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What Can Bring Down Real Estate Commissions?

Monday, July 11, 2005 posted by Tommi Crow

For most of us, the largest single purchase we will ever make is a house. 77% of us buy and sell our house by engaging the services of a real estate broker. In recent months, the real estate industry has been featured in the news about new discount brokerages offering cheaper alternatives to the 6% commission rates and the tactics of used by the traditional brokerages to stop any and all new options from reaching the consumer.

Alternative’s in real estate would be welcome news for consumers, who paid over $90 billion dollars in fee’s in 2004. But, what should consumers think about the new alternatives? Do the new brokerage models promise real savings for buyers and sellers? Is traditional real estate violating anti-trust laws?

For decades, buying and selling a home has been a routine process. Traditional brokerages offer “bundled services” to buyers and sellers. These bundled services include an MLS listing, marketing, open houses, negotiations, contracting and closing assistance. In exchange for the services, brokers receive a percentage (usually 6%) cut of the sales price of the home. Under this traditional system, the seller contracts with the broker. The buyer has no input, but shares the costs because the 6% fee is included in the asking price of the home.

Under the traditional system, there is no option to select only the services that you need. The system offers no cost savings or incentive for buyers or sellers willing to do some of the work themselves. It offers no compensation for a buyer who finds a house themselves without an agent. It was and is an all or nothing proposition for everyone involved.

Many scholars and casual observers began to notice that the 6% commission rate had remained stable over the years, which suggested there was not real competition among agents. This fixed fee was especially significant because house prices increased 94% from 1991-2004. The increase in home prices translated into a 51% increase in revenue, per house, for agents, but did not create price wars or competition in fee’s, during the entire period. This type of news is bad for consumers and suggests price fixing and anti-competition in the industry.

2005, finds that the times are finally changing. 70% of buyers and sellers now use the internet when searching for homes. The internet has significantly reduced the time and costs of buying and selling a house. The California Association of Realtors report shows that agents spend one-third less time showing homes to people who look on the internet because they spend more time searching on their own. The internet has made matching buyer and seller a much shorter, easier process. The mortgage process is much quicker, precise and more competitive due to the web. Advertising property has never been more affordable, nor covered such a wide demographic area, thanks to the internet.

In a true competitive market, these cost savings to brokers should be reflected in lower commission rates, but this does not appear to be happening on a wide scale. Brokers are protecting their “turf” through discrimination against new brokerage models, such as flat fee, discount or online listing companies; real estate lobbiest and legislators are requiring “minimum service requirements” in many states, which essentially eliminate ” a la carte” options; state associations have also banned the use of rebates to thwart fee competition.

What new business models offer pricing competition and beneficial services for buyers and sellers? Which of those will likely survive the “bullying” tactics that eliminate competition and choices for consumers?

Tomorrow, we will look at the new world of real estate. We will begin with new businesses that appear to offer the most choices and value for consumers. We will cover the pro’s and the con’s and clear out the smoke and mirrors. Please check back and feel free to comment on your experiences or feelings about these topics. As with all change, there are many feelings on all sides. We intend to uncover valid and invalid and above all, keep you informed.