Death to the 6 percent

The Times has a delightfully devastating story about upheaval in the real estate broker business asking whether we are seeing the last stand of the 6 percenters. We can only hope.

The Times story focuses on Redfin, a new brokerage in California and Washington only, unfortunately, that will list sellers’ homes for $2,000 flat and will rebate two thirds of its commission (thus usually 2 percent of the selling price) to buyers. Redfin does all this — how else? — by taking advantage of the internet and of the monopolistic pricing of multiple listing service members.

The Times reports that some sellers’ agents refuse to show homes to people coming from Redfin. I’d call that anticompetitive and perhaps even antitrust behavior. Watch and I’ll bet that MLSes will get opened up and then, once any of us can list and find homes on our own, the whole game is over. Bye-bye overpriced agents.

I will guarantee you that as soon as this post goes up, whining real estate brokers will come in — as they do every week here, here, and here — and mewl about how they provide such loving service and get you better deals. Bull. The Times cites Freakonomics:

“It’s a case where nobody wins,” Chang-Tai Hsieh, an associate professor of economics at the University of California, Berkeley, said of the current system. Mr. Hsieh, who has studied real estate commissions, said that they did not vary much from 6 percent and did not generally change in good times or bad. He said it was a form of price fixing, but an odd one. “Consumers pay a lot of money, and even the people who do the price fixing don’t win,” he said. “So it is a colossal waste.”

Traditional agents spend very little time brokering a deal, Mr. Hsieh added. Most of their time is consumed looking for new clients, which is of no benefit to consumers. An agent working for a salary, he said, would be freed of the need to prospect and would thus be more inclined to focus on negotiating.

Others agree. Steven D. Levitt, an economics professor at the University of Chicago, found that commissions did not align the interests of agents with those of their customers, a conclusion he recounted in his book “Freakonomics.” The agent has little incentive to get a few thousand dollars more for a homeowner, he wrote, because it will not much improve the commission. It is far more important for an agent working on commission to get the deal done and move on, he added.

The story points out that apart from a few star sellers, the agents themselves don’t get rich, either. Wake up, agents, your days are numbered. You might want to consider a management career at — dare I say it? — Burger King.

  • http://deleted Mike G

    This is one of the facts of life I have tried to press on so many people. Your realtor will ALWAYS price your house low. Why? So it will sell in a day or two. Bam, done, gone. Whatever they say to sell it at, up it. So it takes a month or two to sell. Too bad, they have to show it every Sunday for a month or two. Boo hoo. If your house sells in 48 hours, you screwed up and didn’t ask for enough.

    Hopefully this whole system will be gone soon. My sister just listed hers in Austin for $500, got on the MLS, shows it herself. How much worse a job can she do, really?

  • http://www.realtybaron.com marc

    Wake up, agents, your days are numbered.

    6% is absurd. No argument there. But all agents will vanish from the marketplace? Not likely. Buyers/sellers are gaining an edge thanks to the Internet, but I predict agents will simply reinvent themselves and their services. As soon as the cost of buyings/selling real estate comes down, buyer/sellers will continue to use agents as a convenience rather than out of fear or being uninformed.

  • http://fizboflorida.com Eric Allam

    It’s nice to see the anti-6 percent sediment spreading. When I first read freakonomics when it first came out, the chapter on Real Estate agents really struck me, and I knew that something in the Realtor business was going to change soon.

    That’s why I am building http://fizboflorida.com (not launched yet) to help people who want to go at it themselves.

    You can tell the Realtors are getting desperate when they launch sites like http://dontityourself.com/. I guess calling customers morons will really help their cause.

  • http://hootsbuddy.blogspot.com Hootsbuddy

    About four years ago I came across a fantastic website that would provide the data used by real estate pros to evaluate residential property. Just put in any address and get from the public records the latest sales around that ZIP code or whatever radius you wanted. Comparables are the lifeblood of real estate pricing.

    Alas, the so-called professionals must have got wind of it and within a few months it was no longer available on line. Maybe in time this valuable resource will also once again be available to the public.

  • http://www,evolutionshift.com David Houle

    I also noticed that article. What it is basically documenting is the inevitable disintermediation, to some degree, of the real estate brokerage business. It is about to follow down the path of stock brokerages and travel agencies. If the intermediary cannot add value to the transaction, then they must lower their price.

