Take that, 6 percenters!

The monopolistic hold big real estate agents have had on information — on access to use multiple listings services — has been blown open at last thanks to the Justice Department’s antitrust settlement with the National Association of Realtors.

Kiss your 6 percent commission good-bye, Ms. Agent! Competition is on the way.

The only reason — only reason — that Realtors could hold onto their high commission for such little value and work is that they kept information away from the marketplace, making it inefficient. To quote Umair Haque (sorry, no link; I’m pulling this from my manuscript):

Competitive advantage is fundamentally about making markets work less efficiently. One catastrophically effective way to do that is to hide and obscure information – to gain bargaining power relative to the guy on the other side of the table. . . .

A world of cheap, abundant, always-on interaction, where value is shifting to the edges, demands a fresh understanding of what’s truly strategic and what’s not.

Here’s a quick example. Where orthodox strategy advises hiding information and making things less liquid, what does edge strategy advise? Exactly the opposite: release information bottlenecks and make things more liquid.

What Craig Newmark realized is that listings — for sale, for rent, for hire — are the property of the market. By making that efficient and extracting the minimum value from it, craigslist grew huge. When Craig spoke with our students at CUNY recently, telling them about some of his other activities, the students asked him why he wouldn’t maximize the value of craigslist, then sell it for billions, then use that fortune for his philanthropic investment. Craig said that he believes he is doing more good leaving the internet dividend he created in the economy. Buyer and seller, directly connected by craig or by Google, keep more money from transactions. The middlemen — agents and newspapers — suffer but more people benefit.

This new economy can now come to real estate sales as information become freer. Oh, it’s not fully freed yet. But I do believe that the combination of this settlement and what it does to empower discount players and the depressed real estate market will combine to finally shove dynamite up Realtors’ rears.

Couldn’t happen to a nicer bunch. A 2008 survey by the British Journalism Review found that estate agents in the UK are the least-trusted profession, worse even than tabloid reporters; only 10 percent of Britons trust them.

Freakonomics demonstrated how real estate agents’ interests are not aligned with their clients. “A real-estate agent may see you not so much as an ally but as a mark,” wrote Steven D. Levitt and Stephen J. Dubner. They cited a study that found that real-estate agents keep their own homes on the market an average of 10 days longer than homes they represent and sell them at prices 3 percent higher. Levitt and Dubner explained that it’s more efficient for agents if they can get you to sell quickly, even though, from your perspective, that is clearly a less efficient marketplace because it doesn’t get you maximum and true value. “Here,” they wrote, “is the agent’s main weapon: the conversion of information into fear.” That is to say, the control of information leads to inefficient marketplaces. But in the long run, Zillow is becoming far smarter than the smartest agent because it knows more thanks to the aggregation of our data about sales. On the internet, more information equals more value.

The Times said:

Real estate agents earned $93 billion in commissions in 2006, with a median commission of about $11,600, Justice Department officials said. Internet brokers, offering pared-down services, provided average rebates of 1 percent on commissions that normally ran 5 or 6 percent, translating into thousands of dollars per sale. . . .

The National Association of Realtors, with more than 1.2 million members, said that the settlement was “a win-win” for both the real estate industry and consumers. It noted that the association admitted no wrongdoing and paid no fines or damages as part of the deal.

Laurie Janik, the [National Association of Realtors] general counsel, said in a telephone interview that the settlement would have no real impact on home buyers or sellers.

“I don’t think they’ll see anything different,” she said. “This lawsuit never had anything to do with commission rates, or discount brokerages.”

Bullshit. Competition is coming. Information will get freer. Rates will decline. Homes will be worth more. A more efficient marketplace is good for buyer and seller but not middleman. We’re finally headed in the right direction. The Times concludes:

Norman Hawker, a business professor at Western Michigan University who organized a symposium on the Justice Department litigation as a senior fellow for the American Antitrust Institute, predicted that the settlement would ultimately mean a drop in sales commissions of 25 percent to 50 percent as a result of increased competition.

