March 2024

Ashley:
This is Real Estate rookie episode 383. Can you invest while wrestling with college debt and much more on today’s episode? My name is Ashley Care and I am here with Tony j Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we’ll discuss how to start your real estate development with a lack of funds and what are the exact steps for buying and launching a short-term rental. Now, if you guys have a question or want to maybe drop a horror story of your own, head over to biggerpockets.com/reply and we just might pick your story for the podcast. Now, today we are joined by two very, very special guests. We have Tama, who’s an investor and director of product and marketplaces at BiggerPockets, and we also have Mindy, who’s the host of BP money, also an investor and an agent.

Ashley:
And last but not least, we actually have a guest on today’s episode to ask a question live for rookie reply, and we are going to be discussing supplies for a medium term rental and also what is a medium term rental and how is it different from long-term and short-term? Let’s say hello to Mindy and tmo, our expert panel. Welcome. Thank you for having me. I’m so excited to be here. Thanks. I’m really excited to dig into some of these questions. Okay, well let’s get into it and welcome our first guest. Mitch, thank you so much for joining us today. Live on the real estate rookie reply. It’s not often we get to bring someone on to ask their question and to also have an expert panel. So Mitch, please tell us a little bit about yourself and then hit us with that hard hitting question that’s just nagging at you to get answered.

Mitch:
Cool. Yeah, thanks Ashley for having me here. And so a little background, I actually work with BiggerPockets on the agent sales side of the business and I help agents all across the US connect with investors in their market looking to buy their next investment property. I’m here just west of downtown Denver, Colorado. I’m now in our Nevada and I own a few rental properties now. And one of ’em, we just decided to experiment with the midterm rental strategy and we had been looking at it for a bit of time now and it looked like it was going to be the best fit. So we got the place furnished and we had used a referral from one of our real estate agents on who do you use as a property manager who’s great midterm rental property manager. And a couple months down the road we got a few bookings in and I think after the second booking we got hit with some fees, about $350 in restocking fees and kind of blindsided us a bit, seemed a little excessive, but we let it go and a couple months later, after another stay, so about 82 days in total we got hit with another $450 in restocking fees.
So at this point it didn’t make sense to us a lot of things like large ticket items, 200 trash bags, 115 dish pods all used in a two days and it just kind of raised a red flag. So we just had a question. How would you approach this situation with the property manager and risk burning the bridges with somebody that was referred to you? How would you approach that?

Tony:
Yeah, great question Mitch. And I think before we keep going, I just want to define exactly what a midterm rental is. So a lot of us are familiar with short-term rentals, Airbnbs, but a midterm is basically that kind of sweet spot between your traditional short-term rental guests and your traditional long-term rental guests. So think 30 days plus we probably less than a year somewhere in that sweet spot. So we have some special guests on the podcast today, so I’d love to get your opinion first. So we have Mindy and Temo. So Mindy, I’ll kick it to you first. What is your insight? What are your thoughts here for Mitch?

Mindy:
Okay, first of all, 82 days and they stocked 200 garbage bags. Are these people having massive, massive, massive parties? I mean that seems excessive isn’t the right word. That seems almost like they are taking advantage. So my first recommendation is to go back to your contract with your property management company because the contract is the legally binding document that is going to rule your relationship with your property management company. What is the section addressing restocking and to make sure that they don’t treat this as a short-term rental because there is a difference between short-term rentals and medium term rentals. I have a medium term rental myself and I give a kickstart to my tenants. I don’t expect them to arrive with toilet paper and dishwasher pods and garbage bags. I’ve got a few so they don’t have to rush right out the day after they get there and buy all this stuff.
But I’ve got like five dishwasher pods, a few garbage bags, a couple of sponges, a couple of laundry pods definitely have the toilet paper stocked because that’s a necessity. But afterwards, everything’s on them and I make sure that they know that in advance. This is a month to month rental and you are stocking everything just like a long-term rental. So I’m wondering if your management company has experience with medium term rentals and what that entails. So first I’m going to send you to the contract and then I’m going to direct you to chatting with the property management company and asking them directly why do you think 200 garbage bags is a reasonable restock on an 82 day stay?

Tony:
We do the same thing even for our short term. We give starter kits for supplies and things like that. We give more than enough. Most of our stays are two to three days on average, but even still every once in a while we’ll have someone that uses all eight trash bags in a two nights day. I’m like, Hey, you got to go figure that out for yourself afterwards. Right. Tiana, what about for you? What are your thoughts on that?

Tiamo:
Yeah, very similarly, we were at an Airbnb this weekend and they said very specifically what they do include and what they don’t include for us. So if we want to use extra supplies that was on our own. But similar to what Mindy was saying as far as the contract, I said very early exactly what the expectations were. And I actually looked at a lot of the housing for nurses across the nation specifically in Colorado to say what were their expectations? So they expected blackout curtains, they expected good linens, good towels, that kind of thing. They didn’t expect me to restock all their toiletries every single month that they kept staying with us.

Tony:
And Tama, I think you bring up a really good point about setting expectations because what leads to less than five star reviews, it’s not necessarily missing something from your listing, it’s just that a guest was expecting something, they didn’t get it. But if the expectations are set correctly when they enter, if they know, Hey, I’m going to get eight trash bags and I’ve got to do the rest myself, even if they run out of the all eight, then they still know that, hey, that was the expectation coming in.

Ashley:
I do have something I want to add to the conversation, but before I do that, we are going to take a short break and when I come back I’m going to play devil’s advocate.

Tony:
Alright, we are back from our break and we’re hearing Mitch’s story about some issues with this property manager and I’ve given some advice, Mindy tmo, but now Ashley says she wants to play little devil’s advocate. So what do you got to say, Ash?

Ashley:
Okay, Tony, I’m actually going to play devil’s advocate and I’m going to be on the positive side for the property management company and I’m going to try to look at maybe one reason why they were doing this as a positive. So when I heard the 115 dishwasher packs, the 24 cleaning sponges and the garbage bags, all I thought of was buying in bulk can reduce costs. So in my mind, I am thinking this property management company went out and said, we’re going to get enough supplies for a year for this property so that way we only have to send someone there once we’re buying in bulk. So it’s going to be cheaper than having to restock every once in a while buying just small 10 packs of garbage bags or however much you want for each person. And I look at my own Airbnbs where we have a closet where we stock up big time and do a bulk order and fill it up.
So Mitch, my question to you would be do you think that maybe this was a reason that they were doing that to kind of buy in bulk and to save you money, but it backfired because everybody had access to those items at all times. Where my cleaners, they ration share, they’ll give each person so many things, a toilet paper out of that closet and then it’s locked up. So I’m curious to hear, could that be one of the reasonings? And they weren’t actually to be bad property management or to kind of screw you over in a sense or overcharge you.

Tony:
It’s a good point, Ash, right? But I still think even if that was the case, it almost does speak to maybe a little bit of lack of efficiency on the property manager side to not

Ashley:
Giving the free for all

Tony:
Given the free for all. Yes. Right. Yeah. So there’s probably still some feedback there that needs to be shared. Manique, what are your thoughts on that?

Mindy:
My thought is I absolutely went that route and said, oh, they bought in bulk and I’ve stayed in a lot of Airbnbs and there is always that closet. It’s not always locked, and I am one to open every single door. I’m not one to take every single garbage bag because I’m usually traveling and plus I’m not a big steeler, but I always open every door and I see that there’s these giant Costco sized bags of everything. So I absolutely think that that’s what they did, but why did they do it twice? And if they did it the first time and left the door open and everything got taken by the first guest, then that should kind of be on them to restock on their own dime because great point. There’s no way that the first guest used 115 laundry pods or whatever it was. But again, I want to go back and direct Mitch to first the property management contract, and then if there’s anything missing in the property management contract, call up the property management company and get an addendum to the contract that spells out specifically the things that are missing.
Who is going to restock? How much is going to get restocked at a time? How frequently is it going to be restocked? You don’t need to go and buy a big $20 thing of Costco toilet paper every week, but if it’s, I mean, what is that going to last three months, four months, then every quarter you expect to have this expense, but that’s what you’re expecting, just like you’re setting expectations for the guest, the property management company or Mitch needs to set expectations with each other so that you’re not blindsided like this. And if the property management company simply doesn’t understand medium term rentals, then maybe this isn’t the right property management company.

