The Exit Engine Podcast Episode 6: The Brave New World of Real Estate

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Welcome to my ExitEngine Podcast, Episode 6. Hey, John.

Joe, how are you today?

Good, man. How are you doing?

I'm doing great.

It's a, uh, we're— this is a very special episode. of the Exit Engine Podcast today.

Because we are— very special episode. Yeah, we're going to talk about M&A, but we're also going to talk about real estate M&A specifically, which is kind of cool.

It's a very, very, uh, important time to have to actually have this discussion. So it's, uh, because today, the day we're recording this, Friday, August 16th, is an auspicious day in the history of real estate.

Yeah, it's funny that the, the actual— the day is the 17th, right? Tomorrow is the day where we have the actual implementation. But yeah, today everyone in the real estate industry, of which I used to be a part, you used to be a part, is sort of freaking out over these, uh, changes that are, that are the result of a settlement that the National Association of Realtors had with, uh, the DOJ.

That's right. So there's going to be a lot of— there's a lot of changes that have to be implemented. A lot of places don't know how to implement these changes. The nature of the real estate industry in general is obviously very much a kind of, you know, first of all, the bulk of it is a franchise model.

Yep. Right?

There are some independent companies still and things like that, obviously, but the size of your company and your ability to weather this particular storm or these changes is going to have a pretty significant impact, we think, on M&A in this space right now. Right.

Yeah. Because I think what's going to happen is, again, from my experience, I'll speak for myself, is from my experience is if there's any reduction in commission rate is what the goal of, I think, the DOJ when they did this is to make consumers be able to negotiate commissions more effectively. And we'll get into the details, but what they want to have is commissions come down. And when commissions come down, that's a good thing for consumers, right? in and of itself, if someone's paying less to buy or sell a house, hey, hey, awesome, more money in their pocket. But, but to your point about the result of that for businesses is if consumers are saving, then businesses aren't making, uh, the same money that they were making from, from the revenue side, uh, you know, when they were— when the commissions— when commissions were higher, or when the commissions are higher now.

So maybe it, maybe it makes sense to start with just, just for— because obviously not everybody who's listening to this podcast right now is going to be in the real estate industry. Yeah, so let's, let's kind of— can we just give a quick overview of what is actually going on right now and what the situation is? How did we get here and, and what's the, what, what's the, what's the change?

Yeah, and, and, and the change results from a lawsuit by specifically by Missouri home sellers. And so what Missouri home sellers were, were complaining about and what ultimately they sued was, um, that they were forced to pay commission to buyer's agents, right? So in other words, the way that the real estate industry works now is typically a commission— and there's no standard commission, real estate agents go crazy when they— when you hear the word standard— but the typical commission was between 5% and 6%, but depending on where you are in the country. And that 5% or 6% was, was paid by the seller of a home. And typically what would happen is the listing agent, or the agent working for the seller, would take, let's call it, 2.5% for themselves, and they would offer out 2.5% in comp— in, um, in compensation to a buyer's agent. And so any buyer's agent that brings a buyer that, that purchases the home, they would split that 5% commission, for example purposes. So 2.5% would be paid to the listing agent's firm Let's call it Century 21 for argument's sake. And then 2.5% would be paid to Coldwell Banker, which is the buyer's agent, uh, real estate brokerage. And, and that worked for a long time, right? There was a long period of time where those— that was the typical, um, way it worked.

And that was, and that was actually a change that only kind of actually came into play really in the '90s.

Yes.