    I wrote about this a few months ago in a post:
    http://www.evolutionshift.com/blog/2006/05/18/disintermediation-3-watching-video-selling-a-home-buying-insurance-part-2/

    Agents can howl all they want, but they are howling at an inevitable historical trend.

    David

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  • http://www.edpadgett.com/blog/blog.html Edward Padgett

    The Internet is changing the landscape of the real estate business, as it has impacted the media as they struggle to retain readers and viewers.

    I’m probably a rarity in my age group (53 years old), I found my current home on the Internet, as well as my car, washing machine and dryer, music, gifts, and all travel arrangements.

    My children and grandchildren are professionals when it comes to using the Internet, we can only imagine where this will all lead to in the future?

    Edward

  • http://www.theperfectworld.us Cal

    The only unusual thing about the story is how long the brokers held out. I’ve often wondered how they were able to avoid the fate of travel agencies.

    Must be information week, because I also learned how car dealerships stay in the game. They have enormous control over auto manufacturers, who consequently can’t sell cars online.

    “As soon as the cost of buyings/selling real estate comes down, buyer/sellers will continue to use agents as a convenience rather than out of fear or being uninformed. ”

    Sure. When was the last time you talked to a travel agent?

  • http://www.therealestatebloggers.com Tom

    This is not surprising. They had the monopoly over the information and managed it as long as they could. Newspapers, travel agents, and many other industries have played this game.

    Real estate is just the next domino to fall.

  • penny

    This is one of the facts of life I have tried to press on so many people. Your realtor will ALWAYS price your house low. Why? So it will sell in a day or two

    Maybe, maybe not. Realtors will also flatter sellers, appealing to their greed, by inflating the listing price cited by other agents to get the listing. I’ve seen that done.

    I recently sold a piece of real estate on Craig’s List. My first time with it. Easy. No fee. Can put up photos. The local paper wanted a small fortune for weekend ads. I’ll never let a realtor walk over me again. Craig’s List is a local newspaper’s worst nightmare.

  • raj

    6%!!!!!!!

    I’m currently selling my house in the UK and negotiated down from 1.5% to 1%.

    When I buy I won’t pay any commission; this is only paid by the seller.

  • http://www.bloodhoundrealty.com/BloodhoundBlog/ Greg Swann

    > Redfin does all this — how else? — by taking advantage of the internet and of the monopolistic pricing of multiple listing service members.

    This is incorrect. Redfin’s cost-savings come from shifting the costs of buyer representation to the listing agent. Redfin takes full commission for doing only the easiest and cheapest parts of the job, then disburses two-thirds of that commission to the buyer. The net consequence of this, in the long run, will be the curtailment or elimination of the buyer’s agent’s commission. Redfin doesn’t represent its buyers at the most critical points of the transaction anyway, but it remains that buyers are the parties most in need of conscientious representation.

    Yes, I’m a Realtor — but you’re completely safe from me. I only work with people who see the profit in my praxis.

  • http://www.buzzmachine.com Jeff Jarvis

    Greg,
    If, as you say, Redfin is doing the easy stuff, then why should I pay 3 percent for someone else to do the easy stuff.
    Yes, in this case, the money goes from seller to buyer. But the truth is it just affects the bottom line: the value of the transaction. Realtors took too much of that transaction for too little value.

  • http://www.realtybaron.com marc

    Cal: “When was the last time you talked to a travel agent?”

    I’m sooooo tired of this over-simplified comparison. An airline ticket is a commodity….every seat will get me to my destination exactly the same.

    Consider this: You drive to work every day. It’s easy. You press the accelerator and avoid the other cars. But would you rather someone chauffeur you instead? It would allow you to do things you enjoy: read the paper, catch up on phone calls, crossword puzzle, etc. Too expensive you say? How about $5 each way? Therein lies my point. I think 99% of FSBOs are avoiding the cost of a Realtor. If that cost was cut to say, 2%, the ranks of Realtors would thin and consumers would breath a sigh of relief. Presumably, the Realtors left standing would get a crack at more deals and therefore make as much if not more money.

  • http://www.bloodhoundrealty.com/BloodhoundBlog/ Greg Swann

    > If, as you say, Redfin is doing the easy stuff, then why should I pay 3 percent for someone else to do the easy stuff.