Tony:
So Mitch, a lot of insights there, a lot of perspectives here in all that. What do you feel is maybe the best path forward for you?

Mitch:
Yeah, thanks so much. I love all of these answers here and it’s really helped me put together a plan, and I can’t say it enough, it sounds like the crystal clear communication is just key, but just going back and approaching it with the positive intent and maybe a place of we’re looking to learn and taking a little ownership, but I think really getting back and setting the expectation there, getting in and writing and agreeing on it together, what our goals are. Are they realistic? Maybe we are missing something at the property. Maybe they didn’t realize there was a locking storage closet and it sounds like maybe they did have it out and the guests took advantage of it, but talking about how we’re going to communicate with each other in the future. Yeah, like Mindy mentioned, definitely a red flag that the restock was done and there was really no communication on it. So yeah, I love these answers and I think getting back to the contract, looking deep into it and then approaching the property manager with the positive intent and really defining what that relation looks like moving forward.

Tony:
Yeah, I love that mention and I hope you’re able to find a good solution with this property manager. I just have one funny story on an owner’s closet that I want to share with you guys. One of the first Airbnbs that we bought there was an issue with the owner’s closet door lock. So it was reversed. So basically it was always set to be unlocked, right? So we couldn’t get it to lock itself, and whenever you put in the owner’s code, it would only unlock it. So the door was just always unlocked. So we took it live with it being open. Luckily we didn’t have any guests that rummage through it, but just triple check before you take your listing live that your owner’s closet actually locks. Alright, this next question is from Jared. Jared says, what’s up Ashley and Tony, I just graduated from college with a degree in engineering.
I’ve been listening to your podcast every day on my way to and from work, sometimes even at the gym. I want to get into real estate investing, but I’m currently paying $2,000 a month in student loans and will not be able to receive a bank loan. I’m so young. So my goal is to house hack, but I don’t see a way to accomplish this at the moment. Do you think I should wait a few years to pay down my loans and get my DTI more manageable? Please help. Alright, since we’ve got a few voices on the podcast today, we’re going to do this rapid fire. So you guys got 60 seconds top. I’m going to have the producers cue the Grammy music if you guys start going too long. So Ash, let’s go with you first. What do you got for Jared?

Ashley:
Okay, so the first thing I’m thinking about,
So the first thing I think of is myself personally. When I started investing, I had farm equipment debt, I had student loan debt, and what I did was I simultaneously invested and I used any cashflow that I had to pay off all of my loans. So that worked for me. In this case, what I would do, the first step would be to, if you can actually get approved for a loan, if you have money for a down payment and you can get approved for a loan even with your high student loans, then I would definitely recommend going in house hacking because you are going to hopefully, if you get the right deal, decrease your living expenses and you can use that extra money you’ve saved to rapidly pay down your student loans.

Tony:
Great job. Tama. You’re up next. What do you got?

Tiamo:
Yeah, I would say something pretty similar. It sounds like $2,000 a month, probably a bit too much for you to actually qualify for the DTI, but there’s a lot of programs out there that you can actually have quite a high debt and also you could have quite small amount of loan payment or loan down payment to put down. So I’d recommend that if not think about for the next year, live as cheaply as humanly possible. Could you be house sitting for people? Could you be dog walking their dogs and sitting for them? So I’d recommend live as cheaply as possible because I think house hacking is your next best option to get that started. I would not do any other investing beforehand because it’s a little bit too risky for having $2,000 a month of debt.

Tony:
All right, Mindy, what do you got for Jared?

Mindy:
Well, first I have a bit of a self-promotional plug. I host the BiggerPockets Money podcast where we talk about money questions and money problems all the time. So Jared, you need to be listening to me in addition to Tony and Ashley and their awesome show. Now I’m going to plug specifically episode BiggerPockets money 35 because Craig Curl up came in and shared his story, which is almost identical to yours. He had, and it’s been a minute since we recorded with him, but it had something like $80,000 in student loan debt. And instead of paying that off, he bought a house hack, lived in it, rented one unit and lived in the other while Airbnbing that other unit and threw all that money like Ashley said, into his debt. So he was able to eventually pay off his student loans by his investments. But also house hacking isn’t a one-way.
Street house hackers need tenants too. So you can reduce your housing expense by being what a house hackee a house hack tenant. Also, there are plenty of cities in this nation where the Airbnb rules state that you can only Airbnb your primary residence, and there’s a lot of people who own duplexes who would love to Airbnb half of it, but can’t because they don’t live there. So I would look for that sort of situation where you can either get a break on your rent or even a portion of the short-term rent that the landlord is collecting simply because you’re helping manage their property. Then bonus, you get short-term rental experience at somebody else’s short-term rental. So sorry, I know that wasn’t 60 minutes. Go ahead and play the music.

Ashley:
No, it definitely wasn’t 60 minutes. You were great. You were under 60

Mindy:
Minutes. Yes,

Ashley:
I came out of 60 minutes. Mindy, one thing I do want to add though is that you forgot to mention with Craig is he also slept on the couch that he rented out all the bedrooms too in his unit. So that’s to take it even to the extreme,

Mindy:
Yeah, he was hardcore with his house. Heck, and you don’t have to be that hardcore, but you could. One last thing is the $2,000 a month your minimum payment, or are you throwing extra money at it to pay it off quicker? Maybe you pull back if that’s the case and you start saving some of that money for your down payment.

Tony:
Yeah, Minnie, you wrap my mind. That was my next question as well, because two grand does feel a little bit high. So Leah, to your point, can you pull that back to just pay the minimums to reallocate those resources somewhere else? If you guys are looking for a good episode on the house hacking and using creative financing, almost episode 2 61, we had Nancy Rodriguez, she was from Love Is Blind, one of the seasons, right? But she used a loan from a company called naca, NACA, the Neighborhood Assistance Corporation of America. And guys, NACA has I think, the best loan product that I’ve ever seen for primary residences, it’s 0% down. There are zero closing costs, and their interest rates are usually about a point lower than prevailing interest rates, and you can use it for multifamily up to four units. So Jared, if you can go out and get approved for this NAL loan, now you’ve got a loan where you don’t have to worry about your down payment, right? You got literally almost no closing costs. I think Nancy got a refund at closing because she got a credit from the seller. So if you can check episode 2 61 with Nancy, look up the naone. It’s a great resource, Jared, to help you start house hacking the way that Mindy tmo and Ashley all talked about.

Ashley:
We are going to move on to our next question, but before we do, we’re going to take a short break and we’re going to be back with somebody who actually built their first property with new construction and now they want to be a developer. Okay, thank you so much for coming back with us for our next question with April. So April said, I just bought my first home, a new construction in September. My plan is to rent it out after a year eventually. However, my goal is real estate development, despite having a good credit score, I currently lack the funds needed for this venture. I’m considering using seller financing for the land. But the challenge is that even with this arrangement, I still don’t have sufficient funds for both the new construction and using the land as collateral. I’m seeking advice on to whether to pursue this path or if you have an alternative suggestion to help me achieve my goal of becoming a six-figure developer. Any guidance would be greatly appreciated. So tmo, I’m going to kick this one to you first since you do have some experience in commercial development.

Tiamo:
So a little bit less of the residential. It sounds like this question might be tied a little bit more residential, but I used to do commercial development in downtown Denver. So think about some of the best breweries you’ve been to think about some of the coworking spaces, self storage, that kind of development. And so the one thing I’d say is definitely talk to your city. Go to the city, figure out some of the opportunity zone thinking about residential. Make sure that you know what you can and can’t build in certain areas because even by going to some of those events within the city, downtown Denver has a downtown Denver partnership. You can actually learn quite a bit from those organizations to make connections with some of those developers that are around you. So city, lots of requirements, lots of rules, lots of regulations. You should know them, you should get really familiar and very comfortable with them, but I think that would apply also to residential.

Ashley:
Okay. And Tony, what are your thoughts? I know you’ve looked into doing some kind of development when you were looking at that property in West Virginia, so what would be your advice about building from the ground up?

