other forms of employment. News of another potential hit to their incomes by the DOJ is likely to continue the trend.
On a macro level, social media use could see more owners forgoing agents and commissions to sell their homes, especially if they no longer have to pay buyer’s agents. Investors are likely to be pleased with the news of having to pay less in commissions, especially if they do not generate their own leads and are MLS-reliant.
However, in a tight market, many still rely on a switched-on buyer’s agent with a network of cultivated contacts to bring them deals they may not otherwise have. They may view their commission as the price of doing business.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
