These Palo Alto guys have been making national headlines since they rolled out their reduced-commission program last week. They are offering a $10,000 fee to buyer-agents, instead of a percentage, AND encouraging buyers to come directly to the listing agent to avoid paying any fees (which is my beef).
Why would a high-end independent brokerage that sold 100 homes in the last 12 months – mostly in the $3,000,000 to $10,000,000 range (with sales of $40,000,000 and $44,000,000 too) – feel the need to effectively shut out their fellow real estate agents? Beats me.
Last week, the Department of Justice stated that commissions should be decoupled and NO fee be offered up front to buyer-agents by the seller or listing agent (though they did agree that buyer-agents can include a seller-paid commission in their buyer’s offer).
What gets lost in the discussion is the 120-year history of broker cooperation – where other agents can sell my listings, and I can sell theirs. It is a terrific system that best serves the sellers and buyers, which is our fiduciary duty.
But greed and market-share dominance is pushing fiduciary duty to the sidelines. Instead, brokerages are taking advantage of the current uncertainty to craft a quasi-single-agency package that effectively shuts out the cooperating buyer-agents under the guise of saving the seller money. Is it in the seller’s best interest to discourage the outside buyer-agents?
This is one of their first listings to hit the open market that offered their $10,000 fee to buyer-agents, and it went pending in seven days:
This report should be the last dagger for buyer-agents.
Won’t buyers who are empowered by searching for homes on the internet themselves just go direct to the listing agent, rather than paying extra for their own representation? They don’t think they need representation – they can find houses on their own!
Listing agents will encourage this program too – and just charge 4%-5% and keep the whole fee (which this report didn’t see coming). In addition, without buyer-agents there will be no need for the MLS. The search portals will become an option, rather than a requirement, for listing agents to advertise their listings if they feel like it.
Also, realtors will be extremely reluctant to advertise their true rates and services. How do we know that? How many realtor blogs do you see today? Instead, the braggadocious fluff will prevail.
Washington, D.C. – A new report by the Consumer Federation of America (CFA) on residential real estate commissions – The Relationship of Residential Real Estate Commission Rates to Industry Structure and Culture – shows that buyer agent commissions are highly uniform. This rate uniformity is strongly supported by the industry’s compensation system in which home sellers pay the commissions of both the listing agent and the buyer agent. Uncoupling (or untying) seller and buyer agent compensation would spur price competition that would substantially reduce the some $100 billion in commissions paid annually by consumers.
“The current commission system is designed to thwart price competition among agents,” said Stephen Brobeck, a CFA senior fellow and the report’s author. “If home buyers were allowed to negotiate their agent’s commission, agents would be encouraged to compete on price and service,” he added.
CFA’s analysis of more than 10,000 home sales this year, in 21 cities from the eastern half of the U.S., shows that buyer agent rates were highly uniform. As the appended table shows:
In eight of the cities, more than 80 percent of the rates were identical.
In 14 cities, more than 88 percent of the rates ranged between 2.5 and 3.0 percent.
In all cities but Brooklyn NY, at least 72 percent of the rates ranged between 2.5 and 3.0 percent.
The report’s analysis of these buyer agent rates and their relationship to listing agent rates reveals that the typical total commission in these cities ranged between five and six percent. The report also explains why the most widely-quoted estimate of a national average rate – by industry-related Real Trends and now below five percent – is misleading and probably inaccurate.
In a Price-Competitive Market, Commission Rates Would Vary Considerably
In a price-competitive marketplace, rates would vary greatly because of several factors:
The work-related costs of agents can vary greatly. Listing agents can do as little as just listing the house on their local multiple listing service (MLS) or also arranging high-quality photos and videos, developing and distributing marketing materials, and meeting potential buyers. Buyer agents can, for example, show only one house or more than a dozen homes.
When the work does not vary, the compensation usually does. Total agent compensation, at a five percent rate (of the sale price), varies from $5,000 on the sale of a $100,000 home to $50,000 on the sale of a $1,000,000 home.
The quality of agent service often varies but the rate usually does not. Experienced agents typically charge the same rates as agents who have just received their license.
