Disintermediation – Say Good-Bye to the 6% Commission Rule.
June 26th, 2007
In the last year I have written often about disintermediation. It is a force that is affecting numerous industries. Residential real estate, as I have written here, is one of those businesses. Any business that has historically inserted itself between buyer and seller and has also kept market information to itself is a business that sooner or later will have to redefine itself in this Internet age. As mentioned in this column, both the stock brokerage and travel agent business have been substantially changed due to the disintermediating power of the Internet. I predicted last year that residential real estate would soon be facing a similar situation unless it adapted quickly.
The recommendation here has been for residential real estate agents to either lower their commission from the standard 6% or add services and create new value to keep their commission at that level. I want to be very clear: I am not arguing against the status quo of this industry, I am just saying that the trend is obvious and relentless and that it should be fully faced. The old days are over. Agents that do not believe this do so at their peril.
It has been no surprise to me to see numerous articles recently about the dramatic increase in discount real estate brokerages and the growing ‘For Sale By Owner (FSBO)’ trend. In a soft real estate market, brokers are no longer gatekeepers of listings but instead are looking for buyers. Sellers are open to finding ways to get their home sold. Mortgage foreclosures are rising and homes are being sold at auction. At the same time, an increasing amount of listings are on the web, available for all to see. The federal government has instituted restraint of trade law suits against the National Realtor Association. This is creating a perfect storm that will bring about dramatic change in the real estate brokerage business in the next two years.
A recent front page article highlighted the fact that of the six year period from 1998 to 2004 people in Madison Wisconsin who sold their homes through agents did not get a higher price than those who sold their homes themselves. When agent commissions were factored in, the for-sale-by-owner people came out ahead. This of course refutes one of the ‘axioms’ of the brokerage business, that people who use brokers get a higher price. The caveat to this story is that Madison is a city that has had a long and successful history of FSBO and that the local web site is well used and well respected. Therefore, this data is local and cannot represent the national market. However, this is the beginning of a trend. What did not exist ten years ago and now is growing rapidly is a trend to be considered. I regularly see FSBO signs in front of houses, something I rarely saw ten years ago.
There are now state and regional discount real estate brokerage firms that are expanding aggressively across the country. A recent story in a Chicago paper profiled what happens when this new trend butts up against the old way of doing business. A young couple had chosen to sign up with an on-line discount broker. The deal was simple: the couple would do all the leg work, the discount broker would handle the paper work, and upon closing would rebate 75% of the 2.5% commission paid to the buyer’s agent. The couple spent a lot of time looking for the right house. When they found it and contacted the traditional broker that represented the seller, that broker refused to work with a discount broker. It took the buyer’s attorney to firmly suggest the illegality of that to bring the traditional broker around. Shortly after the closing, the couple received a check for $13,000 from their discount brokerage, money that traditionally would go into the broker’s pocket. A key component to this story is that it will only work for buyers — or sellers- who are very comfortable with being on-line, as that is where most of the interaction takes place.
A majority of real estate listings are now on the web. Vast amounts of real estate data, including sales prices are also on the web. If buyers or sellers are interested in doing the work, doing the research and spending some time on the effort, why should the broker be paid full commission? To those real estate brokers who might be angry reading these words, please let me ask you a question. If you had researched a stock, had made the decision to buy, would you pay full commission on the transaction, or would you go to a web based discount brokerage firm? If you do all the work and know what you want to buy, why should you pay the full service brokerage fee? Ten years ago full service stock brokers were resistant to change, and look what happened to them.
This force of disintermediation is too powerful to resist. By the time the national real estate market fully recovers from its’ current recession in 2009 the residential real estate business will look distinctly different that it did in the heady marketplace of 2005.
June 26th, 2007 at 7:45 am
There is no standard commission or rule.
Brian
June 26th, 2007 at 3:10 pm
Adios 6%.
June 26th, 2007 at 6:17 pm
Brian –
I am glad to hear that brokers have no standard commission or rule. That means that they must be starting to negotiate lower commissions. During the last year, friends have told me that brokers they spoke with told them it was not possible to charge less that 6%. That means that either the marketplace has changed their viewpoint or that there is some miscommunication going on.
Glad to hear commissions are negotiable. That is a smart survival tactic in the coming years.
David
June 26th, 2007 at 8:32 pm
[…] Say Good-Bye to the 6% Commission Rule. […]
June 27th, 2007 at 7:01 am
I’m glad to see discount brokerage and flat fees for real estate too…and I’m a broker! I love the idea of choice…it just feels kind of…well…American! I love have choices when I’m the consumer. The one thing I would make mention of…I’m the only one in my County offering these menu type services and it’s taking a long time to re-educate the public. I have to be careful so as to not get my fellow realtors so angry that they won’t show my listings so I work really hard with everyone to make the transaction go as smooth as possible, many times giving countless hours of advice and time to my (FSBO) seller. I’m giving up approx. 3% of every close which is my choice (pardon the pun) but I need to make it up in volume. Sellers here just take a long time to embrace a new concept so in the meantime, it’s a struggle to keep making the service available and trying to walk a line with other agents. I hope the public really starts taking advantage of what’s being offered before we are forced to go back to business as usual!
