I have several older posts regarding the reasons for steep real estate commissions. These reasons have included paying for misused time, the cost of lead acquisition, and the cost of friendship. As you can see, none of these reasons have anything to do with the actual value of the service. Inman Real Estate News recently released its findings from a survey given to real estate agents in 2014 on why commission rates aren’t a competitive factor when choosing a real estate agent. Here I will share my key findings from the Inman report.
Before diving in, let’s gain some perspective on discount commissions. The results maintained from the Inman Real Estate News survey showed that only 14% of agents surveyed believed that advertising their discount commissions is a determining factor in finding clients.That’s quite a low percentage, given how competitive the real estate industry is. So, why?
Some Home Sellers Believe That High Real Estate Commission Means High Quality Real Estate Services
While many real estate agents don’t believe in competing by way of commission rates, 41% of respondents said that they don’t use this method simply because it doesn’t work. That 41% believe that sellers are willing to pay top dollar on commission if it means getting top dollar for their house. This is interesting because it implies that realtors think that home sellers believe that there is a negative trade off when decreasing the commission rate. As though higher commission rates mean higher quality service. While this is downright wrong, I do believe that sellers believe this to be true, which would explain why more real estate companies don’t offer commission rebates.
Throughout my years in real estate, I can tell you that home sellers would like to believe that the right realtor can get them a higher price for their home, which will lead to them agonizing over which realtor to work with. But, the idea that certain realtors have a special ability to extract a higher price is impossible to prove. Nevertheless, realtors still claim that they possess the ability to garner a higher sale price, which justifies their high commission rates. In this NAR article, you will see how realtors should justify their commission based on their expertise.
So, despite the questionable difference in realtors’ abilities to extract higher prices, sellers still choose who they work with based off of whose signs they see frequently, or who they believe sells a high number of homes. Basically, these sellers are paying extra for a designer name, just like people will pay extra for a product that has the Kardashian name attached to it.
High Real Estate Commissions Caused by High Marketing Costs
Something I have noticed over the past several years is that the service providers that charge the most also spend the most on marketing. Realtors are no exception, focusing on marketing to increase the interest in their services, which they then hope will allow them to be more selective in finding a client who is willing to pay a higher price. I have come across several Lincoln Park realtors who will spend approximately $20 per household in a direct mail campaign. Guess who’s actually paying for that marketing campaign.
This is why 32% of realtors surveyed say they can offer a commission discount. Their lower marketing costs allow them to charge less commission. 32% isn’t a huge number, but it’s not insignificant. You would believe that if you offered a lower commission than other real estate agents, you wouldn’t need to spend as much money on marketing. But see the previous section.
Some Commission Discounts Cut From The Buy Side
I always warn home sellers against this. Sometimes the listing agreement doesn’t state how the commission is to be split between the listing and buyer’s agent. This could mean that the listing agent will try to recover some, or even all, of the discount from the pocket of the buyer’s agent. This is not ideal. It is too complicated to cover right now, but let me ask you this: Do you want to offer a 2% co-op commission to the buyer’s agent when other homes in your area offer 2.5%? 20% of the survey respondents said that they can offer discounted commissions because they take a cut from the buyer’s side.
No Real Commission Innovation In The Real Estate Industry
Although close to 65% of the respondents said they discounted their commissions (though it might not be advertised) only a small percentage offered other innovative payment methods to their clients. Only 5.75% of the survey respondents reported that they offered commission rebates while 1.72% of the respondents reported that they offered an hourly rate. Another surprise is that a mere 18% of respondents believed that real estate companies offering commission rebates would increase over the next 5 years, and only 5% believed that the hourly rate structure would increase. These outlooks are short-sighted, but remain consistent with the findings that 75% of survey respondents believed that the current commission structure works fine, and a mere 10% believed that it isn’t ideal for the consumer or the real estate agents. But then again, most real estate companies don’t think outside the box - until recently. In the past few years a few startups have emerged with different business models.
Sliding Scale: The Way Commissions Should Work
As can be expected, agents are more willing to negotiate their commission rates as the price of the seller’s house goes up. Only 32% of real estate agents are willing to discount the commission on the houses in the range of $200,000-300,000, but 90% are willing to negotiate if the home price is above $1 MM. This is proof that the current commission system doesn’t make sense. I can’t figure out why more realtors don’t implement a sliding scale system.
The bottom line is that the smart consumer will shop around for a discounted, full service real estate broker. The inflexibility of home buyers and sellers to move away from the current commission system is costing them a lot of money.