“It’s pretty clear that there was an enormous amount of discrimination against brokers who were trying to use innovative business models,” including discounted fees and virtual offices on the Internet, he said. “There are lots of entrepreneurs who have been looking for a green light in the form of this order to begin offering discounted rates. It has the potential to be a big step forward for consumers.”

When I write posts decrying the wasteful sloth of real estate agent commissions, I invariably get a cadre of agents – more often, actually, their defensive husbands – saying I just don’t understand the value they bring. I say that if they have to explain their value, then it is empty. They do not deserve 6 percent commissions and soon they won’t get them. Heh.

  • http://www.technovia.co.uk Ian Betteridge

    “A more efficient marketplace is good for buyer and seller but not middleman.”

    So what’s Craiglist, if not a middleman? I think what you really mean is that a more efficient market is good for *different* middlemen – ones who are prepared to understand and make the most of the new, low-friction, low-cost market.

  • http://timbauer.bauerfive.com Tim Bauer

    Jeff,

    Thanks for the article. I recently reviewed 2 different presentations by the CEO of RedFin around this concept. Great stuff. If you are curious on the outline of what Glenn (the CEO) you can go here:

    http://timbauer.bauerfive.com/2008/04/18/redfin-making-more-with-less-possible/

    I basically blog on webcasts I watch (type rough notes) then summarize so people w/ less time can get the jist of the points.

    Hope that helps.

  • http://simoncast.blogspot.com Simon Cast
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  • http://www.csoonline.com Derek Slater

    Jeff – you seem a particularly angry consumer this week. :) I wonder if the net could have a similar effect on the diamond market, where consumers are at a terrific disadvantage. (Although I think the whole concept of diamonds is kind of ridiculous, so maybe the buyers get what they deserve there.)

  • http://cnewmark.com Craig Newmark

    Jeff, thanks! but much too kind to me, Jim Buckmaster, our gigantic CEO, gets the credit for the smart stuff.

    Craig

  • Paul

    Jeff —

    Like almost anything in life, value can be recieved if it is searched for and/or demanded. You seem to have a hard-on for realtors, which makes one think that you had a bad experience with one. Did you search for one that did the work that make their commissions worth it?

    Another point — few sales net a real estate agent 6%. This is because the majority of sales have one realtor listing a home and a different realtor selling the home — thus a 6% commission is split in half. That 3% commission is then split with the realtor’s broker — 70-80% to realtor being about the norm.

    Let’s do some math. You quote the Times saying the median commission is about $11,600. At a 6% commission rate, that would put the median sales price at $193,333. With a 6% commission split between two realtors, then split 75% to realtor and 25% to the broker, a selling realtor would make $4,350 before taxes – about $3,200 after.

    No, I am not a realtor — I just bothered to research them before I used one. And yes, I agree with the basic premise that information should be open and shared. I just dislike your pissy tone towards realtors – or any other profession — in general. What do you do for a living? How about if we fisk your paycheck line by line and see if everyone feels you are worth it?

    This is a free market system. In any open free market, the actual seller of a widget is going to make a disproportionate percentage of the income than anyone else in the widget chain — more than the manufacturers, more than the designers, more than anyone other than the owner of the widget idea. Why? The salesman is the point man, and drives the entire engine. It is true in any business — do not just pick on realtors.

    Now, go back to cheering for a more open marketplace – that is a commendable effort. But the sneering at a sales force in general makes your writing less appealing…

    Good Day!

  • http://seanbyrnes.com Sean

    Paul, I don’t think the distaste for realtors is based on the fact that they are sales people. It’s based on the lengths they’ve gone to in trying to protect their position in the marketplace. When the points of friction you used to build your business disappear you can choose to change or try and protect that friction. They chose the latter.

