I will believe real estate commissions will fall when I see it
Posted by John Reed on
There has been a settlement in the lawsuit against the National Association of Realtors® and a number of large brokerages. This is being touted as a great change and lower commissions.
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I will believe it when I see it. Here is what needs to happen.
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A start-up will come into being offering low commissions like a flat rate of $3,000 for all homes regardless of the sale price. And that start-up will succeed and get competitors offering similarly low fees.
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Crown Books, which was started by one of my Harvard Business School classmates, is an example. Their slogan was “If you paid full price, you didn’t buy it at Crown Books.” Ditto discount airlines. Uber. Lyft. The stock market is maybe the best. Fees for buying and selling stocks used to be high. Now, typically zero.
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Has this ever been tried in home selling? Yes. And the industry froze them out preventing them from succeeding. What I will look for now is the existing Realtors® trying to kill off the new cheap competitors by refusing to show their listings. That supposedly ends with the settlement.
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The median home sale price is about $400,000; average commission, 5%. 5% x $400,000 = $20,000. I do not believe all the agents who have been getting 25% of that or $5,000 will go quietly. Each of the four agents: seller’s agent, seller’s broker, buyer’s agent, and buyer’s broker get a check for $5,000.
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Experienced top producer agents will likely quit the business in a huff for the simple reason that they are spoiled rotten. They are not doing to do what they used to get $5,000 for and only get $1,000. They would need to sell something five times as many houses per year to have the same income as last year—more in higher priced home markets.
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The entire corps of Realtors® needs to turn over and be replaced entirely by a group that already exists in the industry. Successful brokerages have clerical salaried staff, secretaries, executive secretaries. They will get paid the same as before and do the same as before. The new Realtor® offices, if the commissions really fall, will be like the old ones, only with the old commissioned agents gone and the secretarial staff expanded.
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And what about the broker owners? Ooooh. They are a pretty powerful bunch, or were. Unless they own their offices free and clear and otherwise were extremely averse to overhead, they will be forced out of business. Again, spoiled rotten and utterly unaware of how to function in a $3,000 flat fee industry.
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All the grand Realtor®s offices located around your community will be replaced by hole-in-the-wall offices that look like H&R block. I noticed that the long-time biggest stock broker Merrill Lynch Pierce Fenner and Smith is now a cubicle called Merrill in Bank of America branches. It may be that banks will become the new places to get home selling services.
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Title companies are another racket that needs to get this break-up-the-monopoly-pricing scandal. They also are entirely salaried secretarial staff. They may expand their services to selling homes.
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The main time-consumption activity of Realtors® is showing houses which is comparable to notaries coming to your house to get you to sign mortgage and other real estate documents. Showing homes will become more a security activity preventing squatters from moving in rather than a “this is the kitchen” salesmanship activity.
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The settlement is not the end of the story. The existing Realtor®s will try to ignore this settlement and continue business as usual. An analog is all the deep-state people ignoring SCOTUS decisions on discrimination against Asians and whites. The army of spoiled rotten 5% of the price agents needs to leave. That will take time. The much smaller existing army of clerical workers within brokerages need to expand their duties. Low paid home tour guides need to emerge. If the transition happens, it will take years and more lawsuits.
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I agree John. This is long overdue, but will likely have little impact on the existing fee/commission structure particularly in areas with home prices at and below the median. I have been a real estate investor and Realtor since 2000. Discount brokerages have been operating since well before my entry into the business, yet sellers overwhelmingly continue to prefer full service/high commission brokerages. Much akin to legal representation, the real and perceived risks of screwing up the sell of real estate will continue to outweigh the 2-3% discount that could be achieved by going it alone or listing with a discount brokerage. The savings just aren’t worth it for most sellers. The exception to this should be home owners well above the median price, but incredibly they also prefer full service.
Indubitably, full service is not going to give up without a fight. It will be fun to watch. Thank you for sharing your experiences and well-thought-out commentary. I have read many of your books and have avoided pitfalls through the 2008-2018 period as a result. My 40 rentals in Columbus, GA will be paid in full before my three children graduate high school. I am very fortunate to have a no-BS mentor like you. Your intelligence, integrity, authenticity, and transparency are very much appreciated!