Tony:
Yeah, April, I think that this is your goal, super commendable. Don’t feel like it’s out of reach just because you don’t necessarily have the capital. The funds are just one piece of the puzzle. So I think if you can find a killer deal and you can kind of map out that vision, then the next step is just finding a capital partner who can kind of bridge that gap for you. Because if you find a good enough deal, I would assume there’s a lot of people out there who have money sitting in their savings account right now that’s gotten eaten up by inflation over the last 12 to 18 months. Who would be happy to put this into real estate, which is appreciated over the last 12 to 18 months pretty substantially. So find that capital partner. So maybe just start small, do some infill development. I can’t remember which episode it was, but if you look up Donovan a Dero, Donovan a Dero, we interviewed him on the rookie podcast and he was doing infill new construction like town homes in Texas. So go back and listen to that episode. But he financed all of that new construction using partnerships. So don’t feel it just because you don’t have the funds of April that you can’t make this happen.

Ashley:
And Mindy, what would be your advice for April? Okay,

Mindy:
My advice is to connect with a developer. I love Tia O’s suggestion to learn the rules and regulations of whatever city you’re looking to start developing in. But connect with a developer and ask them if you can start learning from them. But here’s the caveat, don’t just say, Hey, would you teach me everything? Make a list of the skills that you have. Not real estate skills necessarily, but any skill that you have, make a list of those and offer to do things for the developer in exchange for learning from them, connecting with the developer and just asking them, Hey, can I learn? Everything is a great way to get shot down when you don’t have anything to offer. Some developers are, this is going to sound ageist, but I’m old too, so I’m going to say it anyway. Some developers are older and not very good with social media or technology.
And if you can help them in areas that they have pain points and relieve their pain points, they might be more than excited to help you out. Just sharing their knowledge and how do you meet developers? Go to meetups, TBOs suggestion for the neighborhood development area, the BiggerPockets forums. Put it out there that you’re looking to meet developers and you will be surprised at who is all of a sudden, oh, I know a developer, I’d love to introduce you. It’s Bob. He’s right over here, let’s go talk to him. But just putting it out there and being friendly and being open to connections is huge.

Ashley:
Yeah, I 100% agree with you, Mindy, and just asking the people around you, it might surprise you who, your sister, your brother, or your parents know. My dad has the most random associations with people, and it is always great to make those connections. So great advice. Well, thank you very much panel. And we’re going to move on to our next question. And this question is from Kai Menser. As a rookie, I’m becoming overwhelmed by the best process and sequence of events that need to take place from interest in buying a short-term rental in the first booking. What is your recommended sequence of events? So is it remodeling, acquiring accountant, cost segregation study? When does material participation start? When do I start checking costs? If and when do you start an LLC? When do you ensure it, et cetera? So my strategy is basically where do I want to a vacation or where do I want to live when selecting a short-term rental? So today we’re going to turn it over to the experts that actually use data and analytics to choose a short-term rental destination. So Tony, let’s start with you.

Tony:
So Kai, first thing I’d say is you’re thinking about step 30 when you should really just be thinking about step one. And I think that’s an issue we see from a lot of Ricky Investors is they start, we get people who start asking about, well, I’m so worried about how am I going to buy my third property? And I ask, well, how many properties do you have today? They’re like, zero. Well, why are you worried about property three when you should be focused on property one? So I think the very first thing Ka you should be doing is choosing your market, right? That’s the very first thing you should be doing because I see a lot of rookies who, they’re scattershot all across the country. They’re analyzing the deal here, doing one over there, doing one up there. So choose your market first, and that really comes down to knowing what your purchasing power is.
So how much capital do you have available to deploy? What loan amount can you actually get approved for? You put those two things together, you get your purchasing power, and then think about what your specific motivations are for investing in real estate. Is it cashflow? Is it the tax benefits? Is it depreciation? Is it you just want to subsidize the cost of your vacation homes? Because each one of those four motivations will dictate a slightly different market selection strategy. So the very first thing you need to do, and I can go on and on, but the very, very first thing you need to do, Kai, is choose your market and make sure that the market supports your ultimate investment goals.

Tiamo:
Yeah, tying off of that, I would say choose your market and educate yourself on that market. And then shameless plug, build your team on biggerpockets.com, and if you want to go in talking to a lender or an agent, knowing what you know. So there’s a bunch of research that you can do. You can inform yourself. Don’t just call an agent, call lender and say, you tell me all the things I don’t know. Go in educated. Once you pick your market, once you’ve done some of your research, they’re going to guide you, they’re going to help you and support you, but you want to make sure you do a little bit of research and then find exactly what Tony said, know what your purchasing power is going to be for this property, but find an agent, find a lender and get started. Because why are we talking about a cost segregation? What it maybe short-term rental isn’t for you? Maybe a long-term rental isn’t for you. Maybe we don’t want to do a cost egg at all. Maybe there’s other things that we want to be doing, but let’s start with educating yourself about the market and what maybe a rental in that market’s not going to work for you. So start there and then definitely build your team from that. I

Mindy:
Like what both Tony and Temo had to say. This sounds like a classic case of analysis paralysis. He’s got a lot of the lingo down. And like Tony said, you’re on step 30. Let’s go back to step one. You’re interested in buying a short-term rental. Why do you want a short-term rental? And where do you want it? Like Tony said, what are the rules there? Because I want a short-term rental in downtown Denver. Well, the rules say you can’t have one there unless it’s your primary residence. So make sure the rules of the location that you’re looking at, and then start from there. Start looking like Tiao said, get an agent and start getting listings and start looking. Know what a good deal looks like in the market that you have chosen because you’re not going to be able to pounce on a great deal or a good deal or even a mediocre deal if you have no idea what’s going on in that market. I’m a huge advocate for learning the market that you’re interested in. And maybe there’s two, you’re not sure if you want to do it in San Diego or in Fort Lauderdale. Great. Start getting both of those, but don’t start getting listings in a hundred different markets and trying to juggle all of this stuff. I think that this questioner is trying to get ahead of himself, and really you need to go back to the very basics. Where are you going to buy? What are the rules there? How much can you afford? Like you guys said,

Tony:
Mindy Tiao is super grateful that both of you joined us today. So before we let you go, we got to get one last piece of wisdom, Minnie, we’ll start with you. So give us one piece of parting advice for the rookie audience.

Mindy:
Oh, for our rookie audience. For your rookie audience. I want to say education is imperative. You need to educate yourself what you’re doing by listening to the rookie channel, but also you need to know your market. I am such a huge proponent of learning what a good deal looks like in your market so that you can be ready to pounce as soon as it pops up online. I’m a huge proponent of the MLS and finding deals online there. So get an agent, start getting listings and start learning what a great deal looks like in your market so you are ready to act as soon as you can.

Tony:
Love that. Tiana, how about for you? What do you got? For us,

Tiamo:
I would highly recommend going to biggerpockets.com, but I would recommend for talking about Kai specifically, I would say go to back slash smarter S-A-R-T-E-R, and that is a step-by-step, starting with your strategy, your market, your acquisition, if you’re renting or rehabbing, tracking it all the way to exit, and then how do you do it again and again, I would start at smarter. It will connect you to the calculators and the forums to learn and educate yourself and all the different finders that we have to connect you with various folks. It’s a step-by-step guide, wherever you are, maybe your past strategy, maybe you’re past the market phase, it’s going to guide you in those other additional advanced steps as well. So I’d highly recommend going to.com/smarter.

Ashley:
Thank you so much, Mindy and TMO for joining us today. And also a big thanks to Mitch to coming on and asking his question. It’s not always easy to be vulnerable that your investment is not going the way that you had actually planned. So we really appreciate Mitch taking the time to come here and share what he had going on, and hopefully some rookies can learn from his experience and what to do if they come across that. Thank you everyone for joining us for this week’s rookie reply, and we will see you next time.

“I always thought stealing was wrong,” real estate investor and developer George McCleary remarks at the end of a viral video posted on social media last month, “But turns out, if you steal a house, it’s not even against the law here.” 

The video details how McCleary easily broke into a rental listing in Portland, Oregon, fabricated a lease, put the utility bills in his name, utilized a taxpayer-funded legal assistance program to avoid eviction, and was ultimately given $10,000 to leave the property after nine months without facing any legal consequences. 