In home sales, some agents are fiduciaries with total loyalty to clients while other agents work as dual agents or transaction brokers, with loyalty to neither seller nor buyer. Fiduciaries, in general, deserve higher compensation.
Industry Structure and Culture Block This Price Competition
The report shows that the above factors, which should result in highly variable commission rates and agent compensation, are minimized by the structure and culture of the industry.
Historic Rate-Setting: It was only through determined efforts of the U.S. Department of Justice, Federal Trade Commission (FTC), and some state attorney-generals that toward the end of the last century, the industry shifted from explicit rate-setting to “covert-price setting,” the term used by a 1983 Federal Trade Commission report.
Industry Rules: The industry requires listing agents (and clients) using local multiple listing services (MLS) to offer fixed compensation to buyer agents selling the properties. Buyers are unable to negotiate this compensation, and buyers are usually told, if they ask their agent, that sellers pay the agent’s commission. Sellers, on the other hand, are informed by their listing agents that lowering this buyer compensation will risk buyer agents “steering” their clients to higher-commission properties.
Industry Norms: The industry promotes a “cooperative” culture in which agents are expected to be “team players,” according to the FTC’s 1983 report. Company policy manuals often constrain rates charged, and agent scripts explain how agents can avoid negotiating lower rates. A core norm of the industry culture is not talking or writing about commission rates, which helps explain why very few firms, except discounters, advertise commission rates, disclose them on websites, provide them to inquiring consumers who call firms, or typically discuss them at all with home buyers.
Agent Surplus: The high ratio of agents – over 1.5 million realtors – to number of home sales – about six million annually – forces agents to spend much time and money seeking clients. It also provides a strong incentive for agents and firms to support high, uniform rates.
The report notes that there appears to have been some recent erosion of rates and their uniformity. Over several decades, typical rates in urban areas have declined from six to seven percent to five to six percent (with no loss of agent incomes because of rising housing prices). In some cities, there are now a large number of sales at both 2.5 percent and at 3.0 percent. And in Brooklyn, where expensive homes generate substantial fees, typical buyer agent rates are well below 2.5 percent.
Uncoupling Buyer and Listing Agent Commissions Would Spur Rate Competition
The report suggests that the one measure which could spur rate competition is uncoupling buyer and listing agent commissions so that buyers can negotiate compensation with their agents. Buyer agent commissions, now baked into listed prices, would instead be negotiated by buyers. That would lower home sale prices, and both the mortgage and real estate industries would ensure that these commissions could be included in mortgages whose amount financed would not need to increase.
The uncoupling of rates would also free listing agent discounters from the shackles of current industry rules that force them to charge typical buyer agent rates. Over time, there would be a much wider variation in rates (and service options) reflecting agent experience, work, effort, representation, and willingness to compete on rates.
There is a broad and increasing consensus that commission rates should be uncoupled.
Studies published on both the Right (Cato Institute) and Left (Brookings Institute) argue strongly for this untying. Lawsuits filed by major class action firms seek to uncouple commissions. The U.S. Department of Justice is pursuing antitrust issues beyond improved disclosures. The Biden administration’s antitrust agenda targets tied commissions. Even some voices from the industry have suggested the consideration of changes in current rate compensation practices.
A week ago, the National Association of Realtors (NAR) announced changes that would allow agents, firms, and portals to publish buyer agent rates. In an analysis of these changes, CFA noted that they would discourage agents from steering consumers to higher-commission properties, but would not permit significant rate competition because buyers would still not pay, or be able to effectively negotiate, compensation of their agents.
It’s a sexy topic because the realtor industry is terrible at explaining commissions, and then reporters jump into the middle of it with their pre-conceived ideas and write articles like this one that make it worse.
Let’s sort out the two issues.
#1. Do agents steer their buyers based on commission being paid by listing agent? Yes.
Will disclosing the commission rate stop steering by agents? No. Will buyers insist that their agent show them those listings any way? Maybe, but agents will find a different reason why they don’t want to show it so it won’t be about the discounted rate.
Sellers should insist on rewarding the buyer’s agent – pay them a bounty for selling your home. If the listing agent is paying 2% or less to buyer-agents, it discourages them from showing your house.