  • http://www.newwest.net Jonathan Weber

    Jeff,

    I’m not a realtor nor is anyone in my family. The one time I bought a house the agent certainly earned her money, I ended up making offers on idiosynchratic properties that required a lot of research, down to studying 100-year-old water rights records on microfilm. I was actually very impressed with her efforts and her knowledge of matters that would have been very difficult and time-consuming to understand on my own.

    But, the point I want to make here is a different one. Real estate is a complicated market, regulated in different ways in different states, and the NAR settlement is only one piece of a complex puzzle. In some states sales prices aren’t even disclosed, for example. I would argue that Zillow sometimes does a disservice by promulgating radically inaccurate “information” about home values. When you’re selling things that are worth *a lot* of money, and are by definition subject to many layers of regulation and financial review, there are going to be intermediaries. How many intermediairies, what functions, and what cut they get are all on the table. But individuals are not going to be buying and selling houses one-to-one on Craigslist, or at least not in any great number. Ask someone who has tried a FSBO – it’s not much fun, and not only because Realtors make it harder.

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  • http://www.beatcanvas.com Brett Rogers

    For those of you, like Jonathan Weber, who believe “individuals are not going to be buying and selling houses one-to-one on Craigslist, or at least not in any great number,” I bet stockbrokers never thought that people would actually research their own stocks and buy them online.

    Disruptive innovation happens on the fringe, simplifying the process for the unsophisticated first. And then it matures and becomes mainstream, and legacy companies wonder what the hell just happened.

    It’s the age of disintermediation. Realtors are certainly those in the middle of the transaction. Individuals are capable of far more than you imagine.

  • Omni

    Well, if this brings competition to real estate industry, anything like competition brought to the cable industry, commissions will rise to 10% in the next couple of years.

  • http://www.utahhousevalues.com Darrell Catmull

    The 6% commission is actually a 3/3 commission. 3% goes to the listing agent and 3% goes to the selling agent representing the buyer. On a rare occasion the listing agent sells the home and keeps the full 6%, but it is rare. The commissions have been under attack for over a decade. Our board and MLS in Utah have never prohibited discount brokers from setting their price nor has the NAR. Discount brokers have been around forever. I know of two discount brokers who could not make it in the business because: 1) their revenue stunk 2) People end up doing business with a professional who charges what they think their worth and many pay him/her. Yes, it’s most likely 5-7% split 50/50. Some even add transaction fees on top of that.

    Jeff, your article is not researched well and is more of a tirade than informational. The truth as to why it costs 6% to list your home with a competent broker is because there are too many large brokerages housing too many agents. Furthermore, they always need more agents in the house to subsidize the high overhead. As a 15-year veteran and broker I know the game of the big brokerages. They seek out and hire any eager newbie. That newbie predictably will do 1-6 deals with family and friends in the first 6 months. The brokerage keeps 50% or more of each commission. The big brokerages know that the newbie will be out of the business in 4-12 months, in debt up to their eyeballs, if not bankrupt. NEXT! I don’t think my phone service is noticeably different because of Big Brother?

    The solution which the NAR will vehemently fight against is to make it harder to get a license; The NAR likes their 1.2 million dues ($104). The states need to require: 1) at least an associate’s degree in business to enter the field or 2) require that all new agents operate under an apprentice for a period of time and when certain points/credits have been achieved. Under this model, similar to appraisers training (after the S&L scandal), the industry would then attract people with a sense of direction, commitment and understanding of patience and discipline. Right now we get 18-year olds to retirees and everything in between, who just want to earn a buck or two. These incompetent part-timers and squatters tarnish what could be a highly reputable profession.

    I personally have a punch-list that includes 180 items from: tasks, calls, meetings etc. that I do for a single client and this is just a starting point, it’s customized for each client. PLUS I have to prospect for new business at some point in the week.

    This is about the value an agent provides and whether you agree or not. You get to choose the agent! Would you like me to find you three discount brokers? There in every state, every county and every city! A good agent provides value, whether it’s worth a percentage is arguable and nothing is stopping competition. It’s like lambasting the athlete that gets 20 million a year. I bet once that pie is cut up he really takes home half the face value of the contract if that.