In terms of the buyer getting anything. Right, because—

right, there used to be— right, exactly, good point. Back before that, there was what they— there was— there were people that would not cooperate, right? So there was, there was a listing agent. The listing agent in my example that worked for Century 21 before would keep that whole commission herself, and the buyer would have to pay the buyer's agent, or there wouldn't be buyer's agents, right? There was all sorts of sort of differences where people wouldn't choose to use buyer's agents. Um, And then what, what, what came along was, oh no, let's have a cooperative commission between the listing agent and the buyer's agent to share that commission from the seller. And the problem with that is these Missouri home sellers were saying, well, why are we paying— in essence, why are we paying the people who are negotiating against us, right? When you have a home seller who wants to sell their home for $500,000, let's just use that number, and you have a buyer That wants to buy the home for $480,000. Well, what's what their complaint was was why am I paying the buyer's agent who's negotiating against my listing agent, my seller's agent? And the DOJ after a long after many and there's a bunch of suits. This one's called Moral in in Missouri, but there's a bunch of lawsuits around the country that did this. The DOJ basically said came in and said okay. With the ultimate, and their goal, the DOJ's goal was to make the buyer negotiate with the buyer for commission and make the seller negotiate with the seller for commission. Because what they're saying is that this arrangement where sellers control both sides of the deal, sometimes buyer's agents would say, "Well, you don't have to pay me anything, buyer. That's help. I'm helping you buy the home because." The listing agent's going to pay me. So, so in essence, so in essence, the, the, um, the, uh, the commissions were inflated because no one was negotiating on at least one side of the deal. Sure, if you're a, if you're a listing agent or you're a list— you're a seller, you can negotiate the price down from 6% to 5% or even 4.5% depending on where you are in the country. But the buyer and the buyer agent didn't really care because They weren't paying the commission. So the thinking is that by taking the listing agent commission and the buyer's agent commission and making them negotiate separately, then the commissions will come down because each is able to negotiate with, um, with their agent specifically.

So each, each, the buyer and the seller now are going to be ostensibly be, have to be in charge of their own negotiations with their own representatives as on their side of the deal, right?

Yeah. The problem with that, with, yes, you're exactly right, Joe, and well put. problem with this settlement is it doesn't specifically spell that out in the way that you just said. Is what they're doing— the 2 basic changes, and there's 2 basic changes. One is there's something called multiple listing services across the country, and you can think of these in the way like they're networks of agents, and all the listings in that area are, are, um, shared in that network, or in that network, in that database of listings. So if you're a real estate agent in New Jersey, you can look up the multiple listing service, all the listings in, uh, in Summit, New Jersey, as an example, and you'll get information about the house, but you also get information about the commission rate, um, that the, that the listing agent's willing to pay out to you. You get all sorts of agent remarks like, hey, the, the open house is going to be— is going to be on Saturday, and here's the times, here's the lockboxes if you want to show somebody or you want to do the showing. So those multiple listing services are now prevented from sharing that cooperative commission, that 2.5% in our earlier example, um, in the future. So that's one big change. So yes, in essence, the DOJ has prevented that from happening, and that's what the National Association of Realtors agreed to. But that doesn't prevent people from having a phone call and saying, hey, I'm— yes, I'm, I'm willing to offer 2.5%. Now ultimately, you're right that the DOJ wants to prevent that from happening, so no shared commissions. But that's not part of this settlement yet. Um, and so, so, so that's, that's coming soon. And there's a couple of attorneys who say, look, the whole point of this is to, is to take real estate commissions and not have the seller communicate with the buyer at all about commission. That's not, that's not, we're not there yet, um, but that's the goal. Um, so that's one, that's the one big change. The second big change is buyer's agency agreements. And, and, and currently there was, there were 18 states where buyer's agency agreements, where If I'm buying a house, I would have to sign an agreement with a buyer's agent saying X, Y, and Z. You agree to take me out. It's it's six months. It's a six-month process, and and usually those agreements said something like you know if I didn't get cooperative commission from the seller, you would be responsible for X, Y, and Z. And and often ninety-nine percent of the time that happened. There was cooperative commission in those deals. But now what they're saying is those. Those buyer's agency agreements must be everywhere in the country, and they're required to be signed even if they're only valid for like one house or one day or one hour. And the point of that, I believe, from the DOJ's perspective, is that they want to create that contractual agreement link between the buyer and the buyer agent, with eventually the buyer's agent, like we talked about before, the buyer's The buyer of the house will pay the buyer agent directly some commission rate, this, and the seller will continue to pay, uh, the seller's agent some commission rate. But those are the 2 things that are being implemented, like, in whatever, 10 hours or something.

So this is going to make a— this is a revenue issue, isn't it, for, for some of these companies?

It'll be a huge revenue—

You're talking about the agents as if they're individuals, but the reality is, is that agent who works for that brokerage has also probably got a 60/40, 50/50, maybe a 70/30 split with the— of that commission with the rest of the brokerage, right?

