The Traditional Real Estate Commission Model. A Critical Assessment

December 20th, 2006 Categories: Real Estate News, alternative real estate commission models

Prelude: I’ve read, and expanded on (mostly mortgage related) a critical assessment originated by Mark Nadel, a 15 year FTC attorney, regarding alternative commission models for real estate agents. It’s a very well thought piece, 75 pages long, with the research you’d expect from, well, a 15 year FTC attorney.Since I was enrolled in The Swap just yesterday, some quick research has turned up:

Kevin at 3Oceans tackles the economics of implementing some of the changes for the Realtor Assessment
The guys at Sellsius gave their futuristic outlook.
Greg Swann chimed in with his usual condescending tone
Ardell, always there to keep Greg in check, gives her $.02 on The Rain City Guide
Steven Levitt, The Freak of Economics himself, even had time to weigh in, since Mark dutifully cited his accomplished work.

So…I’ll keep to addressing some of the madness that causes these alternative methods to the current and antiquated 6% split model to be hypothesized. I prefer to dig up the psychological and otherwise less apparent underpinnings of such calls for blood in the streets.

Part 1

Why Has the Standard Realtor Rate Structure (and Rate Levels) Remained Dominant?
Big Business Flexing it’s Muscles. Brokers Recognize the Power of the NAR

With about 1.3 million members, 326 the NAR is the largest trade association in the nation.327 Its members’ presence in every voting district of every state legislature and large campaign contributions make it one of the most powerful lobbyists in the nation,328 and led one state official to note “virtually no proposed legislation relating to real estate has a chance of passage unless it is approved by the state association of realtors.”329
In other words, any significant change would have to come from inside out, an organic virus, etc

1) State Real Estate Commissions Protect Traditional Business Models

Most regulation of real estate brokerage is a result of state law and state real estate commissions created by state legislatures. Although the laws and commissions are presumed to be intended to protect consumers, a 2006 Consumer Federation of America (CFA) survey of real estate regulatory agencies in 47 of the 50 states found that more than 70 percent of commissioners were real estate brokers or salespeople.³³⁴

Given the presence of real estate agents in every state legislative district and the availability of state affiliates of the NAR to manage industry lobbying and campaign contributions, it is not surprising that states have generally protected traditional brokers from entrants with new business models.

Many state bodies enforce prohibitions against rebates to home buyers and many require sellers to purchase a minimum bundle of services that many sellers do not desire.³³⁵

Self-Government usually isn’t fertile ground for progressive business practices to grow.

2) MLS Access Rules and Local Boards Can Discipline Non-Traditional Brokers

One way that traditional brokers have discouraged entry by brokers with business models that threatened to introduce price competition is to limit their ability to use the critically important MLSs. 3rd Party access to the fragmented MLS’s is vehemently opposed by the NAR. They place restrictions on the display of MLS listings online, which triggered the 2005 DOJ antitrust lawsuit…which has dutifully progressed, and not on the NAR’s favor.

MLS listings are required to include the fee offered to the buyer’s broker, which may facilitate the practice where agents working with buyers may intentionally fail to inform a client of an attractive offering, because other listings will yield the agent a much higher commission.

Of course, the power of traditional brokers to use the MLS to discriminate against non-traditional firms will disappear if Google, Zillow or others offer an MLS-like online, easily-searchable database that displaces current MLSs or MLSs change to compete with Google, Zillow et al.³⁴⁷
3)Consumers are Ignorant of the Many Options That They Could Reasonably Demand

Propaganda at it’s finest:
Around 1980, undoubtedly due to the long history of fixed rates in the industry, about half of all sellers believed that commission rates were fixed and non-negotiable and that the fixing was done either by law or by “the Board of Realtors.”³⁴⁸

The 1996 Kiplinger’s “Guide to Buying & Selling a Home” stated that commissions run typically at 6 to 7 percent and that “[a]s a practical matter, you won’t get very far negotiating a lower rate unless you have special circumstances that make your property more economical to sell than others.”³⁴⁹
In 2006, a columnist for Inman Real Estate News continues to recommend that sellers not try to negotiate a listing broker’s commission before signing a contract.

The Bloodhound Blog offers a compelling solution on how to negotiate with buyers agents here.

4)Traditional Brokers Have Successfully Portrayed Discount Brokers as Inferior

To defend themselves against lower priced new entrants, traditional brokers have heralded the old adage: “you get what you pay for.”³⁵³ They imply that brokers with lower prices must be skimping on quality and/or services³⁵⁴ compared to the “full service” offered by traditional brokers, although conveniently they fail to define full service.³⁵⁵

Although there is a simple refutation to this insinuation, few buyers or sellers hear it, because there is no entity with the funding and mandate to effectively counter the NAR’s marketing. If there was, it could point out that if a listing broker who charges $18,000 on a $300,000 home can afford to provide full service, then a broker charging only a 4.5 percent commission on a $1 million home ($45,000) can too. Yet when media firms criticize protectionist tactics of traditional brokers or praise new firms, vocal brokers accuse the media of being misinformed and biased.³⁵⁶

The purchase or sale of a home is such a major transaction to most home buyers’ and sellers’, merely planting seeds of doubt about the quality of non-traditional brokers is often enough for traditional firms to scare buyers and sellers from using such new entrants and sticking with traditional brokers.

I have been browbeat with this tactic almost daily. Offering someone a better value for relative services, gets one stereotyped as ‘cheap’ by competitors, even if my net bottom line is better than theirs…
FINALLY:
Three conditions indicate many Realtors overcharge for their services:

First, many former employees of traditional brokers are now willing to provide full-service for flat fees of less than $5,000. ³²¹

Second, traditional brokers are willing to provide full service for the sale of a $150,000 home for $4500 (half of the six percent) in fee. The costs to agents of handling the sale of a home priced at $500,000 for their half appear be very similar although the commissions they charge would = $15,000

Third, brokers in other nations now charge much lower fees for providing similar services.³²³ The commissions paid on the purchase and sale of the highest-priced homes are particularly vulnerable. Vigorous price competition could very possibly reduce total revenues for brokers precipitously, by $30 billion or more annually.³²⁴

This gives traditional brokers a strong interest in resisting this result. As an agent for a large, national, traditional brokerage firm explained in a September 2006 email to a friend who had just listed her home with a flat rate broker:³²⁵

I love you guys but why would I want to sell your property? Most full-service agents in ___ County want to remain full-service agents and I am one of them. Why would any full-service agent want to help a flat rate broker? None of us do. We don’t want to become flat rate agents and if flat-rate agents become successful then we would all have to become flat-rate agents. They have a VERY small % of the business out there. We want to keep it that way. If I can avoid showing Help U Sell properties or Assist to Sell properties I also will not show them. When you list with a full-service agency then you have the co-operation of most of the agents in ___ County. A 3% commission with a bonus is not enough incentive to put a nail in the coffin of our industry. . .

Now, she’s got an interesting outlook…

I wrote this post to essentially demonstrate what many of the early movers in Real Estate 2.0 are up against, no small task to say the least, as well as point out some distinct marketing angles that some may (and do) choose to ‘exploit’. I’m not an objective expert like Mark, but I do know opportunity when I see it.
It’s a bold but effective way to differentiate oneself from the maligned and stigmatized industry…from the teachings of Seth Godin, to not be different is to be dead…moo.

Next Week:
The How….Six Disclosures that Might Stimulate Price Competition….

Many thanks to Mark Nadel, all citations are located here originally from his core piece

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