Commenters speculate that McCleary, a boutique real estate firm owner who has worked in real estate for the past two decades, didn’t actually break into a rental home and trash it, but the scenario he presented was nevertheless a realistic possibility, given robust tenant protections in Portland. The video exposes the dangers of widespread efforts to expand tenant rights in cities as a response to the housing affordability crisis. 

How Squatters Take Over Rental Properties

In McCleary’s video, which was widely shared and collected more than 6 million views, he explains how he navigated to a vacant rental property listed online and followed YouTube video instructions to break into the lockbox. He then forged lease documents and called local utility companies to put the bills in his name. 

“When the owner showed up, I politely explained that this is my house now, and they need to leave,” McCleary says in the video. The police, after viewing the fake documents and utility bills, let the owner know that this was a civil matter. 

When the owner hired a lawyer, McCleary mentions he called a legal advocacy group, which “gives me a lawyer that’s 100% free and funded by taxpayers.” After a months-long legal battle to evict the squatter, the owner gives up and writes a check for $10,000. 

“I didn’t even have to clean the place up, and that’s a good thing, because I do a lot of drugs, and the house looks every bit of it,” McCleary states satirically. “So I just got nine months of free rent in a house that otherwise would have cost me three grand a month, plus a nice cash for keys check, and I wasn’t even charged with anything.” 

It may seem like a far-fetched tale, but similar scenarios have played out across the country in recent years. The National Rental Home Council estimates that more than 1,200 homes in Atlanta are now occupied by squatters. In one case, the occupants used the property to operate an illegal strip club. 

Here are some more ripped-from-the-headlines cases:

• In Beverly Hills, a group of squatters took over a mansion and threw wild parties, charging for tables and rooms and using a fake lease to avoid being removed from the premises. 
• In Texas, a squatter with a history of evictions locked a homeowner out of her house and forged a lease for the property.
• In Maryland, squatters took over a woman’s home while she was on vacation and sold $50,000 worth of furniture. 
• In Chicago, where evictions can take six months or more, a homeowner struggled to remove a squatter with a criminal history who had changed the locks on a two-flat last year, even after an incident of gun violence at the property. 
• In New York, a homeowner tried for three years to evict a squatter, leaving her with a hefty utility bill by the time the squatter was arrested. 

These crimes rarely lead to prosecution and cause significant losses for property owners. Owners are forced to continue to pay taxes and other homeownership costs, even if they don’t have access to their own properties.

In some cases, the trouble starts with a legal lease agreement. A tenant may move in, pay the initial required deposit, and then violate the lease terms down the road by failing to pay rent, damaging the property, or committing other infractions. 

But even in the absence of grand larceny and fraud, policies that expand tenant rights can have unintended and dire consequences for small landlords—and the wider housing economy. 

The Role of Policies That Expand Tenant Rights

Even before the pandemic hit, rents were rising more rapidly than wages, and renters’ budgets were strained. Everything came to a head when the economic slowdown put millions at risk of eviction, causing lawmakers to put in place $45 billion in rental assistance and a moratorium on most evictions. This turned the tables, and eviction rates declined. 

When the federal eviction moratorium expired in August 2021, many municipalities and states chose to keep the ban in place longer. Rents were still rising, and over 40% of renter households were considered cost-burdened (meaning they spent more than 30% of their income on housing costs). Policymakers also pushed for stronger tenant protections, ranging from rent control measures to free legal aid programs for renters, both ideas that garner strong bipartisan support from the public. 

There’s also been a wave of legislation banning criminal background checks on prospective tenants, as is the case in Oakland, or requiring landlords to ignore a tenant’s criminal history outside a specified look-back period, like in New Jersey. In Minneapolis, landlords can’t consider misdemeanors from more than three years ago when evaluating tenants, nor can they set a minimum credit score for applicants. Low-income renters are also entitled to free legal help if they face eviction. 

Policy initiatives like these make it tough for landlords to prevent issues with tenants and respond to them in a timely manner. And they also benefit scam artists who come to possess a rental property illegally. 

Many cities have made crimes like trespassing a low priority for the local justice department. “In jurisdictions where people know they can get away with crime, they’re much more likely to commit crime,” says McCleary in an interview with NewsNation. 

Though fabricating a lease is a criminal offense, the document creates the possibility of legitimacy, and the dispute between the property owner and the scam artist becomes a civil matter. Even after the fraud is uncovered, the squatters rarely face criminal charges. 

In most states, adverse possession laws require a squatter to live in a property for years before they have any legal right to ownership. But in New York City, squatters can claim their right to inhabit a property after just 30 days of residing there without interruption or objections from the owner. After that, the owner can face charges for changing the locks or removing the squatters’ possessions. That’s how an heir to a $1 million home in New York ended up in handcuffs when she approached the strangers living on her property. 

But even in jurisdictions where property owners have a leg to stand on against fraudulent tenants, lengthy eviction proceedings can destroy a landlord’s finances. 

Can Robust Tenant Rights Laws Solve Homelessness?

It’s important to note that just as fraudsters take advantage of lax laws in jurisdictions that are soft on crime, some landlords abuse their power in areas with weak tenant protections—there are both bad tenants, with and without legal leases, and bad landlords. And in many municipalities, landlords can evict tenants without just cause. 

But policies should aim to strike a balance between renter and landlord protections to avoid the negative consequences of favoring one party or the other. Research should also focus on the best ways to prevent homelessness rather than attempting to prove that landlords play a role in the housing affordability crisis. 

Case studies conducted in cities where tenants are provided with free legal representation show that these programs lead to lower eviction rates. Cost/benefit studies also show that legal aid programs that prevent eviction help cities save money on other social safety net programs provided to the unhoused.

However, many of these studies fail to consider the financial impact on landlords and the ripple effect on the housing market. Other solutions may have similar benefits without the fallout. 

For example, a Massachusetts study found that the commonwealth saved $2.40 in homelessness costs for every dollar spent on eviction representation for tenants. A new study from the University of Notre Dame shows that emergency rental assistance provides similar benefits, saving cities $2.47 for every dollar spent providing assistance to renters. The latter solution, however, keeps tenants in their homes without costing landlords an average of $3,500 per unit in eviction losses. 

Two recent studies, one from a Clemson University professor and one from a Ph.D. candidate at Stanford University, examined the long-term impact of tenant protection ordinances intended to prevent evictions and found similar results: The cost to landlords led to increased rents and a decrease in the supply of housing, adversely impacting low-income renters and causing a rise in homelessness. 

“On the surface, strict landlord regulation sounds good for tenants, but our paper points out, the solution isn’t that simple,” says Clemson University professor Lily Shen. “The research suggests that conventional thinking on the issue of more regulation may have the opposite effect on tenants.”

Most eviction filings occur due to tenant nonpayment of rent. Yet some researchers point to evictions as a “primary cause” of homelessness. While it is true that displacement worsens outcomes for low-income people, contributing to a cycle that traps people in poverty, it’s misguided to primarily focus on preventing evictions through tenant representation when the root cause of displacement is that tenants lack sufficient funds to pay their rent. 

The Impact on Landlords

Pandemic eviction moratoriums provide an extreme example of how eviction challenges impact landlords and their tenants. These moratoriums disproportionately impacted small landlords, according to the Joint Center for Housing Studies of Harvard University—landlords who owned fewer than 20 properties were more likely to experience catastrophic declines in revenue. 

Furthermore, landlords of all sizes were more likely to sell their properties during this time, and about a third deferred property maintenance, a sharp increase from the 5% that reported doing so in 2019. These consequences were cause for concern about a long-term decline in the availability, affordability, and quality of rental housing. 

Most rental properties aren’t owned by corporations. About 70% are owned by individuals with one or two properties, according to 2018 Census data. Research shows that small landlords file far fewer evictions than large landlords, often resolving issues with tenants directly, and are far less likely to evict tenants due to nonpayment of rent. 

Despite this evidence, the sentiment that “all landlords are evil” and the policies aimed at preventing eviction often fail to distinguish between small landlords and corporations. 

Urban Institute acknowledges that small investors play an important role in the availability of affordable housing, noting that policies should “incentivize capital investment by local residents and stakeholders” and that anti-eviction policies “should target the market’s largest landlords, who likely also have the highest eviction rates.” 