Exactly. So, so in the example that we were talking about, let's, let's call it 2.5%, and let's use a 70/30 split with the agent and the brokerage. So that 2.5% on the buy side, right? So the agent at Coldwell Banker who has a 70% split with her brokerage the— she gets 70% of the 2.5% commission and the brokerage gets 30% of that 2.5% commission. Now, that 2.5% commission will likely go down, right? Because the, the buyer will be— you know, the 2.5% commission is, is sort of a vestige of a past time when agents were being taken around in back of cars and, and they were, they were exclusively being shown these properties for the first time by this agent. Whereas now everyone's on Zillow, everyone's on Realtor.com, And so the activities that an agent's doing is, is much less. And so what, what, you know, what people will probably do is— and the fact that they can negotiate, right? When you give someone the chance to negotiate, they will do so, or some subset of them will do so.

Right, right.

You know, like, it's like when you go in and you go, you get a, a quote from a construction person, like, okay, or I was just doing this last week, hey, it's, it's gonna be, um, $11,500 for this. Well, can you do it for 10 grand? Be like, yeah, okay, I can do it for 10 grand. And that's what's going to happen with commissions. And that's what people think is going to happen, is these commission rates will go down now that Joe and Julie, uh, buyer will be able to negotiate directly with the agent that's providing them the services, as opposed to some seller who they don't even know.

So then we're facing a situation where obviously, where the— where, where on the buy side especially— well, really on either side, because either the sell side was always negotiable.

Technically, correct.

And, and it was just that the seller was then negotiate— essentially negotiate— or so the seller's agent was then negotiating with the buyer's agent or stating in the MLS that I'm willing to split, you know. And most of the time it was— 99% of the time was about a 50% split. The other thing that I think potentially was happening though was that there were a back— there were backroom deals being done between sellers, sellers' agents, and buyers' agents that were where it wasn't being seen. Which was one of the concerns, or the concern that that was happening. I'm not sure how much it actually was, but the issue really is that if I have to give up— if I'm already— it's already hard enough to be a real estate agent because of it. People don't realize this, but it's a volume business.

Yes.

So when you walk around and you sell your house and you're like, I have to give my agent 6% of the thing or whatever, and then he's going to split it— first of all, they don't even realize that you're splitting it with the buyer's agent half the time. No, you're only getting half of that as the— but that's not you getting that, the seller or the buyer— sorry, the agent. That's the— that is the brokerage getting that. And then the brokerage is giving you 30% or 70% or 50% or whatever your negotiated rate with them is. And that changes based on your seniority and how long you've been there and your volume. Exactly, your volume and all that stuff, right? So, but what people don't realize is that Let's do some math real quick, right? You said a $500,000 house, right? What is the total— let's say a 5% commission on a $500,000 house, okay, is, is $25,000.

Correct.

That $25,000 is split in half. Half goes to the Coldwell Banker brokerage in this example. The other half goes to the Century 21 brokerage. Of that $25,000 The, the, the— based on the rates that the, that the, that the agents are— I've negotiated with their brokerage, they are getting 70— let's just say the Coldwell Banker agent is getting 70% of that $25,000.

Yeah, right.

And then they're gonna pay taxes on that and all the other stuff and whatever, right? So—

And they have to market the house. There's all sorts of costs, you know. They have to do the photos and they have to do all these.

By the way, those costs are, are shouldered by the agent in most cases. Not brokerage.

The brokerage may have like a deal with a photographer that's like, oh, give our brokerages a good deal.

They've got some technology and they've got some things that they're giving you and stuff like that as part of your— as part of what you're paying for with your commission, with your fee, which is really what that is, right? So I think it's an interesting point though, is that this, this means now, okay, that potentially that if you're a buyer's— if you are a buyer agent And remember that the buyer agent thing was invented because real estate used to be the Wild West. I mean, we think M&A is the Wild West. Real estate, man, was it— back until the '90s was a buyer beware situation.

Oh, really?

It was no representation for buyers. You went in and you— the same agent that was the listing agent was the person who sold you the house, and they got all the commission.

And right, and this is— and the situation would be in the example you have is, imagine this: the listing agent is representing the seller, yet she's negotiating and, and dealing with you so that it's like kind of, are you working for me? Am I— are you working in my best interest? I'm like, no, definitely not.