    Jeff, your tirade is focused on the symptom vs. the cause. Perhaps your right, the commissions will come down. But consider this: If I average more than 1.5 clients a month, with my system, I would have to hire one competent assistant (36K per year) for every 8 additional clients. This is exactly why you see the trend of “teams” in big brokerages. That 6% gets cut up like a small pie at Thanksgiving. An assistant in real estate is the equivalent of daycare to a two income blue-collar family. It may pay to hire daycare it may not. The real disservice to consumers would be cutting the commission for the sake of cutting the commission.

    Office Max, the internet all have fill in the blank forms. What’s stopping anyone from selling or buying a home without paid help? Why are you blaming brokers for high commissions? I see nothing in the way of competition! There’s fixed fee, discounted commission and Pay for performance brokerages all over, why aren’t they more successful? Oh I know it’s because Big Brother needs to step into this fight because the consumers are too apathetic and scared. They can’t organize and make a difference without government? Phewy! I can create a business plan on $3000, 2%, 3%, $995 or any other amount but why would I choose $995 when over 80% of the property sold averages over 2.74% each side? Would you tell your boss, no don’t give me a raise, that’s idiotic.

    The Bad guy that can’t recognize a garage is too small for the buyers trucks and sells the house to them anyway should go home create a virtual office and hide behind the internet for $99 per sale, maybe then consumers will recognize the value in an experienced broker regardless of the size of their fee. It’s not about the money silly it’s about the consumer being educating and responsible for their choices. Meanwhile enjoy deciphering what’s fraud and what’s not on Craig’s’ List as Craig so often warns you.

    The right thing to do is to make it harder to become an agent. Then watch the commissions go down naturally or watch the service and reputation of agents do a 180 and the commissions go up. Microsoft doesn’t seem too affected by Big Brother and nor will the pro’s. I’ve been financially broke many a months because I truly have the clients’ best interests at heart. I didn’t sell a property even though I easily could have. I know many who fall into the same category of ethics but like all things the bad guy ruins it for the good guys.

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  • http://www.FlatFeeDirect.com Terry Shortt

    Although consumers probably won’t actually see any benefit from this settlement agreement, it does send a strong message to the real estate industry to stop erecting barriers to alternative business models.

    The US real estate industry, dominated by the National Association of REALTORS and its affiliates nationwide is still a closed business that is highly resistant to change. Implementing any change that would have a direct impact on consumers (like lower fees) is like trying to turn the Titanic around in a bathtub.

    Most consumers have no idea that the NAR has a strangle hold on virtually every state real estate regulatory body (the very entity that was established to protect consumers). They exercise this control through their state affiliates and it goes virtually unnoticed.

    Real estate regulatory bodies like the Kentucky Real Estate Commission (KREC), operate with little or no oversight and rarely make a move without the direct involvement of the Kentucky Association Of REALTORS (KAR). It’s easy enough to see that that the objectives of the KAR would be “industry” oriented and that the KREC should be “consumer” oriented.

    We are not likely to see any meaningful change in the way the real estate industry functions until we restore independence to real estate regulators. Currently in many states, a position on the state real estate regulatory body is a “pay-back” for past political involvement and has to be approved by the state REALTOR trade group.

    What we actually need are “subject matter experts” serving the interest of consumers and establishing reasonable rules and policies that reflect the fact that we are living in 2008 not 1960.

  • Andy Freeman

    > then split 75% to realtor and 25% to the broker

    > That 6% gets cut up like a small pie at Thanksgiving.

    Either those folks are adding value or they aren’t.

    I like messages that tell about wonderful, time-consuming, and expertise requiring jobs that realtors do and then rant about realtors who are basically suits giving the industry a bad name. The former may be worth 6% but the point that such messages always miss is that the latter is worth less than the former. Yet, those messages are always arguing that the 6% fee should be universal.