In addition, it’s small landlords who are also more likely to be hurt by scam artists who take advantage of tenant protection laws because they have fewer resources and are less capable of absorbing losses. 

In Seattle, a tenant claimed low-income status to avoid paying rent and keep the utilities on. Meanwhile, the tenant turned a profit renting the unit on Airbnb. The landlord, who was forced to continue paying the utility bills without rental income and couldn’t get help from city officials, essentially became homeless. “I consider myself lucky that I was able to build out a nice little camper van, given the situation,” he said. 

The Bottom Line

In many areas of the country, landlords have more rights and resources than tenants, which may threaten housing security even for honest tenants. But in recent years, dozens of states and municipalities have tipped the scales too far in the other direction, leaving landlords vulnerable to tenant nonpayment and fraud. 

Some of these jurisdictions have simultaneously gone soft on crime, allowing even illegal squatters to benefit from laws intended to protect tenants from displacement. And taxpayer-funded legal aid programs fail to address the root cause of displacement and have unintended negative consequences on not only the livelihood of small landlords but also the rental market and homelessness. Rental assistance programs and other solutions are more likely to keep renters housed without long-term adverse effects.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

The National Association of Realtors (NAR) agreed to a settlement last week that will eliminate its rules on sales commissions. The deal, if approved by the federal court, is likely to shake up the real estate market and could potentially decrease housing prices across the country.

Anthony Panebianco, a real estate attorney at Davis Malm Attorneys, told BiggerPockets that the settlement is unsurprising, as a judgment would have likely led to the NAR’s bankruptcy.

“The elimination of the mandatory cooperative compensation model was predicted before this settlement and now is guaranteed,” he added.

The NAR agreed to pay $418 million in damages and implement new rules by July that will change how real estate brokers are compensated. One rule would prohibit brokers from offering compensation on the multiple listing service (MLS), which critics say led to brokers pushing more expensive properties on buyers. Another rule would require buyer-brokers to enter into a written agreement with their buyers.

“It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals,” Nykia Wright, interim CEO of NAR, said in a statement. 

An End to the Traditional Commission Model? 

The change to NAR rules essentially means the end of the standard 6% commission rate for brokers, and commissions are expected to be cut by as much as half.

In turn, this could open opportunities for alternative selling models. These could include an increase in models that already exist, such as flat fees and discount brokerages, or even completely new models, Nick Narodny, founder and CEO at real estate startup Aalto, told BiggerPockets. 

“They could be everything from subscription to flat just giving consumers more of a power of choice and the representation of buying,” he said.

With all the current issues facing the NAR, Panebianco said there would be traction if other groups were to try to step in and offer other models. 

“Now would be a good time if an entity was so inclined to come up and say we’re different than the NAR, and we will lobby on your behalf and be able to better predict what the future holds,” he explained.

Some brokers feel the news could improve the industry, as less experienced brokers are likely to leave. And the decoupling will also mean more transparency in an often complicated commission system.

“Real estate investors will benefit from only the savviest agents remaining in the industry,” Michael Martirena, founder of the Ivan and Mike Team with Compass in Miami, told BiggerPockets. 

Martirena said this will lead to a “collective leveling-up in terms of education, information, and client service,” as agents can help clients with no hidden costs. “The transparency will benefit investors as much as consumers,” he added. 

What This All Means for Real Estate Investors 

The NAR’s settlement isn’t the end of the compensation debate. While the NAR rules apply to just agency members, not all databases require membership. Other real estate companies, such as RE/MAX and Redfin, have gotten rid of requirements for agents to be part of the NAR in response to numerous lawsuits.

The Department of Justice (DOJ) is still continuing its investigation into the NAR, including its MLS, which it has questioned for stifling competition and potentially going against antitrust laws. In a statement of interest related to the commission lawsuit, the DOJ advocated for an end to cooperative compensation.

Narodny said he doesn’t see the DOJ allowing the settlement to stand. “They want commissions to be decoupled, not have the rules be changed,” he said. “I think we’ll see true change by this summer, and I think commission will be decoupled. This means buyers have to pay their own way, and potentially investors have to pay fees out-of-pocket.”

It’s widely believed that the changes will also help bring down the costs of financing or even overall home prices, which could be welcome news, as the market has been beset by record-high prices over the last few years. Some buyers may even opt to forgo an agent completely. 

Brokers are likely to get paid somehow, even if the price structure changes. While the elimination of buyer’s broker fees should be seen in the purchase price, “I’m skeptical of that being a reality,” said Panebianco. “The market sets the price, rather than the machinations of how the industry conducts a deal.”

Final Thoughts 

Still, industry experts are hopeful that in the long run, the NAR settlement will ultimately be a win for the real estate market.

“With the ability for buyers and investors to now favorably negotiate with their broker on commission fees as a result of the NAR settlement, we are likely to see an increase in the volume of deals, which has been generally on a decline for the past few years,” said Panebianco.

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A recent CNBC survey based on cost per square foot revealed that the United States’ most expensive real estate market is San Francisco’s South of Market, which contains historic Victorian buildings surrounded by Beaux-Arts and neoclassical government buildings. On the other coast, in New York, Brooklyn’s most expensive real estate market is Brooklyn Heights, a leafy neighborhood of century-plus-old brownstones. 

Both have designated historical status, meaning their period architecture cannot be changed. However, not all older neighborhoods are historic. For investors looking to maximize equity appreciation, the key is buying an older home on the cusp of receiving the historic designation. 

Historic Districts Can Gain 20% Appreciation Per Year

There are more than 2,300 local historic districts in the United States, and new ones are being considered constantly. Every state has them, and they aren’t out of most investors’ price range. The government often offers grants, low-interest loans, and tax breaks to renovate homes in these areas. 

A real estate analysis of Washington, D.C. by economist Donovan D. Rypkema showed historic districts can increase property values. Indeed, a 2011 study of Connecticut historic districts and property values found this designation could raise it almost 20% per year in some areas. 

The first step in becoming a historic district is to be designated a “landmark” status. Neighborhoods with historic churches and older buildings are particularly good candidates, as they are most likely listed in or eligible for listing in the National Register of Historic Places. 

Becoming landmarked is not fast or easy, but it’s a resource that investors often overlook. Once a neighborhood is afforded a historic designation, the older buildings attain prestige because they are immediately protected from developers. Preserving architectural gems can profoundly affect property values in cities with new, gleaming condo towers like New York. 

Crown Heights North, a gentrifying neighborhood in Brooklyn with a reputation for crime that is also filled with brownstones and old churches, was given historic status in 2011. All metrics point to a massive shift in not only property values, which occurred throughout Brooklyn but crucially, household income (the largest demographic earned below $20,000 annually in 2000, compared to $100,000 to $250,000 in 2021). Poverty had dropped to 14.8% compared to 18% citywide, while rents increased by 48.8% between 2006-2021.

Things to Be Aware Of When Buying an Older Home

If you’re buying a home in a landmarked designated or historic district, it’s likely older and needs renovation. There are a host of potential issues you could incur. Here are some considerations.

You might be entering into a restoration rather than a renovation

Buying in a historically designated neighborhood or a landmarked one means adhering to a strict code. 

Common stipulations for rehabbers include using wooden window casements that match the original ones that came with the home instead of model metal and vinyl ones. Exterior railings, gates, and doors will likely be replaced with like ones or restored to their previous condition. Ditto goes for moldings, motels, and fireplaces. However, mechanical walls, such as plumbing and electrical upgrades, will likely be unaffected and can be upgraded with modern materials. 

Homeowners insurance could cost more

Home insurance rates can be higher for a historic home due to the cost of building to historic specifications in the event of a total loss. Also, if the home is larger, with various outbuildings as part of the parcel, this will also increase the insurance cost.

Getting Financial Assistance for Your Renovations

The good news is that grants and loans can help investors with renovations. Your state Historic Preservation Office (SHPO) should be your first stop to learn about funding advantages. 

The National Trust for Historic Preservation’s Historic Tax Credit program (HTC) is also an invaluable resource. Historic preservation easements are also worth looking into, and if they apply, they can also bring additional tax benefits. 

A Historic Home Can Be a Good Investment for a Vacation Rental

If you own a historic home in a scenic part of the country or in a bustling downtown city neighborhood, consider a vacation rental business.