And the answer was right. The answer is no. I only work for the seller, so buyer beware. And that's when buyer agents, they became a thing to protect the interest of the buyers. And the only fair way to do that, or the— they thought the fair way to do that was to split the commission. And it made a lot of sense.

It made a lot of sense, and it made a lot of sense to have. And if you think about it from a, from a preservation standpoint, the listing agents wanted to keep the commission on their side. So as an example, and I'm not saying this is— this has always happened, but if they ever wanted to keep 3%, as an example, and offer 2.5% out if the total commission was 5.5%, They would have— they never wanted to give up the ability to negotiate the commission, even, even with buyer's agency representation. Does that make sense?

Right, right, right. So that's the— that's the— so now what we're seeing is a situation where potentially, as a buyer's agent, I now have to go to— in order to get the client, I have to now go and negotiate ahead of time what is the rate I'm going to charge you for finding you, helping you find a house, and help walking you through the transaction and making sure all the stuff gets done, which is really, by the way, the bulk of the job of the agent.

Yeah.

Most people don't realize is that most of what they're doing is the backend stuff, making sure that the documents get put in, that the deposit gets made, that the title company gets involved. If there's states that require legal review, that that happens. They're the project manager that is basically guiding this transaction through the process. And that hope— and, and by the way, when you have an inspection and you've got to negotiate now with the other side, that's the negotiation is done, is done traditionally by the, by your agents, between the agents and things like that. Okay. And the cooperation of agents was what the MLS was invented for, the Multiple Listing Service. Yeah, your ability to see these listings on Zillow or anywhere else is because some enterprising person back in the '90s decided to, to, to basically take all this stuff and put it into one main system so that everybody could see what houses were available, where they were, and what their prices were, and then the whole thing. And that grew from there over the last 30 years.

And there— and, and, and I don't know what the number is now, but when I was, when I was doing this in back in 2022 and 2023, There were like 600 MLSs across the country. So there's like, there's like 15 in Southern California that like have like, like there's one in Ojai, California, which is always the example that I give.

They're private, privately owned entities. They are not public entities.

Right. But it's not as if like an MLS would be a one-to-one relationship with a city or a state, right? There's some cases where that's the case, but like in Ojai, California, there's one that literally is for Ojai, California, and that's it. And there's, there's, there's a couple, there's a couple in New Jersey, there's a couple in Pennsylvania, there's one big one in Massachusetts, but it really varies across the country. But at one point there were like 750 back in the day, and I think now there's like 500. And there's, there's, there's going to be consolidation among them, there's going to be consolidation among, among brokerages, they're going to be consolidation among teams because the money is just not going to be there in the future. Or that's at least what I think is, and many people think, not just me. There's going to be a lot of consolidation because you can only squeeze 100 cents out of a dollar, right? You can't get any more than that. Right.

So now we're in a situation where all this kind of trickles kind of like uphill in a way, right? Which is that if the buyer now has to negotiate a commission, that commission's probably going to be lower. Now, if you, depending on who you ask, sometimes the buyer job is harder than the seller job in terms of the amount of time that you're spending with people, and you are driving around and looking at places and the whole thing. The, the, the process is not entirely online. It still requires people to leave their homes and get in the backs of real estate agents' cars and drive to places and see those places, um, and, and, you know, to make determinations. And then is the negotiation and the putting in, writing the offer and doing all this stuff. So the, the workload on the buyer is not less, that's for sure. It's probably in some cases a little bit more in terms of once the house is listed, the listing agent's job is pretty much done except for the negotiation of, of what the— of offers that are— that come. Whereas the buyer is actually— the buyer's agent is actually out there like physically with people driving around, spending a lot of time and energy just selling, showing someone 25 houses before they make a determination, right?

Or yeah, what I've noticed is my wife is a real estate agent, and perfect, uh, you know, in disclosure— and, um, in the interest of disclosure, I should say— and her activities have changed over time, right? She's doing less of the, I'm picking them all up at 9 o'clock on a Saturday and showing them 11 houses, to, hey, I want to put an offer on this house, Karen, can you do this for me, right? So their activities have changed a little bit.

Because of the nature of the market?