  • PAA

    …you could say the same thing about M&A bankers as well…

  • Greendoggie

    Not to digress from this important discussion but I feel compelled to share a fabulous find I just came across. It’s a business search engine called planetbuzz com. Businesses can advertise for FREE! Can it really be in this day and age when everything is falling “UP” around us??????

  • http://www.netchoice.org Steve DelBianco

    As someone who advocates every day for convenience, choice and commerce on the Internet, I am happy to see this settlement reached. NAR must now actively encourage Realtors to invest in technology and try new ways of providing information and service to home buyers and sellers if they want to remain relevant in the future. For more insight: http://blog.netchoice.org/2008/05/just-in-time-re.html

  • LTB

    However you slice the percentages going to agent(s), brokerage, etc., 6% of a home’s selling price represents 21.6 months of mortgage payments on a traditional 30 year mortgage, or 10.8 months if you can handle the payment for a 15 year mortgage. Yes, it “comes out of the seller’s pocket” – but unless the seller is taking an outright loss, it’s covered in the sales price.

    It’s not very unusual anymore for a “reasonable” mortgage payment to equal half of a household’s monthly take-home. For such borrowers, 11 – 22(ish) months of mortage payments adds up to 5 -11 solid months (!) of hard-earned post-deductions income going to the broker, for what? – how many hours of effort? How, exactly, can this not take a huge bite out of the “value” of homeownership, short of a market that is forever appreciating wildly out of sync with incomes and inflation?

    Every few generations, we have to be taught anew about the dangers of “leverage”, Ponzi Schemes, and just general unregulated greed. These lessons don’t come cheap, and if the NAR’s constituency pays a particularly disproportionate price, I’m afraid there won’t be many tears shed…

  • http://robhahn.wordpress.com Notorious ROB

    Terry –

    While you’re right… pray how is that any different from the Bar Associations and the state legal regulators? (Overseen, incidentally, by the courts whose members are judges, meaning… they’re all lawyers.)

    Or medical regulators that regulate doctors?

    Why single out realtors?

    -rsh

  • http://www.newwest.net Jonathan Weber

    Re Brett Rogers’ comment above, the issue is not what individuals are capable of. It’s about what they want to do themselves vs. paying someone else to do for them, and how much they are willing to pay. Personally I like having intermediaries in many situations, not because I can’t do it myself, but because I don’t want to, and it’s a bad use of my time. For example, I just started using a live, human travel agent again, not because I don’t know how to buy plane tickets on Orbitz, but because of the tedium of it (and in fact good travel agents have their own deals with airlines and can sometimes get you a better price, though that’s another story).

    And, just to be clear, I certainly agree that the NAR settlement is a good thing, and there should be competition on commission rates and in other areas of real estate sales.

  • Husband of a Realtor

    Jeff–I am not a Realtor but I am married to one. I can’t speak for other Realtors or their inclinations, but I do know how hard my wife works and how important it is for her to do right by her clients. What’s more, like an actor, Realtors spend countless hours working for a job that may not materialize in the end. In fact, much of her work goes unrewarded when a potential client decides against buying.

    True, when she is able to go to contract, she gets paid but remember also that they don’t pocket the whole 6%. In most cases, each deal requires a broker on the sell-side and one on the buy-side, so the commission is split 50-50. Then the brokerage takes its cut. So in the end the broker, unless they have been with the firm so long and performed so successfully over the years that they have been able to command a more favorable percentage, usually winds up with only 1.5%.

    The new regulations will help many buyers and sellers save money, of course. In many cases, people don’t need Realtors. Much in the same way that many day-traders don’t need a broker. But there will also still be those clients who still feel they need the professionalism and insight that working with a Realtor provides–and for which Realtors like my wife work extremely hard to bring to their clients.

    Like many jobs, it is a lot tougher than it looks.

