Agents/BrokersReal Estate

The future of U.S. real estate commissions

Not just lawsuits, but alternative business models and an insane housing market threaten to disrupt home sales commissions

HW+ real estate commissions
Glenn Kelman, CEO of Redfin, and Luke Babich, chief operating officer of Clever (left to right)

This is the final of a three part series on residential real estate sales commissions. Part one explained the history of sales commissions, and the labor market for real estate agents. Part two dove into legal challenges of the present commission system, and the industry’s defense of commissions at the present level of 5% a home sale. 

You know what’s annoying? 

Telling someone the Internet has made their life a lot easier. 

Few professions are told that more repeatedly than real estate agents. Some grudgingly say that’s true, but others claim agents work more than ever.

“Twenty-five years ago, you might send a photo to the paper of a property,” said Ryan Gorman, president of Realogy-owned Coldwell Banker. “Now there are 36 different images, a video, imagery captured from drones. The average real estate agent is probably an expert at Tik Tok.”

Agents have portrayed a veritable home-showing arms race in defense of continued 5% commissions on home sales. 

“The cost alone for prepping the home for market is much greater than it was,” said Janelle Fautt, a RE/MAX agent in San Francisco.

Fautt pays $2,800 out of pocket for “minimal staging” of a property, she said. Photography “with virtual walk-throughs and drone photography and videography” can “start at $600 and easily reach $3,000 for a complete package.”

“Twenty years ago, and even ten years ago,” Fautt said. “This was not a thing that listing agents did.”

But to entrepreneurs who see 5% sales commissions as the relic of a long ago era, such elaborate photography and staging is part of the problem.

Alternative models

“High commissions are often the result of marketing inefficiencies,” argued Luke Babich, the enthusiastic Chief Operating Officer at Clever.

Like REX and its iconoclastic founder, Jack Ryan, Clever is in industry parlance a “discount brokerage” – a pejorative-sounding term that means their agents charge a lower commission. They work with agents otherwise affiliated with a non-discount brokerage, who moonlight for a lower fee in exchange for a likely sales transaction.

Most brokerages are not consumer-facing, per se. They provide resources and a brand name to their independent contractor agents, and those agents pay the brokerage service fees, a split of each commission, or both.

However, St. Louis-based Clever, which launched in 2017, negotiates on behalf of consumers to lower commission rates. A rate negotiation, Babich noted, “Is a very uncomfortable conversation for a consumer to have.”

The largest discount brokerage is Redfin. The Seattle-based company – which attracts consumers through a website that aggregates National Association of Realtor-sanctioned Multiple Listings Service data – reported $37 billion in 2020 sales volume, good for 5th on Real Trends’ list of the top U.S. residential brokerages.

In order to attract buyer’s agents and meet NAR’s guidelines, Redfin homes list at the typical 5-6 % sales commission. But once the purchase is made, Redfin gives the home seller a rebate, meaning Redfin agents receive just 1.5% of the final sales price, while a non-Redfin agent on the deal’s other side keeps their customary 2.5-3% commission.

Most agents subsist entirely on their commissions. But Redfin and REX both pay agents salaries, which they claim reduces the incentive to drive up commission rates.

Industry insiders tend to view such alternative business models as mild headaches that will soon pass.

“Rarely have discount brokerages collectively aggregated more than 2-4 % of the market,” said Steve Murray, president of RealTrends. Murray rattled off a remembrance of discount brokerages past including HelpUSell from the 1970s, Assist2Sell in the 1980s, and ZipRealty during the 1990s.

Also, discount brokerages’ existence are cited as further evidence that consumers have a choice, a choice that is also cited in the consumer’s right to negotiate rates. 

“Commissions can be negotiated at any point throughout the transaction, including at the outset, after the results of a home inspection, and after an offer has been made,” stated Charlie Oppler, president of the National Association of Realtors

But others see consumers flying blind.

For his book “Upsold,” Max Besbris, a sociology professor at the University of Wisconsin-Madison, tracked real estate agents and homebuyers in New York City. What he found was that agents hid their own economic interests.

“Most homebuyers had a dim conception that their agent was getting paid,” Besbris said. “But the actual specifics were something that real estate agents didn’t discuss.”

A former agent and now a real estate professor at Florida Atlantic University, Ken H. Johnson said he “does not believe homebuyers have much awareness at all they can negotiate.”

Added Johnson, “Consumers are not aware of the market’s underlying currents.”

Cracks in the structure? 

Lately, Johnson has been noticing a trend in Florida: Commission rates are falling. 

A small but increasing number of sales, Johnson has observed, are happening off the MLS – even though the NAR barred members in 2020 from such “whisper sales.”  

“The movement and vulnerability come from the listing side,” Johnson said, as not just consumers but buyer-side agents are grumbling about listing agents getting their normal commission during a period of record demand

Time will tell whether it’s a lasting trend, or the product of the current housing market. Johnson has studied real estate agents in other countries, and he finds that other countries have their own ways of doing business. In Australia, for example, homes are increasingly auctioned off.

For the most part, other countries lack a trade group with an equivalent clout of the NAR, or a comprehensive listings database like the regional MLSs. 

Also, as Gorman of Coldwell Banker pointed out, other countries do not have rules like America’s Real Estate Settlement Procedures Act. It’s a rule that effectively prevents U.S. agents from dipping their toes into title servicing or mortgage lending. 

The biggest difference between the U.S. and other countries is the number of agents.

In America, the economists Panle Jae Barwick and Maisy Wong noted in a Brookings Institution paper, less than six million home sales are completed each year in a labor market of almost two million agents. In the United Kingdom, one million homes close annually in a market of 50,000 agents.

High commissions plus low barriers to professional entry mean agents chase a big pay day. The result, Barwick and Wong concluded, is “A reduction in labor productivity and a loss of social welfare because some of these individuals and firms could have engaged in the production of goods and services in other sectors that is valuable to society.” 

No group laments the plethora of real estate agents more than the agents themselves. Brokerages such as San Francisco-based Side tout that they weed out “the 9 out of every 10 agents” who are “hucksters and charlatans.”

But brokerage pledges aside, it may be hard for consumers to know if they have a quality agent, or a charlatan.

“For the rarefied nature of a home purchase,” noted Besbris, of Wisconsin-Madison. “There is a lot of opacity for the consumer.”

Like the majority of those interviewed who study but do not work in residential real estate, Besbris wants consumer-friendly changes. But he’s not sure they will come. 

“Activists are in a better position than they have been for pro-consumer reforms,” he said. “But the structure has been in place for quite some time.”

Check back in another few months. Or another 108 years. 

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