No, just because of the nature of technology, right? The technology exists. Zillow is usually— what would happen back in the day is you would sit down with your agent and be like, okay, I want a 3-bedroom, 2-bath in, in these 4 communities, um, you know, outside of New York City. Can you come up with a list of this? And this is before sort of Zillow. Now what, what, what happens now is The person finds an individual house, which they don't end up buying because that's kind of rare. Maybe they do, but they come to the agent with one individual house or 2 houses like, I want to— can you set up appointments to see these 2 houses? And then based on that, it's sort of the back— you get to the same place, but it's— you get to, oh, they want a 3-bedroom, 3-bath, they want a pool too, and they want all the attributes that they didn't tell you in the initial discussion or the discussion they had in the past. It's like, oh, Oh, you want to be on a quiet street based on these 2 listings. So the agent's inferring a lot of information from the attributes of the listing that they're asking to see. And so it takes the process, it sort of compacts the process from, you know, it used to be like 6 or 7 or 8 weeks, maybe even months to when they buy a house or put in an offer. Now it's condensed. And so agents, buyer's agents are doing different activities and more of some of those different activities.

And I would think, though, that in addition to that, that in some markets, the The heat of the market and, you know, markets where there's— where there is high demand and low inventory, where people have to make offers quickly and the whole thing, obviously have compacted that timeframe even more, right?

Exactly. I mean, yes, exactly correct. So when I say 6 weeks, it's probably really 3, or it could be 2, or it could be, hey, in a hot market, you need to get this offer in by Sunday night because they're taking best and final on Tuesday. The fact that you just saw it for the first time, it could have been on the market for 3 weeks and you, you're late to the party, so to speak.

So, so now what we got a situation is, is that potentially is that buyers have to negotiate on their own, right? And that now in some, in some ways maybe opens up different models to occur. Okay. Huge.

Yes.

Right. So for instance, I always thought that being a buyer, the whole thing was more guidance and more consultative than it was being a seller's agent in some cases. And that, you know, potentially a fee for your service is now possible as opposed to splitting the commission on the transaction. However, it's a, it's a radical shift from what people are expecting. And right now, the biggest, the biggest hits will come early on because of the just the nature of the change, which is that potentially buyers' agents will get taken advantage of because the sellers know the buyers themselves know. That their commission is negotiable and that they will say, hey, look, look, man, um, you know, I'll give you, you know, uh, the issue is that most— the reason that home— one of the reasons why home buying became affordable, okay? And this is the American dream. The second biggest American dream, or the first biggest American dream, is owning a home. The second biggest is owning a business.

It is Yep.

But the idea here is that, you know, potentially that I, I, I, as a buyer's agent, just let's take the process from the beginning.

Yeah.

And your example, I've come online, I've seen a house, I, I hit the button that says contact agent because that's normally how people start. They will take the listing agent themselves, okay, and start there, and the listing agent then quickly turns into a buyer's agent And start showing them other houses because that one, that exact one isn't right for whatever reason and blah, blah, blah.

Exactly right.

So that's generally the way that this stuff starts to unfold. The process starts to unfold. However, if I am in, in the, in the way that it was up until tomorrow, I am— I have been able to— I knew I was going to get whatever the listing was. The commission was already in there, and whatever that was, I was get— if I made the deal, I was guaranteed to get that money. Now I'm in a situation where I have to negotiate on my own with the buyers about how much they will pay me at closing. The problem is—

Yep, you're getting into a big problem right now.

Right. The buyers are— where are they getting the money to do this stuff? From a mortgage.

And you can't finance a commission.

And you can't finance a commission.

