I've written on numerous occasions about why real estate commissions are so high, covering a wide range of reasons like wasted time, the cost of friendships, and lead acquisition cost - none of which have anything at all to do with the value of the service provided. Recently I ran across a special report from Inman Real Estate News on Why The Real Estate Industry Does Not Compete On Commission Rates, which is a summary of the findings from a 2014 survey of real estate agents. So I thought I would share some of the key takeaways that shed a bit more light on the subject.
Let me start off by putting the discount real estate commission in perspective. Only 14% of the survey respondents said that they compete for listings by publicizing their willingness to discount their commissions. That's a pretty low number in a highly competitive business. So, why?
Some Home Sellers Want To Pay High Real Estate Commissions
Perhaps the single most interesting finding from the survey is that, although many real estate agents are philosophically opposed to competing on the basis of commissions, 41% say that they don't compete this way because it doesn't work. They believe that "sellers are more interested in getting the best price for their house than saving a few thousand dollars in commissions". This is fascinating because it suggests that realtors believe that sellers believe that there is a tradeoff between paying a low commission and getting the best price for your house. Sort of like "you get what you pay for". Of course that is nonsense but I suspect that it may in fact be true that sellers think this way and it would go a long way towards explaining why we don't see more discounting of real estate commissions.
I can tell you from personal experience that home sellers desperately WANT to believe that if they find the right realtor they can get a higher price for their home and, therefore, they will agonize over which realtor to use. But, again, the notion that some realtors have special powers to extract a higher sales price is impossible to prove. Of course, that doesn't prevent realtors from claiming to possess those special powers and that helps prop up high commissions. In fact, this NAR article was just published in the last few days about how realtors should Use Your Expertise To Justify The Commission.
So, in the end, a lot of consumers will pick realtors that they think "know the building/ neighborhood" or "sell a lot of homes" or they "see their signs everywhere" and this search for the holy grail of realtors ends up costing consumers a lot of money in higher commissions. It's sort of like when they slap the Kardashian name on a cosmetics line. People pay extra for that stuff.
Marketing Costs Drive High Real Estate Commissions
This really ties into the cost side of the equation. One thing that I've noticed with service providers over the years is that the ones that spend the most on marketing also charge the most. It's a very specific business strategy, focused on using marketing to drive more leads so that you can be more selective in pursuing clients willing to pay top dollar. There are Lincoln Park realtors whose idea of a direct mail campaign is sending out books at...I'm guessing...$20+ per pop. Guess who's really paying for that.
That's why the survey results show that 32% of realtors (presumably the ones that do discount their commission) say they are able to discount because they have lower marketing costs than their competitors. That's not a huge percentage but it's still significant. In theory you would think that if you offered discounted real estate commissions you wouldn't need to spend as much on marketing. But then see the previous section.
Some Discounters Cut The Buy Side Commission
I always tell home sellers to be careful of this. Often the listing agreement doesn't specify how the commission is going to be split between the listing agent and the buyer's agent. That opens up the possibility that the listing agent tries to recoup all or some of the discount by taking it out of the buyer's agent's pocket. That's not a good idea. I can't go into all the intricacies here now but do you really want to be offering a 2% co-op commission when all the other homes for sale in your neighborhood are offering 2.5%? Well, 20% of the respondents to this survey said that they are able to offer discounted commissions because they will cut the buy-side.
Not Much Commission Innovation In Real Estate Industry
Another interesting finding is that, although something like 65% of the survey respondents said they offer discounted commissions, though they might not advertise it, a very tiny percentage offered more innovative payment structures to their clients. For instance, only 5.75% reported offering real estate commission rebates and only 1.72% reported offering an hourly rate structure. A further surprise is that only 18% of the respondents believed that commission rebates would become more popular in the next 5 years and only 5% believed that an hourly rate structure would be more popular. These short sighted outlooks seem to be consistent with the fact that 75% of respondents thought that the current percentage commission system works just fine and only 10% felt that it doesn't work well for either the consumer or real estate agents. Then again, the average realtor doesn't think too far outside the box.
Real Estate Commissions Should Be On A Sliding Scale
As you might expect the willingness to negotiate commissions goes up as the price of the home goes up. While only 32% of realtors are receptive to discounting in the $200 - 300K price range (I'm actually surprised it's that high in that price range), 90% are receptive above $1 MM. This is basically an admission that the current uniform commission rate system doesn't really make sense. Frankly, I don't know why more realtors don't use a sliding scale.
The bottom line is that the more sophisticated consumer is shopping around for full service, discount real estate brokers and finding them. Adhering to the conventional wisdom and industry myths is costing home buyers and sellers a lot of money.
#RealEstateCommissions #RealEstateRebates #DiscountCommissions #CommissionRebates
Gary Lucido is the President of Lucid Realty, the Chicago area's full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think he's the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.