With cultural tourism (defined by the United Nations World Tourism Organization as “movements of persons for essentially cultural motivations such as study tours, performing arts and cultural tours, travel to festivals and other cultural events, visits to sites and monuments, travel to study nature, folklore or art, and pilgrimages”) accounting for 40% of tourism in some countries, rental sites Airbnb, VRBO, and Joybird have sections dedicated to historic homes that appeal to travelers looking to avoid sterile corporate hotels in favor of a character-filled, welcoming stay. Marketing your home’s historical status and choosing tasteful interior designs will appeal tremendously to visitors. If you own a historic home, you could also get the advantage of state websites (here’s one example from Pennsylvania) promoting your rental to attract visitors.

Final Thoughts

Historic homes are character-filled and often located in the scenic or older parts of towns and cities where most people want to live. This results in rapid appreciation and high rental demand. Check with your city’s rental laws to ensure your home can accommodate guests.

Entering a historic home renovation requires time, patience, and experience when following the city’s guidelines. As an investor, you can be certain that if you maintain your property, it will likely increase in value far faster than other non-historic homes in the area.

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Invitation Homes CEO Dallas Tanner joins ‘Money Movers’ to discuss the state of the rental housing market and its impact on home affordability.

Dave :

Hello investors. My name’s Dave Meyer and welcome to the BiggerPockets Podcast Network. Today we are covering a breaking news story. If you haven’t heard already, there have been a bunch of antitrust lawsuits lobby against one of the biggest trade organizations in the entire country, the National Association of Realtors. And just last week, NAR, the National Association of Realtors has settled these antitrust lawsuits and what was contained in those settlement really is the potential to change the entire real estate investing industry. And I know that might sound a little bit dramatic, but it is really true. This could really fundamentally shift the way that people buy and sell real estate. So today, in order to fully understand this super important topic, we’re going to bring on Debra Kamin, who is a journalist from the New York Times to discuss the most recent developments. Before we bring on Debra, I just want to acknowledge that this recent and unfolding story has created a lot of uncertainty and a lot of strong opinions about what might happen next, what should happen, whether this was the right thing to do or not. In today’s episode, what we’re focusing on is what we actually know because there’s a lot of speculation and we’re going to just have to wait and see how a lot of things unfold over the coming months. But our purpose here in bringing in Debra is not to say one way or another what should be happening, but instead to just say what has actually happened so we can all learn the facts and form our own opinions about what this means for the real estate industry. So with that said, let’s bring on Debra.

Debra, thank you so much for joining us today.

Debra :

Thank you for having me. It’s fun to be here.

Dave :

For our listeners who might not be real estate agents or familiar with the whole drama that’s been going on, can we just start with the basics and have you explain to us what the National Association of Realtors is in the first place and what is their significance to the real estate industry?

Debra :

Dave, such a good question and the word that I’ve been using this week as I’ve been talking about the fallout from the story, the words are invisible hand. Essentially the National Association of Realtors has been for a hundred years like an invisible hand that’s guiding the entire housing market because they are such a large and powerful trade organization. And because to buy or sell a home in the us, you basically have to be a member. Otherwise they make it incredibly difficult.

Dave :

And that’s for real estate agents who need to be members of the National Association of Realtors, right?

Debra :

Correct. Exactly, yes.

Dave :

And how do they make it difficult to buy or sell a house if you’re not a member?

Debra :

So there’s a couple ways and pretty much from the entire transaction, from getting the house on the market to physically getting into the house to show it to a buyer or a seller, to then even completing all the documentation that comes with a home sale NAR is involved from the get-go. The most important way that they’ve really practiced control over the market is through these things called multiple listing services or MLSs. These are just databases where homes are listed for sale. So if I am selling a home and I hire a real estate agent and I say, okay, let’s put this house on the market, they’re going to put it on something called the MLS. But in almost every city in the US the MLS is actually owned and operated by the local subsidiary of NAR. And in order to access that database and see the houses for sale, you have to be a member. So it’s basically if you’re not a member, you can’t see if the homes are even on the market. You can’t bring buyers to them. You can’t operate in this space as an agent.

Dave :

Okay. So NAR is this essential part of the real estate buying and selling industry right now, as you said, they are sort of this invisible hand over the last couple of years they’ve faced many lawsuits, but there’s been one in particular over the last few months that has been really important. Can you tell us about these antitrust lawsuits?

Debra :

Absolutely, and I want to be really clear, there’s one that was really important. There was one lawsuit that was, they lost in October, but the settlement that we’re talking about actually wraps all those lawsuits together and is a global settlement because all of these lawsuits have made the same accusation. NAR has set rules for how agents are paid for the work that they do for the commission that they receive, and even how that commission is communicated to them. And because they are so powerful and because they control so many aspects of the housing industry, there have been arguments against them that these rules are essentially anti-competitive. I don’t know if you know about the 6%, I don’t know how deep you want to get into this, but are we familiar with the 6% that people pay to buy and sell a home? Do you want me to dig into it for a sec? I think

Dave :

A lot of our listeners are, but let’s get into it because I think the details do really matter here.

Debra :

Yeah, so 6% is this number that when we’re talking about this settlement with NAR, everybody has been throwing it around 6% is essentially the standard fee that you almost always have to pay somewhere between five and 6% in America. If you are selling a home, this fee is not written anywhere. It is not set in stone, it is not required. And that has been n NAR’s argument. But because the way they’ve set up the rules and because there’s really been no way for agents to be competitive in real estate, everyone has essentially charged the same fee. When you sell a home and you pay 6% to your agent, that agent then will take half of that and give 3% to the buyer’s agent. If I’m selling my house, I pretty much just have to take on this additional cost of 6% of the sale price that I’m going to pay and commission to my agent, and then that agent’s going to go ahead and pay the buyer’s agent.

And in 2018, 2019, a group of home sellers in Missouri looked at the contracts that they’d signed with their real estate agents and realized that they did not know that they could have negotiated that fee. And in some cases they didn’t even know they were paying that fee until the money had already come out of the transaction and they thought we might have a, so they went and they got an attorney. And that spiraled into a class action lawsuit in Missouri that in October of last year, NAR lost and the loss was nobody was shocked by the loss more than NAR themselves. They never expected it. And since then it’s really been just like a domino effect. That brings us to where we are today.

Dave :

Thank you for explaining that. That was a great explanation of how this works and how we’ve arrived. At this point, I do want to ask a little bit about these contracts because I hear from real estate agents all the time and I know from my own personal experience that these commissions are technically negotiable. And so what is sort of the point here or why did the jury side with the plaintiffs here saying that there was actually this collusion to keep prices high when technically you are able to negotiate,

Debra :

So technically you are able to negotiate and that has been NA’s argument all along, but whether people actually are aware that they can negotiate and whether if they negotiate they are then put at some sort of disadvantage in the market is an entirely different conversation. The two pieces that were argued in court were not even really about the 6%. The first was this rule that NAR has that a seller agent can offer commission to a buyer’s agent. And by doing so, it has made commissions high. So if I’m an agent selling a house, when I’m telling my clients you need to pay commission, that commission needs to be big enough that I get my piece and the buyer’s agent gets their piece. So that has inflated these commissions up to 6% because half of it has to be split with the buyer agent. And there was actually a rule that NAR had that anybody who was a member of the organization had to follow that if I’m a real estate agent and I’m selling a house, I have to make an offer of commission on these databases where homes are listed to the buyer’s agents.

And basically what that means is buyer’s agents, if they’re taking customers around to see homes, can see before they even take people into the homes, how much they stand to make if they sell that home. So why would anyone offer less than 3% if they’re trying to sell a house, why would they say, Hey, come see this house. I’m only going to give you 2%. You’re not going to get any buyers to come buy this house that you’re trying to sell. And that has kept commissions inflated artificially. So that was the first thing the jury said, this is a conspiracy, this is price fixing. There’s no room for competition here because these rules have made it that everyone’s offering the same thing because otherwise they can’t compete. The other aspect of the argument was this idea that offers of commission are made on these databases in the first place because that means that only people who are in this organization and following these rules can sell homes. It keeps all other people who might offer different types of commission or might even sell houses differently if they’re not members of NAR. It keeps them out of the market because if you can’t access the MLS, you can’t access home listings. You can’t sell a home without accessing home listings. So those were the two pieces that actually came down and were discussed court.