    The reason that you pay for representation is to have someone do the hard stuff — the same reason you pay for anything. Using Redfin.com’s business model, part of the hard work (and a doubling of the legal liability) is shoved onto the listing agent — the hook in the NYT article. Much of the rest is not done at all — to the buyer’s peril.

    > Yes, in this case, the money goes from seller to buyer.

    All the money in a real estate transaction comes from the buyer at the closing table. Sellers need some representation and a lot of marketing prowess. But buyers need a lot of zealous, conscientious representation — this is why all the contract contingencies should be written to the presumptive benefit of the buyer. Buyers can and should negotiate their agent’s compensation, with any surplus commission going toward their costs. But an unrepresented seller faces far fewer disastrous consequences than an (essentially) unrepresented buyer.

  • Natanya Anderson

    There seems to be some thought that this is a fairly black and white picture: either we have realtors at high commissions or we don’t. Isn’t it more likely that we’ll see a significant shift in the number of agents (from so many to a select few who are very good at what they do) and a combination of buying/selling avenues that meet any individual consumer’s needs? As with other areas of commerce — travel and cars are two examples — the Internet will make consumers smarter, more savvy, and more capable. They can then make informed decisions about when and why to use an agent and when to take the DIY approach.

    We just sold our house and are building a house. We used a traditional agent who charged 5% total to sell our old home and help us buy our new home. Granted, she is a fantastic agent, so the services were stellar, but even so, she took care of things I simply didn’t want to deal with. Was I capable of taking pictures of my home and posting them online — most definitely. Could I have dealt well with others and negotiated for what I believed was necessary for my family — of course. Could I have researched home sales and values to understand what the right price to list at should have been and figured out what I’d probably eventually take for it — yes, of course.

    The most important question however is did I want to do any of this — not at all. It was worth every cent to me to have our excellent realtor with her years of experience manage all of this while I juggled the fun of work, parenting, and Pop Warner pre-season football. She thought of things I wouldn’t have, and kept the nightmare that was managing through the closing on the house completely hidden from me while I was trying to make a deadline.

    Would it have been worth it if she wasn’t an excellent realtor? Nope. With all of the tools and resources available to me, I am not willing to pay someone to do as well as I could have, I expect them to do significantly more and make my life a better place. Its for these same reasons that I have a professional paint my home and keep my lawn. And I’m not comparing realtors to painters or to landscape companies — just my motivations for using professionals in all of these areas.

    In reality, the days of sub-par 6% realtors are probably numbered, and as well they should be. However, as with many other services, professionals who are good at what they do and have a strong value proposition will always find customers willing to pay for convenience and experience. The fact that we have a choice now is what really matters.

  • http://www.forsalebyownercenter.com For Sale by Owner Center

    The reality is simple. A REALTOR is a “Salesperson” their job is to sell. So ideally, if you are a salesperson and your job is to sell things, you must make it move quickly. This happens when a property is priced on the lower end of the range. This compresses the sale cycle and therefore increases the hourly rate of an agent. This is why most agents will suggest that you accept the first offer that comes in, maybe you counter back on services and a $10,000 price difference but their job is to sell and sell it quickly. This also supports the Freakeconomics data.

    To truly get top dollar, one must focus on “marketing” which is exposing the property to as many people as possible and let the market determine what is the real value by the offers one receives. Real estate agents are not marketers… they are sales people. They move from transaction to transaction and have no real benefit to get you an extra $20,000 for you home (what they make an extra $1,200?).

    The public uses agents because it’s the only way they know to “get into” a home they like and in about 64% of the time, they found it themselves. The NAR and REALTORs have brainwashed the “home buyers” telling them their services are free… it’s even in their code of ethics that they can advertise services as free when they expect payment.

    Redfin and companies like it will expose this reality and there will be downward pressure on not just the seller side of commission but also buyers side, especially now that we are in a buyers market.

    Agents will say that their mega brand has the best site with the most traffic… well for about $500 bucks, your listing can appear on THIER site because they use an MLS feed. Why pay 6%?

    Agents in most cases are not real marketers and they don’t really analyze what they do. If you don’t believe me, use this tool real estate commission negotiation calculator and script we created that helps you interview your agent (if you decide not to try FSBO first) and provides you a script to negotiate your fees from any of the mega brands.
    Watch the expression from the agents you interview and save yourself thousands in real estate commissions. When you get an agent that can break-down these calculations, they you got an agent who is really earning their commission.