  • http://www.utahhousevalues.com Darrell Catmull

    I just saw a local news story of a “for sale by owner (FSBO)” who lived outside Utah but felt confident Craig’s List could generate plenty of traffic to get it sold. His neighbor agreed to help show it because they, like Jeff, felt REALTORS compensation was in excess.

    Using the above FSBO’s pictures a scammer will create a new ad indicating that the property is for rent to own. These very creative and well executed cons generate thousands of dollars for the scammer before he/she shuts it down. Here’s how it works. The scammer sends the would be renter to the address and says “look through the windows, if you like it, send me $100 via Western Union (untraceable) and I’ll have the key’s and lease to buy agreement, for you to sign, delivered.

    Now that the NAR has been exposed as this evil entity stealing and hoarding billions of homeowners effortlessly earned equity dollars we can rejoice in the creation of more scamming outlets like the VOW.

    And for those of you who still believe the NAR has been protecting 6% universally, visit http://www.halfpriceagent.com , there are thousands of agents and sites like this. For those of you who can’t see that the VOW is the dawn of new outlets for scammers, good luck! For more on the settlement visit http://www.realtytimes.com and view their video on VOW’s.

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  • Dave

    It’s been stated already, but your argument is typical of someone who hasn’t had a good realtor. We bought our first house and our agent worked his ass off for us in getting a house that was being sold out of probate. We would have never got the house without him. When we found out what his cut was after 3 months of fighting on our behalf, we offered him money out of our own pocket (which he refused). Do more homework shopping for a better realtor next time.

  • http://realtor.com Todd Kimmel

    I’m a Realtor.
    Please… figure out a way to put me out of business!
    I need a vacation (haven’t had one in two years).

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  • http://www.freeltor.com Adrian

    A lot of good points made in this discussion.
    Truth is buyers agents provide a service and earn every penny
    selling or listing agents are due for change.
    Freeltor is a new website that offers owners access to the MLS for free.
    They follow the freemium model that google and others use. As of right now it is the only company online offering free access to the MLS. check them out
    freeltor.com

  • http://www.joeymarino.com Joey Marino

    This depends on the area as well. In my area, $100,000 and less make up the vast majority of our market. $100,000 can buy a lot of home, but $6000 has to be split 4 ways! $1500 for some times 2 months of work is too much? How about car salesmen who make $500-$1000 in one day? I don’t think Realtor’s jobs are at stake, but there are agents that do make way more than they deserve. Agents are constantly adapting and building tools to make their services better. I for one, spend more money than any of my competitors on marketing and promoting homes for sale. If I spend $500 on advertising a home, I shouldn’t be compensated? I’m trying to understand the consumer’s viewpoint and I think I do. Consider the area and the local market so we don’t end up hurting the little guys trying to make an honest living.

  • http://www.rehava.com V. Spencer

    It’s all about efficiency and educating buyers in advance, plus using all the awesome tools available on the internet today to market and sell homes. I cannot believe that real estate agents spend money to advertise when statistics show that most people start their search online first…it’s cheap or free to market online. I also cannot believe in today’s hi-tech world some real agents still drive buyers around and show them 100 or more homes. I do not have that kind of time to look at houses. I can look at a home online and tell if I like it or not. I can look at 100 homes online and tell that I do not want to see any of them in person.

    Rehava real estate store in Charleston, SC (maybe you read about rehava.com in connection with the Rehava/Remax debacle -Remax tried to dispute rehava’s trademark) based its new progressive real estate business model on sharing as much information with the consumer as possible, using cutting edge online tools to share this information and splitting its commission (50/50) with their buyers. As you can image, the company has received a lot of grief from its competition for this model. What does it really mean for the future of real estate if one company can become so efficient that it can pay half of its commission back to buyers at closing? Does it mean that the other companies will have to figure out how to be more efficient and do the same…

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  • http://www.graniteequityinc.com/ Rocklin real estate

    Real Estate agents no longer have a hold on information and can’t charge such a high commission rate.

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