Dave :

Alright, so now that we know the basics of these lawsuits and where the 6% commission rate came from, we’re all wondering what happens next? What do these changes mean for you? Whether you’re an investor, an agent, or just someone trying to buy a home? Deborah spells out the scenarios we may see right after the break.

Welcome back to bigger news. I’m here with Debra Kamin from the New York Times talking about the breaking in NAR settlement and what it means for the real estate industry as a whole. Thank you for explaining that. Debra. I know this is sort of a complicated process, but the details do really matter here. And for everyone listening, I know you probably have your own opinions on which way you would’ve cited if you agree with the jury that this is collusion or if you agree with the NAR that this is a perfectly fair practice. I totally understand this is a complicated topic, but today in our conversation with Debra, I want to focus on what might happen next because the jury’s already made a decision and so let’s look forward into how this might impact all of us in the real estate investing industry. So Debra, tell us a little bit about this settlement. We just heard about the judgment that was made back in October. What is the settlement that took place over the last week?

Debra :

Yeah, so Friday morning, we’re talking really early Friday morning like 1:00 AM Friday morning NAR. And the attorneys for the plaintiffs in these settlements decided to settle and it came for many people as a surprise when the verdict came down in October, NAR stance really was that this was a false verdict. There was no price fixing, there was no collusion. They were going to appeal, they were going to appeal, they were going to appeal. That was their line. What happened after that lawsuit is the floodgates essentially opened and all these other copycat suits started being filed and by the time we got to Friday, NAR was facing something like 20 different lawsuits all making the same accusations, and the pressure had really become insurmountable. So they decided to settle. The amount of the settlement is $418 million, which is a fair amount of money, but what’s more important is the rules that they’ve agreed to change as a result of the settlement.

And those include that sellers agents can no longer make these offers of commission to buyer’s agents using the databases. That’s the main thing. And there’s other rule that homes have to be entered into these databases that are controlled by nar. That rule has also changed. So what it’s done is really for the first time in a hundred years broken this hold that NAR has had over the real estate industry and allowed the possibility for competition to enter the market. And we all know that when competition enters the market, prices tend to go down because people can compete and offer the safe services for less or offer different types of services, and that’s what we’re going to see.

Dave :

And can you tell us a little bit just logistically how this new competition may play out and drive prices down?

Debra :

Yeah, absolutely. So there’s been a lot of questions people have said, how is it possible this is going to lower prices if all this means that now buyers are going to have to pay their own agents? And the reasoning behind it, every economist I’ve spoken to has said the same thing. When you sell a house and you sit with your agent and you set the price that you’re going to put the house on the market for, it’s a number you agree upon with your agents. Anyone who’s ever sold a house has gone through this and the agent says you’re going to pay commission. That amount of commission then gets baked into the home sale price so that if I’m selling a house that’s worth a million dollars or I want to take home a million dollars from the home sale, we tack on enough so that the commission can come out of that sale and I can still walk away with money.

So home prices have been elevated artificially according to the lawsuit because they have included this high commission rate for so long. So if those commission rates go down, the amount that’s baked into the home price is also going to go down, which is going to lower home prices across the board. It might just be one or two percentage points, but when you think incrementally about the size of the US housing market and the amount of money that Americans have traditionally been paying for commissions, it’s something like a hundred billion a year that Americans spend on home commissions alone, economists forecast that number is going to go down by like 20 to $50 billion. So think about that reduction into home prices across the board that will lower home prices. It will also make the cost of moving lower because the commissions involved with moving are lower, which might encourage people to move more often, which will put more fluidity into the housing market and really just give a bit of an injection to a housing market that is so stagnant right now because affordability is so dire for so many Americans.

Dave :

I get how commissions could get forced down or a downward pressure could be applied to the seller side commission. Right now, if you’re a seller, you’re like, Hey, I only want to offer 2% or I’m only going to work with an agent who offers for two or 3%, but the part of the puzzle here that’s confusing to me is the buyer side. So if sellers aren’t going to pay for a buyer’s agent, does that mean we’re going to see a complete shift to where buyers have to pay a commission or a flat fleet or somehow pay for the real estate agent that they presumably will use?

Debra :

Dave? It’s such a good question and it’s one of the big things that people are most concerned about with this settlement because for so many buyers, especially first time buyers, they are barely scraping together enough pennies just to have a down payment. So now think, oh my God, now I have to pay commission to my agent on top of this. How am I possibly going to afford this? It is highly problematic. That being said, what this is going to do is allow for there to be new models for how buyers work with agents to enter the market. The way that we buy and sell houses today in the US is radically different than it was 50 years ago. It used to be if you wanted to buy a house, you called a real estate agent, they picked you up in their Volvo, you drove around, you saw the houses that they knew that were on the market, you looked to ’em, that was it.

Now 99 to a hundred percent of home buyers are using sites like Zillow and Redfin look at the market themselves before they work with an agent. This doesn’t mean that buyers still don’t need agents. This is probably the most important financial transaction of someone’s life and there’s a very strong argument to be made for working with an expert, but it does mean that perhaps what the rate that we’re paying should shift or should evolve or should somehow represent a different type of compensation because the process is different. So we might see agents who are charging a flat fee or charging by the hour. We might see sites like Redfin and Zillow making it so you can look at home listings and then buy through those sites the same way we can now book travel through Expedia and Kayak when we used to have to go through a travel agent. There’s a lot of options here for the entire market to completely be restructured and recalibrated because this choke hold that NAR has really had, and I use that word carefully, it’s been broken for the first time.

Dave :

Deborah, are there any models from other countries or elsewhere that could be an example of what might play out here in terms of new models for agents and buyers working together that we may see here in the us?

Debra :

That’s a really good question, Dave. I’ll tell you what I do know, and I’m not an expert on international home buying by any means, and I don’t want to pretend that I am. I will tell you that real estate commissions in the US are among the highest in the developed world. It’s something like number three out of all countries. In most countries, they’re not 6%. There’s something closer between two and 3%. In a lot of countries, buyers don’t use agents. In some countries dual agency where an agent represents both people is much more common. There are pros and cons for that argument. Some people say it’s great because it saves money. Other people say you have one person working both sides of a negotiation which causes problems. So yeah, I think actually a really good way for real estate agents to think, oh my God, what’s the day after going to look like once they recover from the blow of this news is to look at other countries and see if there is a model that would apply. Obviously the entire economy in the US is different than other countries and our housing market is different. So it’s not a perfect comparison, but it would be a good place to start to get some ideas.

Dave :

Yeah, it’s super interesting to think about. I am still trying to wrap my head around it because it’s just so foreign from what I’ve experienced being in this industry for the last 15 years. I’m wondering if you think there’s an opportunity or one of the models may be fewer people using real estate agents, and I am a big proponent of people using real estate agents. I think they add a tremendous amount of value and it sort of worries me a little bit to think about, particularly like you said, first time home buyers trying to go it alone on what can be a complex and really financially intensive decision.

Debra :

I totally agree with you. I will say I have gotten a lot of angry emails over the past few days from real estate agents and there are a lot of really high emotions right now. Completely understandably. Part of the reason for that is that real estate agents have been very much left on their own to make their own money to survive financially and then also to deal with the fallout of this lawsuit without any sort of support or guidance. Most of them are not employees, they’re freelancers. Even if they work for brokerages, they have to split that commission with the brokerage they work for, but they don’t have the benefits of being a full-time employee or the security or the safety. And most of them have been paying dues to NAR for years loyally and then feel like after putting in all that money and all that time NAR went to court, they lost and now it’s the agents who are left seeing their livelihoods potentially halved or slashed, and then also being vilified by some people who are saying, well, hey, I don’t even need an agent in the first place.

What I definitely think will happen as a result of this ruling is we are going to see fewer agents in the marketplace. There are a lot of real estate agents in America, tons and tons. So many people during the pandemic especially went and got their real estate license because it’s not that difficult. It takes about 40 to 50 hours of certification and when the market is really hot, you can make a lot of money really quickly selling a home. Those agents, the ones who are only selling a home casually here and there probably will leave the market. The ones who are really good at their jobs, the ones who really do provide an extremely useful benefit to buyers and sellers will stick around, but we’re going to see probably a time of transition before it flattens out. And then the ones who stick around, they have to change how they are paid and that’s going to be painful for some of them.