#2. Everything else is an assault on buyer-agents, who are getting squeezed out of the business.
Redfin and Rex want to convince buyers that they don’t need help. Just find yourself a house that you want to buy, and they will do the paperwork for you. They will say anything to convince you it’s all you need.
If the day comes that buyers have to pay for their agent, then they will just go straight to the listing agent who will have worked out a deal with the seller to handle those cases.
In either case, buyers won’t get good help. They will get no help – not from an agent who represents the best interests of the buyers, and advocates on their behalf.
Buyers don’t realize how much they want and need good help until it’s too late – but this doesn’t get considered by the Department of Justice, NAR, or reporters.
A few readers have sent in articles regarding the class-action lawsuit filed about commissions – an excerpt:
A class-action lawsuit is seeking to upend the way homes are listed for sale and the commissions paid to agents. The goal, say the plaintiffs, is to make home selling more affordable by challenging how agents share commissions on local Multiple Listings Services known as the MLS.
The focus, the suit claims, is on NAR’s “Buyer Broker Commission Rule,” which, according to the complaint, requires “all brokers to make a blanket, non-negotiable offer of buyer broker compensation” in order to participate in the MLS, which is what brokers traditionally use to list for-sale properties. Brokers who don’t participate in the MLS can’t effectively market their properties, according to the lawsuit.
NAR, however, has no such “Buyer Broker Commission Rule” as described in the lawsuit, according to Mantill Williams, vice president of communications at NAR.
“The only requirement imposed by NAR rule is that the listing broker advise all other MLS participants what the amount of compensation to the buyer’s broker will be,” Williams says. “That amount is determined by the seller and the seller’s broker – not by NAR or the MLS. It can be expressed as a percentage of the sale price or as a fixed dollar amount – as low as $1. Under NAR policy, a buyer’s broker is free to negotiate the amount of the commission with the seller’s broker.”
Sellers can negotiate the amount of commission they pay to their own agents. Although sellers traditionally pay the commission, that commission is typically split with the buyer’s agent. The seller might end up passing on the commission costs to the buyer in the form of a higher listing price.
There are two problems that contribute to the situation; 1) The commissions aren’t disclosed to buyers, and 2) In spite of the statement in bold above, the commission rate offered to the buyer-broker is non-negotiable, according to the Code of Ethics:
Standard of Practice 16-16
REALTORS®, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation. (Amended 1/04)
The lawsuit wants to cause the buyer-agent’s commission rate – and who pays it – to be more negotiable (it’s not negotiated by the buyer now). What this lawsuit will include, but not solve, is buyer-agents steering their clients to listings that pay 2.5% or more in commission.
The attorneys will sensationalize the facts during their jury trial, and NAR will probably end up agreeing that buyers have more access to commission rates.
We will ignore this basic premise though: sellers should be free to offer a bounty to buyer-agents to sell their house, and the listing agent should convey that message, and encourage sellers to offer a rate that causes buyers to be steered to their house.
It sounds edgy, but it’s how it works in real life.
I said previously that this will likely cause more buyers to go directly to the listing agent, which will destroy the broker cooperation model we enjoy now.
But we could solve all of these issues with one answer.
If we did auctions instead, we wouldn’t have these problems.
The commissions would be obvious in advance (it’s been the 10% premium, paid by buyers), and all buyers would have an equal chance to buy the home. The sellers would be the big winners – no commissions, and eye-to-eye competition to drive the price higher, with no shenanigans!
We already have at least twice as many realtors as we need, and now we are loading up with middlemen too – everybody wants a piece of the pie! There is an escrow company now that will input your listing into the MLS for $50, as long as they get the escrow!
These guys think they have the magic mix – I’m still not sure what it is – but they are taking it nationwide. But they will find out that somebody needs to do the actual work! Thanks to Susie for sending in this article!
Compass cofounder Ori Allon says real estate is one of the last sectors of the American economy that hasn’t been transformed by data and technology.
He says when he talked to buyers, sellers, developers, and agents, everyone felt they were getting the short end of the stick. And when everyone feels like they are getting screwed, the market is probably inefficient.