And, and so, right, so you're exactly right, is you can get, you can get your attorney, or you can get your mortgage broker, mortgage banker, whoever Private wealth advisor to say, hey, they can afford a house for $400,000, or they they're pre-approved for $400,000. What you can't do is have $400,000 cover the the your buyer's agent commission. So they have to come out of pocket. So in addition to the down payment, so let's just let's just call it you know they're putting down 20% in that $400,000 example. They're going to come up with you have to come up with 80 grand. Plus, so they had to come up with $80,000 before. If they're buying a house for $480,000, they have to come up with the $80,000 down payment, the $400,000 mortgage is mortgage, and then in addition, 2.5% of the total price of the, of the property. So that's a lot of money. That's, uh, doing the math quickly, that's like $10,000 that they have to come out of that they didn't think come out of their pocket. So you Yes. So this is going— and the reason that this is sort of chaotic right now is what— that's one of the main reasons, Joe, that you just mentioned is the Fannie and Freddie Mae and all sorts of other lenders out there, they're not able to finance. So what's going to happen when this goes into effect? What's going to happen? But the bigger impact is sort of on— is when it gets into our business, right? It gets into M&A and why we got into a little bit, but I want to get into that because in the interest of time, is the reason that this will impact and come into our world very quickly is that many of these smaller size brokerage, not Coldwell Banker, not Century 21, but brokerages that exist all across the country that are smaller, that have 2 or 3 offices, that won't be able to sustain themselves from a revenue perspective if their buy-side commissions go down. If they have a, if they have a brokerage that they have, again, they have 100 agents, or they not even 100 agents, they have 50 agents. And 25 of them are listing agents and 25 of them are buy-side agents, meaning most of their business is on those sides. If 25 agents all of a sudden go down to, let's call it 15, or let's call it 12, um, on the buy side because they're not able to negotiate, they're not able to change with the times, they're not able to garner, to get money from buyers— because there will be, there will be some agents that won't be able to convince a buyer to pay them That's lost revenue to the business, and the broker who owns that brokerage will really have to think about how he or she is going to survive when their buy-side commissions go down. And presumably their sell-side commissions will go down too, because the, the seller will realize, well, I don't have to pay— maybe I don't have to pay a percent of the house, I'll pay a flat fee like you were saying. Okay, we'll offer a buy— we'll offer the buy-side person $5,000 flat fee. Well, that's a lot less in, in many cases than the percentage of the home. You know, I think the average sales price across the country was like $440,000 now, which is insane. But, um, but, you know, $5,000 is a lot less than, you know, 2.5% of, you know, $440,000.

So, so the, the issue, the issue is, so you're going to see declining revenue probably on both sides of the transaction.

Yeah.

Because— and by the way, probably a slow, a slowdown potentially even in the housing market in general, because less houses will sell because more— less people will have the capital they need to be able to actually pay an agent. So what happens is— what happens? Do we go back to the Wild West it was in the '90s where the listing agent is just the, just the person who does everything? Do I? Is there a new model where I give you just a transaction agent, or or or or or where where there's some other kind of is there room for some other lower paid person to be able to to guide you through things? Probably not, because the other thing that it conflicts with it conflicts with is the state laws about licensing real estate agents. You're not even allowed to like rent apartments to people in Pennsylvania without a real estate. license. Like, you know, there is not— there is— it's a, it's a very highly regulated situation because of the way that it used to be.

Yeah.

All of this regulation has only been really in the last 30 years. So now we're in a situation where, where, where this housing market slows. Yeah, I have to definitely have to try to find, especially if I'm a smaller brokerage, I have to find some other way of, you know, of, of, of I have to first of all come up with a model that I can give my agents to help them get commissions as buyers' agents to begin with, right? And there might be, it might be a commission thing, it might be a fee, it might be a retainer or whatever, you know, other thing that is. But getting that, especially at the beginning for people, is going to be hard. The worst-case scenario is that we just let the— they just set the, the, you know, the, the, the now regulated Uh, you know, uh, real estate industry back 30 years to a point where it's actually going to be worse for consumers potentially, because the consumers will, will, will take no representation in order to save money.

Yeah, and, and like you mentioned earlier, there's all sorts of business models that are, that are going on right now, right? That are— one in particular in Iowa that I've talked to the brokerage owner a couple months ago is he's He is only doing 3% listings. So he, he, he offers his— so his, his deal is, hey, I'm going to compete with, uh, the people who are still doing these 5% and 6% listing agreements in our example before and sharing some of the commission. Like, no, no, I only work for you, seller. And every buyer, when they put in an offer on one of his listings, they list the commission that they would like and And so the, so the seller can take all those, all those offers and say, okay, well, Joe is offering me X amount with X percent commission, and Sally's offering me X amount and Y percent commission. And so it's basically the total. They're thinking of it not in terms of the sale price of the home, but the total proceeds that would net to the seller, which is a, which is a really smart way to do things and say, Look, I'm—

he's—

then he, then he's able to say, I'm not conflicted anymore. My agents on this side only work for the listing agent. We're only concerned with this, and everything that becomes part of the transaction is, is required in the offer. So the offer requires a listing price— I mean, a price they're willing to pay— as well as a commission rate that the buyer, the buyer's agent, is trying to collect from the seller. And then the seller can decide, okay, I want to pay this. I'll get this lower commission rate at this higher rate, or whatever it happens to be. So there's more mechanics, and that requires more skill from the buy-side agent to put that together for their customer, as well as interpreting that from the listing side. So that's a cool business model that's happening now.

