Cut-rate realty: Commissions pressured beyond discounting
Savvy buyers, sellers tap new business models for more savings
The competition for listings between so-called “traditional” realty brokerages and commission discounters kicks up a lot of dust, but when the air clears it’s apparent that cut-rate brokerages aren’t the only force putting downward pressure on realty commissions as a percentage of the home sales price.
Fee-for-service brokerages, Internet-savvy buyers, skyrocketing home prices, a dearth of listings in some markets and some sellers’ notion that they can sell their home without paying an agent are among the other factors bearing down on conventional realty pricing structures.
Brokers and agents for decades have feared and resisted changes that would restructure commissions and traditional business models. But experts say change is unavoidable due to the new breed of real estate consumer created by the Internet.
“Real estate for almost a hundred years (considered) the end-user as being the agent and the brokerage, not the consumer. With the advent of the Internet, the entire paradigm is shifting and our end-user is definitely the consumer, not the agent,” said Julie Gardon-Good, founder and president of the National Association of Real Estate Consultants, a 1,000-member group formed in 1999 to assist realty practitioners in reframing their focus as real estate consultants.
Consumers want more control over the transaction. They value the real estate agent’s knowledge, but they resist paying for it as a percentage of the home sales price, according to Gardon-Good. She believes the fee-for-service model gives sellers what they want and compensates agents with what they’re worth.
Fee-for-service agents attach a dollar value to each service or calculate an hourly rate that’s paid regardless of whether the deal closes. The model recognizes services that have typically been given away and identifies which services are more profitable than others. Discounting typically includes providing the so-called “full service,” but charging less than the market-rate commission.
The menu aspect of fee-for-service often is confused with commission discounting. But the home’s market value determines whether the seller pays a discount or a premium price on a fee-for-service basis.
Bill Wendell, broker/owner of the Real Estate Café, which dishes a la carte buyer-side realty services, operates on the front lines of the fee-for-service model. Wendell charges $100 per hour for his services.
The average real estate transaction requires 40-60 hours per side, according Gardon-Good. That means Wendell would earn $4,000 to $6,000 per transaction or slightly more than 3 percent on a $160,000 house, but significantly less than 3 percent on a $300,000 house.
Other forces picking away at the commission structure are for-sale-by-owners who can pay a flat fee to an agent for an MLS listing with or without a buyer-agent commission split offer and the low inventory of houses for sale in some markets, which motivates agents to cut commissions in an attempt to win listings.
Skyrocketing home prices lead some sellers to question the typical 6 percent commission. A home that cost, say, $200,000 a year ago would have generated a $12,000 commission at 6 percent. If that home cost, say, $235,000 today, it would generate a $14,100 commission at 6 percent for the same services. The numbers are more striking for higher-priced homes and exceptionally hot markets. Sellers make those calculations themselves, then use the numbers to negotiate a lower rate.
Tom Cromer, broker/owner of a Miami Assist-2-Sell office, believes technology and demanding consumers pressure commissions downward, especially in the high-end housing market where a $3 million sale with a 6 percent commission would net a $180,000 commission.
“We don’t find home selling that complicated. It doesn’t take much more effort to sell a $3 million house than it takes to sell a $300,000 house,” he said.
Internet-based find-an-agent referral services like HomeGain, among others, have empowered home sellers with anonymity and turned them into fearless commission negotiators.
“People have more courage on the phone, so it would make sense that people would have more courage taking this issue on online,” said HomeGain CEO Bruce Schroder.
Self-sufficient, Web-savvy buyers and sellers know their options, spend more time virtually shopping homes and less time in the backseat of an agent’s car and expect their hard work to be rewarded with lower realty fees.
A California Association of Realtors 2002 study revealed that home buyers who used the Internet to help them with their real estate needs spent on average two weeks home shopping with their real estate agent and looked at approximately 7 homes. Traditional buyers spent approximately 6 weeks with their agents and looked at approximately 15 homes.
“The Internet has brought real estate information, be that about Realtors, house prices, commission structures, to everybody’s doorstep. So things which they might not have been sensitive about before they are more aware of today,” said real estate expert and author Stefan Swanepoel.
Editor’s note: Inman News Publisher Bradley Inman also is the founder and chairman of Homegain