Launched in 2013, Compass (formerly Urban Compass), has already shaken up the real estate industry in New York and DC. Now it’s raised another $50 million to expand all over the United States.
The funding raise, which was led by Institutional Venture Partners (IVP), brings total funding to $123 million and values the company at $800 million, according to a source familiar with the matter.
Allon is a startup veteran, having already sold two companies — one to Google and one to Twitter. But Compass is far-and-away bigger than both combined.
Here’s how it works.
Compass helps people find neighborhoods and places to live — either renting or buying. And while there is a sleek interface on the user side, IVP General Partner Todd Chaffee says what really impressed the firm was the agent-side technology. This tech has attracted over 350 agents to the company already, with more of half of them in New York.
Allon says what makes Compass special is that it can significantly reduce the amount of time it takes to find a home and it’s a cleaner experience than alternatives like Craigslist. Compass listings appear on a Google-like map, which also includes pictures of the homes. And if you want to see an apartment, you can schedule a viewing on Compass, which will put together an itinerary for you.
Compass acts as a broker, and the service (including fees for the agent) totals 0-15% per completed rental deal. Fees are significantly less for homebuyers, and at 6% (taken on the seller side), are in line with most high end brokerage firms.
Tom Ferry is real estate’s #1 educator, and he and his staff are coaching realtors around the world. He was gracious enough to allow me to run his latest video below, where he discusses the developing trends in the business:
Right off the bat, he mentions Commission Compression, and that he thinks 60% of the agents will soon be discounters.
I totally agree, and would like to expand on that point.
We’re not talking about the agent who shaves a half-point to bring a buyer and seller together. Instead, it’s those who are ‘buying the business’ – the agents who advertise their reduced commission rate to attract new clients.
In the internet age (where you can get pretty much any product you want with a couple of clicks), the consumer’s investigation time tends to be much quicker – and less thorough, especially in the house-selling business that is loaded down with pre-conceived ideas about how it works.
Will consumers be more thorough about investigating agents?
They haven’t been, and it’s doubtful that will change now.
Discounters could blame the consumers – people want a discounted rate! But regardless of the commission rate, agents have a fiduciary duty to the sellers to explain the whole picture.
We already saw last week that the NBER guys think there is a conspiracy by other agents about not showing homes with discounted commissions. Not mentioned was whether those listings agents who openly advertise their discounts are despised by others in the industry.
In the haste to hire an agent – or to get hired – the fiduciary duty to explain the benefits and burdens to the seller will likely get trampled.
Click below for more Tom Ferry videos and blog – which are fantastic for realtors (I’m not a TF client):
Zillow Group is positioning itself to take the lead in bringing the entire home-buying process online.
During a Tuesday call with investors, Zillow CEO Spencer Rascoff revealed Zillow’s reasons for acquiring DotLoop, a Cincinnati-based company that aims to simplify real estate transactions by enabling brokerages, real estate agents, and their clients to share, edit, sign and store documents digitally, and what Zillow plans to do with DotLoop.
The short version? Rascoff believes the time of the paperless transaction is now, and believes that Zillow and DotLoop are well-positioned to lead the revolution.
“DotLoop is very exciting for us,” Rascoff said during the call. “There is no question that real estate transactions are moving online, any of you who have bought a home, know that signing hundreds of pages of documentation is a burden and that the day of the paperless transaction is here now, and DotLoop is the clear leader in the category.”
Rascoff said that Zillow’s acquisition of DotLoop allows the company to provide increased value to the industry by bringing the paper-heavy real estate transaction online, from “the creation of a listing agreement to the submission of offers to the actual closing.”
Spence has said that they are here to help realtors, not replace them, and this acquisition sounds like it falls in line with that mission. Except the real estate industry went paperless about 3-4 years ago.
Yes, a buyer has to physically sign a load of bank-generated loan documents, and Spence isn’t going to change that. But he is using the ‘hundreds of pages’ excuse to justify bringing DotLoop to Zillow.
There are plenty of realtors using DotLoop already – they are closing $30 billion in sales every month. Does Spence just want to help more of his realtor buddies hook up with his DotLoop buddies? On the surface, that’s what it sounds like.