  • http://www.yourhawaiirealestateinfo.com jpillow24

    Not surprising. What else can we expect from a weakening industry?
    The key for agents’ survival is reinvention. Maybe they can start with attractive offers.

  • Paul Singh

    I’ve been seeing more and more articles like this and I, too, am excited to see that people are talking about getting away from the traditional real estate agents and their 6% scam.

    My wife and I have been looking for new homes for a few months now. Interestingly enough, it seems that new home builders will give the BUYER anywhere from 3-4% for *not* bringing a real estate agent to the deal. I have no idea why they do this but it is a nice little incentive either way.

    I’m confident that we’re going to see more and more fo-sale-by-owner types of things in the future. Especially since many companies are beginning to offer tools to help sellers list and advertise their homes on their own — one example, http://cellulist.com

  • Jerry

    I am glad to see this movement taking place. I live in a market where the largest listing agency has essentially become a monopoly selling 60 to 80 percent of the homes. A few years ago they decided to change their fee to 7% saying the reason is they have not had a raise. What??!! House prices have been going up so this is a load of bull. They are just taking advantage of their monopoly position.

  • Trevor

    I think there’s something important that people are forgetting here about Realtors and home buying/selling in general. in some states, the Realtor is responsible for provisions in the contract, they have to take out a type of insurance for it (the name evades me as I write this). Additionally, in other states, you need to have a lawyer at the closing. and finally, there’s the title company. The real problem is that there’s “too many hands in the pot” so to speak. Real Estate lawyers are not especially popular so far as I can tell. in my home state of Florida, I’ve seen a bunch of commercials of Lawyers trying to convince people there is a need to have a Lawyer if you’re buying or selling a home, whereas much of the responsibility that a lawyer might have, is taken care of in the errors and omissions insurance that realtors have, so far as I understand it. Don’t get me wrong, I totally agree that realtors need to innovate. (I feel the same way about travel agents), but there is more of a purpose to them than simply calling them salespeople. Of course, I was insulted when I bought a house here in FL and none of the realtors bothered to show up for the closing!

  • Richard Maher

    It really is time for the 6% to go. In some countries in Europe (e.g. Ireland 1% or less has been the norm for years).

    The internet has simply broadened the reach of any marketing campaign, which is key to getting the best price. The more potential buyers, the higher the potential of getting a price close to value. After all any home’s value is only worth what someone is willing to pay for it.

    People need to push back on the 6% to realtors who keep saying ‘it’s only 6%’. That’s fine as a percentage of sales price. But the commision comes out of a sellers EQUITY. So 6% on a $500,000 is ‘only’ $30000, but if the seller has a $400000 mortgage that’s 30% of their equity (THIRTY PERCENT!!!!)

  • The Secret Agent

    6% is here to stay folks…sorry to say. When you want to handle all of the legal responsibilities of disclosing every known fact of your home, negotiate with buyers coming in at $50,000 under your asking price, and advertising your home for an average of three months before the first offer (at least here in Northern California) be my guest.

    Until then, hire someone who knows what they’re doing. And by the way, half of that goes to the buyer’s agent.

  • http://www.flatfeemlsmarketing.com Flat Fee MLS Marketing

    I’ve managed to find brokers in 29 states that are publicly offering flat fee mls services (most in the couple hundred dollar range) and the numbers seem to be growing everyday, though I think many are afraid to go public with this information for fear of discrimination by other agents. This pretty much eliminates half of the 6% equation (the listing agent commission), and then savvy buyers are able to eliminate the other half by going directly to the listing agent or using one of the new services such as Buyside or Redfin.

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  • http://www.money.amazingguide.org Daniel

    I couldn’t understand some parts of this article Death to the 6 percent, but I guess I just need to check some more resources regarding this, because it sounds interesting.

  • http://www.listingflatfeemls.com flat fee mls

    I think its all over for full service in the next ten years.

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  • http://www.rehava.com Steve deGuzman

    I almost wet myself (ok, i actually did, jk) after reading this section in the book.

    4 years ago we started doing what you recommend agents should be doing today. My company is an Agent 2.0 machine and we are having an extremly difficult time with other agents lying, coniving and doing everything in their power to discredit us. REMAX sued us and it goes on and on.

    Can we talk?

    steve@rehava.com

    Ciao.

    twitter @rehava

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