So that's something that's different, the whole thing. That's something that could potentially save it, because all you're doing is putting the decision in the hands of the consumer, which is really what you want to be able to do at the end of the day, which is is what they're trying to protect.

And, and that's what they're trying— and, and, and that example is, I think the DOJ will like that, like the, the fact that, that the buyer is talking to the buyer agent and get— and getting advice from her, and the seller is getting advice from the seller's agent. And like in that example, as opposed to the, the sort of oddity of, oh no, the, the listing agent's going to do this, and, and there's all sorts of ways that people have sort of tried to work around the settlement that the DOJ papered, whereas I just think it's going to come out that what the DOJ wants is this bifurcation. Buyers deal with buyers, sellers deal with sellers, and the, the only way that they meet is when they agree on a transaction and a price and a commission rate.

Gotcha. So, uh, the other thing, obviously fallout of this, is that if we're talking about less revenue into these smaller brokerages and So, you're talking about then potentially a lot more consolidation over the next couple of years in the real estate industry in terms of mergers and acquisitions, right?

Exactly. Many of those 3, 2, 3, 4 office, even franchise companies, right? Or the companies that are independent and not part, you know, John Kniff Real Estate or Jo Stapleton Real Estate that exists across the country are going to find the economics of their business will change drastically. And you'll see some more specialization. You'll see smaller firms. You'll see firms that only focus on, on buyers. You'll see only firms that focus on sellers. But the point is, the traditional real estate where you collected some percentage of your revenue from the buy-side transactions, some percentage of revenue from the sell-side transactions, and then maybe if you had a mortgage or a title business, you'd do that too. The margins are just going to come down because the revenue is going to come down and the net profit you're going to realize is going to come down.

So the reality is that we're probably going to see, again, a lot more sell-off of smaller things or the absorption of smaller companies into larger ones, right? The larger ones can sustain it because they've got an economy of scale that the smaller ones won't be able to have.

Exactly.

So, that'll be a new efficiency, you know, there that will be competitive from a competitive standpoint. And so, the question is, what can, what should the smart, you know, real estate brokerage right now, that if you're in a, let's say, a midsize or below brokerage, what should they be doing now in terms of, you know, in terms of examining the, you know, the possibilities around merger and acquisition?

Yeah, I mean, one of the two— there's two things I think of right off the top of my head. One, examine your financial statements, right? Look at your financial statements and look at your business and have that cold-hearted, calculated, clear view of your business that you can model something very easily. And we do this in my exit engine all the time is we model a change to the business, right? We help people say, hey, if a huge competitor comes in and you— and this happens, or there's a regulatory effect like this one? If— what happens if your revenue in one product goes away or your business goes down 20%? So, you know, that's one thing to look at in the financial statements. And 2 is join my exit engine. I know this sounds selfish and self-serving, but, but the reality is that, that, that in my experience and with my experience, that We are going to have a number of real estate brokerage owners in our, in our system now. I've already gotten calls from a couple of them in the last, let's say, 2 weeks, and they're thinking about joining because they, they're getting to the point where this is going to drive people out of the business. And what My Exit Engine does is it helps you plan for your exit. And there's nothing— this isn't going to happen overnight. This isn't going to be a transition over the next couple— next, it's going to be a transition, right? But over the next couple of years, your business will drastically change. This is the time to plan your exit and fix your business and modify your business so that when you do sell it to a larger firm or you, or you, or you find a partner to take your business on and you move along, is they are going to ask you the questions that we are talking about today. What percentage of your business comes from buy-side transactions? What percentage of your business comes from sell-side transactions? Where is your other revenue coming from so that you can position your business for sale and to say, hey, I've changed over the last 2 years from an even 50/50 split to 75%, 25%, or 80%, 20%, and 80% being listings and 20% being buyers, which could be a strategy that you choose, right?