June 27th, 2007 at 7:45 am
Linda-
Good attitude and great web site. You need to find the smart and motivated sellers. Just like Home Depot has created a huge business for do it yourselfers, so too will brokers like you lead the way. The trend is going your way.
David
June 28th, 2007 at 1:15 pm
[…] David Houle of Evolution Shift says Say Goodbye to the 6% Commission Rule:  The recommendation here has been for residential real estate agents to either lower their commission from the standard 6% or add services and create new value to keep their commission at that level. I want to be very clear: I am not arguing against the status quo of this industry, I am just saying that the trend is obvious and relentless and that it should be fully faced. The old days are over. Agents that do not believe this do so at their peril. […]
June 29th, 2007 at 12:19 pm
Actually, on average, commissions have been on the rise with the slowing of the general real estate market. With longer number of days on market for each listing and skittish buyers afraid to “pull the trigger”, agents are working longer and harder for less and less. My market average commission is 5% and has been for over four years but I know of plenty of other markets that average 6% with a few at 7%. Good agents are well worth it. It takes more these days than a simple yard sign and a one-photo MLS listing on Realtor.com to sell a home.
June 29th, 2007 at 7:24 pm
Rob-
I have no problem at all with your rationale. The logic inherent in you position suggests that in a strong market you would lower your commissions since it takes less time to go from listing to closing. Would you agree? So if 6 or 7% works in a slow market, and you are at 5%, in a fast market the commissions would go down to 3 or 4%, right?
David
June 30th, 2007 at 12:56 am
David, our market is very competitive between the agents and has been for a number of years. We’ve always been, on average, charging less than communities near ours. With sooooo many agents in our market it is career suicide to run things a 6%. You can charge that in some instances, but I estimate 90% of us charge 5% commission with half of that paid out to the buyers agent. Other than the top 15 out of 300 agents in our town, nobody is getting rich out here. Most agents see no more than 10 transactions per year. With a market average sales price of $140K, and after buyer’s agent and brokerage splits, the average agent makes between $20K and $30K. And that’s before taking off for taxes, gas, supplies, MLS and Realtor fees.
June 30th, 2007 at 1:05 am
We never had a hyper market like the coasts did these last few years. We’ve always had a steady 3-4-5% annual rate of appreciation and are not really feeling the effects of the “bubble burst” here. Our market doesn’t heat up that fast it seems. Our average commission is low simply we’ve got too many hungry agents who will cut costs, corners, and ultimately commissions to win business – any business. Most communities nearby charge an average of 6% and some even are averageing 7%. Other than, say, the top 10% of local agents, most os us make between $20-30K per year gross. Chop off taxes, MLS and Realtor fees, supplies, gas and car expenses, technology (phones, computers, etc.) and lots of us are well down into the teens for annual income.
June 30th, 2007 at 8:02 am
David,
…one thing to consider: the best agents will get their traditional “6%” if they can build a niche around people selling or buying their house who want “peace of mind” that ALL is taken care of and they do not need to do anything, an outsourced approach. Trust me, with three children under the age of six, running my own business that includes extensive travel, we do not have the time nor desire to do the work. There are a few of us “dinosaurs” that appreciate the full service agent and are willing to pay.
October 17th, 2007 at 4:23 pm
There is no such thing as a standard. What you will find most of the time is you get what you pay for. An agent that spends $5-10k a month in marketing homes can not afford to do so at a discount. Agents that spend money to advertise sell homes faster and typically for a higher dollar amount then one that just sticks the home in the MLS and calls it a day.
One other thing that nobody ever wants to talk about is that the agent doesn’t get the whole X%, Lets us 6% as an example. Half will go to the agent that brings in the buyer, now the listing agent is down to 3%. From that 3% the agent pays for all marketing and has 100% of the risk as they only get paid when a listing sells and closes, which in the current market means many times the agent has spent hundreds if not thousands of dollars to get nothing in return. But the agent doesn’t even get to keep the whole 3% as most have a split with their office. The office will keep 30-50% of the 3% with no allowance for all of the marketing costs the agent incurred.
Plus we get hit with the wonderful self employment tax so that by the end of the day we end up paying over 50% in taxes between State, Federal, and self employment tazes. Heck someone has to pay for all those wonderful government programs.
Anyways the sad reality is that the median annual income of real-estate sales agents in 2004 was only $37,600, down from $39,300 in 2002, according to NAR. (couldn’t find newer numbers quickly, but they are actually lower in ’05).