Dave :

Absolutely. Yeah. I forget the exact data, but there’s some stat where it shows something like 20% of agents do 80% of the volume. So there’s about 1.5 million members of NAR and as of the last reading, the amount of inventory on the market in the United States is 900,000,

Debra :

Right? So imagine how competitive it is. This is why real estate agents are panicking understandably. There’s so many agents, there’s so few houses, and now they’ve just been told even if you do sell the house, you’re going to make less than you plan to make less than your entire financial structure was built around. This is really tough news. The good news is that if we do see fewer agents, the ones who stick around stand to be more successful once the dust settles from this, I hope that’s at least comforting. That

Dave :

Is the feedback I’ve gotten. I have a lot of close personal friends and professional friends who are real estate agents, and that does seem to be sort of the prevailing belief here is that there is going to be some short-term pain. I think that’s the unfortunate news for the real estate agent industry, but a lot of the people I know who have built successful businesses over the last 10 or 20 years feel that what this will likely do is eliminate a lot of the people who are part-time agents, and I actually even know a couple part-time agents who are like, yeah, I’m probably not going to renew my license and have sort of owned up to that. This is no longer going to be worth it to them. But the people who make this their profession and who do add tremendous value to this industry, and especially obviously to home buyers, but in our industry of real estate investors, they add a tremendous amount of value. I think a lot of the experienced people I’ve talked to have echoed what you said, Debra, is that they feel like this might actually be beneficial to them in the long run, but it’s going to be an uncertain period here for at least six months a year, and it maybe even a little bit longer. Alright, we have to take one more short break, but stick around because Debra’s going to give us her insights on the future of NAR right after this.

Welcome back everyone. I’m here with real estate reporter Debra Kamin. Let’s jump back in.

Debra :

One of the other criticisms of NAR over the past few months that I’ve heard is that they have not done their job as a trade organization of convincing people of the value that real estate agents bring. So many people now hearing about this verdict are saying, oh, well, I’m just going to not use an agent. And okay, fine. Obviously you can buy anything you want with or without an agent. This is one of the nice things about living in America that is part of the economy, but there is something to be said for being guided through the transaction NAR and their role as the largest most powerful trade organization in the US has put out some sort of materials about the value of real estate agents, but they’re not getting into the market. People who are buying and selling homes, the message is not resonating. And that’s a problem too for real estate agents, especially for those who are thinking, wait a minute, is my entire financial future now at risk because of this ruling that they lost in court? So there’s a lot of anger towards them, and I think it’s understandable. There was a lot of arrogance going into this case and they did not expect to lose.

Dave :

Well, they have been quite successful historically at sort of swatting down lawsuits because they do get sued quite a lot and they have, but well,

Debra :

I’ve spent a lot of time examining their financials and they spend a lot of money on lawyers,

Dave :

Aren’t they? One of the biggest trade lobby groups in the whole country,

Debra :

Dave, they are the largest political action committee in the country. So not only are they the largest trade organization in America, they are the largest political action committee, and that has been really, you just hit the nail on the head. That has been the key to much of their power because in addition to being a trade group, they give money to candidates who support their agenda and they spend money to fight candidates who don’t support their agenda. So they’ve been able to really maintain a lot of their power and influence through that avenue. Now, if they stand to lose as many members as is projected, and some of the projections are, they’re going to lose up to two thirds of their membership. That also means they’re going to lose a lot of their political donations, their members who fund their pac. So that means that the lobbying arm that’s pushing a lot of these agendas in Washington is going to be a lot weaker. So that’s the real fallout couple years from now that I have my eye on for what the real impact of this is going to be. It’s not just about commissions being baked into home prices.

Dave :

Wow. And Kailyn, our producer just sent me a note that the amount spent lobbying by NAR in 2023 was $52.4 million.

Debra :

That’s actually probably not even the number because that’s

Dave :

The number really, it’s

Debra :

Higher. Well, that is the number that they have officially spent through their own channels, but they also make a lot of donations to other groups who then filter that donation to other groups. And that in addition to NAR, you have to remember there’s the National Association of Realtors, but then at every state, there’s the California Association of Realtors then have had Association of Realtors, and then every state has its own small city groups. So there’s the San Diego Association of Realtors. Each of these groups also have political action committees and also raise money, and a lot of the funds are flowing back and forth and then being moved to nonprofits, and this is a project that I’ve been working on. It’s a story that we haven’t published yet, but I’ve been tracking their finances for quite some time to really see the size and scope of this machine of money coming from the realtor lobby and where it goes, and it’s monumental.

Dave :

Wow. Well, it really makes you wonder what the future of NAR is going to be if there’s a lot of dissatisfaction among its members. People are projecting such huge losses. Do you have any thoughts on how this might shake out for the organization itself?

Debra :

I don’t see a day where NAR is gone completely. I think that they a serve an extremely important role in the housing industry and the real estate industry, and they’ve been around for a very long time. There’s a lot of legacy and a lot of history, but I also cannot imagine a future where they have the same unchecked influence and sort of wild power that they had a year ago. They have been through so much over the past year, not just the lawsuits, but also the sexual harassment. Have we talked about that? Do we want to talk about the sexual harassment?

Dave :

I think we should because their organization I do. But yeah, so I know there’s been a lot of internal turmoil at NAR, but could you fill us in?

Debra :

Yeah, I mean, I enter the story at this point in many ways. When I became a real estate reporter at the New York Times, which was a little bit over a year ago, I had never heard of NAR. Most people who have not bought or sold a home or not directly involved with real estate investing have never heard of NAR. They just know that they have a realtor and they think realtor is a normal word. They don’t even know that realtor is a word that has been trademarked by NAR, and you cannot use the word unless you are a member. None of this was on my radar. So I started looking into them and I became aware of many allegations of extreme sexual harassment and bullying at the National Association of Realtors. Most of those allegations were directed against one man, Kenny Parcell, who was the president of the organization.

And at the times, I published an expose on these allegations last August, and that was really the moment that NAR entered the global stage in the conversation. A lot of people who read that story had never heard of them and did not know how powerful they were. Kenny Parcell resigned two days after the article ran, and there was a lot of uproar at the organization from staffers because not only had he allegedly been sexually harassing women, many women who had been whistleblowers were paid off. There had been lawsuits that had been quietly closed, and there were a lot of calls for the CEO to resign and for there to be other staffing changes. All of this was happening in the background when NAR went to court in October. So since that moment, they’re now on their third president in six months and they’re on their second CEO. There’ve been a lot of other resignations since then. So they’re having all of this turmoil with their leadership and all these legal challenges, and every single one of these events is like a cut, right? So you add up enough cuts, their power has really been blunted because of it, and their reputation has been blunted.

Dave :

Wow. Yeah. It sounds like we’re just sort of at the beginning. I know we’ve, A lot has already happened per your reporting and multiple leadership changes, multiple lawsuits, but I think this is going to be a story that continues to unfold, it sounds like for months on the NAR front and certainly on the commission front and how this all impacts real estate agents. So Debra, we’ll have to have you back hopefully sometime in the near future to fill us in on how this story continues to evolve.

Debra :

I’d be very happy to do so. Thank you.

Dave :

Thanks again for joining us, Debra. We appreciate it.

Debra :

Of course.

Dave :

Another big thanks to Debra for joining us for this breaking news episode. Now, I know that this is a very important and often controversial and sometimes emotional story that really impacts every corner of the real estate investing industry. I, myself, am still trying to think through all the implications of this settlement, and I do want to recognize that for real estate agents and people who work with them, this can be a difficult and maybe a frightening time right now, and we would love to hear from you. If you have some comments or thoughts on what this means for you and your industry, we would really appreciate your input. So if you’re watching this on YouTube, please comment in the comments below. We also have BiggerPockets forums about this, BiggerPockets blogs that you can comment on, because we want to hear from those of you who in our industry, that this impacts whether you’re a real estate investor, a real estate agent, or someone else in the real estate industry. Thank you all so much for listening, and we’ll see you again soon on the BiggerPockets Podcast Network on the Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.