But here’s the problem:
The industry is changing to a transactional business.
This business used to be relationship-based. Realtors used to rely on getting new clients from family, friends and past clients. While those referrals will still be appreciated, they aren’t enough to support the big realtor teams. Instead, they hire marketing people and newly-licensed agents to maximize volume.
We closed a sale this year with a big team, and the only time the team leader got involved was after the deal was signed, hoping to change title and escrow to their in-house companies.
The big teams put their clients on the transaction conveyor belt, with each team specialist doing their part to close the deal. But does it feel like somebody really cares start-to-finish, or just processing the order?
For-sale-by-owners already use Zillow to promote their homes for sale.
If, and when, Zillow allows FSBOs to use DotLoop, you will know that the end is near.
If consumers get the feeling that they just need to have someone process their order, and Zillow is offering those realtor-like services, then realtors, as we know them, will be extinct within a year or two.
Those of us who are swift and nimble will adapt, and become consultants who use the best online features to process the order, and include a good dose of advice and counsel for a reasonable fee. Single agency will flourish, and hopefully auctions will become popular.
The big teams might adjust, but the big-box brokerages that rely on less-experienced agents on lousy commission splits will be toast.
Yesterday, a name and number was sent to me by an internet lead service. It doesn’t cost me anything to receive the leads – the internet-lead company gets a referral fee from the listing agent once the sale closes. I’m on the list more for amusement – I’ve never closed a sale from any internet-lead service.
I always check the MLS to see if their house has been listed recently, and look for upgrades in the photos – because there could be a 10% swing in price.
This property was an active listing, so I knew what was coming – the sellers weren’t getting enough action, so they blamed the agent (not their price).
I get the seller on the phone, and he starts right in with,
“What company do you work for?”
His current agent is an independent, so instead of having a frank conversation about the realities of the market and why his house isn’t selling, he jumps to the conclusion that he needs a big company to push the product. I mention that I can better expose his property using my video tours, but he wouldn’t have anything to do with it.
He wants a big-name company. Period.
This is why the large franchises exist. They know that sellers don’t have much experience with selling real estate, and the accompanying discomfort causes them to make snap decisions. Many people have been brainwashed by advertising, and feel more comfortable selecting a brand name, rather than investigate the choices.
My take on the subject:
1. Most are independents. According to NAR, the majority of realtors (57%) work for independent, non-franchised companies. If the realtors themselves don’t see the value in working with a franchised company, then why should the consumer?
2. Selling real estate is an individual sport, not a team sport. Sellers are hiring an agent to advise them how to sell for top dollar with minimal hassle. You want to believe that there is a ‘Company Way’ to sell houses and every one of their agents did it the same. But it’s not like that – we are independent contractors that all sell differently. Want proof? The only thing we have in common is the MLS – and look at how differently it is used by agents. Some include lousy or no photos, great or crappy remarks, etc.
3. Quality – The recent DANGER report concluded that ‘the No. 1 liability for the industry is its masses of “untrained, unethical and/or incompetent agents.”’ These agents work at every company (franchise and independent), and sellers are misguided to think that if they call a brand-name company, they will automatically get a competent professional. Inexperienced agents typically usually learn at a big franchise office, then go out on their own once they are experienced – which would make you think that hiring an independent agent would make it more likely to get an experienced agent.
4. Reputation – Have you ever had a bad experience with a brand-name company? This is why many agents prefer to be independent – the actions of other realtors in the office can have a negative impact on their own reputation.
5. Independent companies vs. independent realtors. Once you are open to hiring an independent, then break it down further. A big independent brokerage has some of the same problems as a big franchise. Ideally you want to hire a guy whose name is on the door – he has the most riding on every detail of the transaction.
This isn’t a knock on franchise offices themselves – there are good and bad agents everywhere you go. It’s the industry itself that prefers to mask the competency of the agents. Have you noticed how few realtor blogs there are? Why is that? It’s because agents don’t want to be scrutinized, and their employers don’t want to be either. They prefer to hide behind big names and imagery where the consumer has little idea what they are actually getting – until it is too late.