And so the idea is that what we're, what we're What we'd like people to know is that there are options. Okay, so if you find yourself being at one of these particular brokers who might be in, in a situation where you don't know what to do, where you're concerned about the dropping revenue and things like that, where now— and to John's point, now is the time to start planning and protecting and hedging your bets. We're not saying that every, every small broker should go out there and sell themselves. That's not what we're saying.

No.

What we are saying is, now is the— if there— if you haven't done it before, now is the ideal time to start looking at what an exit could mean and what it— what it is that you could do to move on from this industry or into another situation and get some— be able to get some capital out of this business, this real estate business, to be able to do that. Whether that's retirement, whether that's opening and going into a completely different industry, or starting a new business, Or potentially whether it's about— remember, we, we talk about acquiring stuff, you know, about, about selling your business all the time, but the reality is you might be pro— you might be one of the lucky ones who's primed to acquire another real estate agency.

Well, yeah, just exactly correct. And just like my, my buddy in Iowa who, who has already implemented this, has already learned, has already gone through the pain points, I know for a fact that he's going to look to to buy companies and consolidate companies and move them more towards his brokerage model. So this is what they call like an inflection point. And it's funny because usually you don't see one. There's, I mean, with regulatory changes, yes, you do. But sometimes a competitor just comes in and like decimates an industry and comes in and completely changes the industry. And you don't have the chance to do this. This is an opportunity, right? You need to look at this, these changes as an opportunity to change your business and, and strengthen your business for what will be happening in the future as opposed to what has happened in the past.

Absolutely right. So we implore everybody, if you're in the real estate business right now, you own a real estate company, you're in your brokerage, um, and you're medium to small brokerage, um, come join Exit Engine. Uh, come to myexitengine.com, take a look, take our assessment. Have a call with us. Let us know what's going on because this, this is an opportunity, guys. And, and I know that as much as we've spent probably the last better part of the last year and a half or so since it's been going on worried and fretting over what will happen, uh, well, it's here. Um, it's time to take an honest look at stuff. And we've got a lot of people here at ExitEngine who can help you, um, and potentially even maybe even set you up with a, with a buyer or seller depending on which way you wanted to go and that kind of thing. So, really good time right now to come to myexitengine.com and subscribe. And whatever you do, like this podcast, please. Love to have you. Hope this was informative for you guys. Want to have you subscribe to the podcast. We do this— this comes out once a week. We talk about everything that has to do with mergers and acquisitions and exit planning and all that here at ExitEngine. So, if this is the first time you're joining us because of the real estate angle, then welcome. Um, but there's lots more to learn here, and becoming a member of ExitEngine is good. Now is the time, right, John?

Yeah, and exactly correct, Joe. And I'll, I just echo, you know, go to My ExitEngine, follow those things, uh, follow our site, go to LinkedIn too. We have a, we, our LinkedIn page, uh, Joe's LinkedIn page, um, My ExitEngine's LinkedIn page. Reach out there as well. So if you want to just schedule a call Connect with us on LinkedIn. We are all over LinkedIn, and we are, um, you know, looking for people like you, real estate people, to have discussions with, to, to talk to them about different business models. That's our, that's our business.

That's right. Absolutely. Well, John, this has been great, incredibly informative. I hope everybody, you know, enjoyed this. It's a really good kind of deep dive and a very clear way of, of talking about what was going on in this been something that's been in the news for a while, but, uh, having it come to fruition and then, and helping, uh, you know, anybody out there prepare, uh, themselves for the transition that, that every real estate brokerage will be going through. Um, it's just a matter of, of can you control your own destiny, you know, when it comes to, uh, when it comes to your particular brokerage. Um, join My Exit Engine, come check us out, uh, share this podcast with friends. If you know someone who is a brokerage or whatever, let them know that this exists and, uh, We'd be happy to talk to them and help everybody out. So hope everybody, you know, enjoyed this, and we will see you at our regularly scheduled time. This, it will be next Friday, but for right now, we're going to get this one out for everybody to enjoy because it is obviously like real estate, time is of the essence.

There you go, exactly.

All right, thanks, John. Have a great one, man. We'll talk to you next week.

Thanks, Joe. We'll see ya.