What happens to Real Estate Commissions in an Economic Downturn?

By
Real Estate Agent with Real Estate Professionals

Remember the housing boom that spurred the seller's market that started this whole economic roller coaster ride?  Seems like a decade ago even though it was only a few short years!

During those days, many of the discount brokerages rose to fame, touting increasingly lower fees with "full service" representation.  FSBOs flourished.  Redfin and the like took to the internet to grow their agent-free business model.  If you divided all the commission paid by the price of all the houses sold, I would guess that the average commission was lower from 2003-2007 than it had ever been.

Now the tide has turned and houses take longer to sell, requiring more effort, diligence and creativity by agents and more flexibility on the part of sellers. 

What I'm wondering though, is whether the average commission has actually gone up? 

The problem is that many sellers are short on equity, or don't have any equity at all, so as the economy contracts, I have to think that sellers (many of whom have refinanced at higher values) are probably watching every dollar.  This means they are very concerned when they see that the commission is in some cases more than what they are going to walk away with from the sale.

In addition to seller equity influence on commission, agents who are getting fewer transactions in this market probably are willing to accept lower commissions, because "something is better than nothing" as they say.  When your next listing appointment might be 2 months away instead of 2 weeks away, you may reconsider turning it down just because the seller didn't agree to the commission you wanted.

So my theory is that average commission levels from the seller's market will continue (despite more effort required by the agent in today's buyer's market), at least until the balance of industry atrition and seller equity position yields an environment more favorable to charging a higher commission.

Also, I think that the importance of us, as agents, demonstrating high value, regardless of what we charge, is now going to be critical.  We need to improve our skills, marketing savvy, and service to our sellers so that we can help ignite the market again, and earn what we're paid.

I would love to hear other opinions or theories on the subject.  What do YOU think?

Comments (3)

Randall Sandin
Carolina One Real Estate - Charleston, SC
843-209-9667 - Search for Charleston SC Real Estate

In the Charleston, SC market the number of limited service firms has really fallen in the last 2 years. People are realizing that theyu need experienced professionals when it comes to their home or investment property. I still do not understand why someone would want to risk their single largest investment by dealing with a part-time agent or a limited service agent. I guess the thought of saving a few percentages points to too strong of a lure even though most lose out in the end. I love representing my buyer with a FSBO...we always get a much better deal than if they were working with an agent. Happy Holidays

Dec 12, 2008 12:08 AM
Troy Williams
Real Estate Professionals - Owings Mills, MD

Hey Randall, thanks for your response.  We have a discount firm here with a flat fee listing for like $495 to get you in the MLS, and anything beyond that is a-la-carte, so basically it's a FSBO service.  I spoke to the owner a few months back and he said business was way down, so the info you tell me is not surprising.

Dec 15, 2008 11:53 PM
David Coffman
Exit Realty 1st Choice - Tucson, AZ

I think most agents in the market, shouldn't be in the market. Those that reduce their commissions obviously know their worth. At Exit Realty we teach our agents what it truly means to be a REALTOR. This includes how to best represent our clients, proper prospecting and all the true nuts and bolts of creating business. One of our programs revolves around better commissions based on better service. Often it is easy to show a seller a better net on their property by offering a higher co-op & superior marketing plan. Our office routinely takes listings at 7,8,9% or more.

If an agents does the work and doesn't just sit around waiting for someone else to do their work for them, they too will find their own value and start charging accordingly.

If you are reading this and want to learn a better way to earn, I'd like to talk with you. Where you live is not relevant. Let me show you a better way!

Dave Coffman

Exit Realty 1st Choice

520-734-3948

Dec 25, 2008 07:25 PM