With all the “disruptive” technologies around, why have real estate brokerage commissions remained so “sticky”? Why hasn’t some disruptive technology come along to really shake up the commissions structure?
These questions come up fairly often and with good reason. Selling a home has always been an expensive process and for all the new technology out there, it is still expensive. Many people draw an analogy to travel and other industries where disruptive websites have literally crushed commissions and other forms of reimbursement.
God knows internet marketers have tried desperately to get their claws into real estate and become a disruptive force. In some ways they have been very successful. They certainly have managed to get their fingers into the commission pie, but that hasn’t really translated to lower costs for the home seller.
One reason is that for all the new technology that has been thrown at the real estate industry, it hasn’t reduced the workload for the boots on the ground. Perversely, it could be argued that it has made commissions even more “sticky” than before. When you insert yet another middle man without streamlining the process, the cost of doing business goes up, not down.
One of the first things you learn when you first get your license is that real estate transactions are slippery suckers. There’s 1000 ways for a deal to fall apart and it is the rare transaction that doesn’t face at least one or two major sticking points. Its interesting to observe newly licensed agents with a background in other types of sales confidently march into their brokerage on their first day. They all firmly believe that their salesmanship chops will allow them to immediately leverage a six-figure income. The hubris doesn’t last. They learn that agents have to juggle numerous issues and wear many hats. They discover quickly that real estate is a different animal.
Home buyers and home sellers who wish to go it alone discover the same thing in pretty short order. The vast majority of FSBO’s still end up listing with a brokerage. With all the free information and help that there is online, this wouldn’t be happening without a reason. The truth is that it if this is not something the general public does every day. It is all too easy underestimate the number of sticking points that can come up during the course of a transaction. Most FSBO’s find themselves in over their heads. It has nothing to do with intelligence, and everything to do with experience.
This is probably the crux of why commissions have remained so “sticky”. The home selling/purchasing process is friction filled and complicated. Agents and brokers are still a vitally needed catalyst in the process of actually getting transactions closed. No number of disruptive technologies or sexy web platforms has been able to make a dent in the need for a good agent. Maneuvering the obstacle course between sticking a sign in the ground and the closing table is not so simple.
That still doesn’t fully explain why commissions remain so high. The reason commissions are so high has to do with risk vs. reward. About a week ago I was talking to one of the local brokers in my area. He summed up the issue nicely when he said that listing a house or working with a buyer is “engaging in an act of pure speculation.”
This is spot-on. We put our money and time on the line, in the hope that a transaction will actually result. Its kind of like playing the lottery, except there is a lot more work involved than buying a ticket.
The fact is that buyers and sellers change their minds, get stuck on unrealistic price points, have needs and wants that change on a dime. They may not feel fully committed to selling or purchasing a home, but that’s not something they tell us. Lenders can go berserk and start picking apart a loan to the point of madness, appraisers can make mistakes and inspections can reveal expensive issues. Its all part of the process.
Meanwhile, agents are expected to roll out the red carpet, pour money and time into listings and drive potential buyers hundreds of miles over 1-2 counties. Then we are not supposed to flinch when a client merrily walks away from a fabulous deal that is unlikely to be replicated with another property. Without even considering the outlay, we are literally working for “free” for months or perhaps years without knowing if an actual sale is going to take place. It’s expensive in terms of both time and money.
Depending on the market conditions, most agents kiss between 4 and 20 real estate “frogs” before finding finding a “prince” (a client that will actually go all the way to the closing table). For example: In 2011 I had 26 buyers in my car. I racked up thousands of miles and thousands of hours with those buyers over the course of that year. I showed some of these buyers north of 50 homes. It was exhausting and expensive. The housing recession was at its peak and I had offers from sellers that were so sweet they were literally dripping honey. Not.One.Sale. Tons of outlay, with nothing to bank as buyers were turning up their noses at deals so sweet they should have been crying with joy.
Now, this was an extreme example, but even in big bull markets, buyers and sellers bail out all the time. But, at some point, agents have to earn a living. This is what the consumer ends up paying for when they pay our commissions. Working on contingency in this way pushes up the price dramatically because the nature of the work is so high-touch and tenuous.
Yes, there is. But I don’t see it happening any time soon. Buyers and sellers would have to start putting skin in the game and start paying their agents for their time and expertise. No more free showings. No more listing a house without a retainer. If the client is out thousands and the house didn’t sell, that would just be the way things go. Ditto if they decided not to purchase a house after 50+ showings. Agents wouldn’t make as much from each transaction, but they would be compensated for their time, marketing money, gasoline and knowledge from day-one.
I know that several brokerages have experimented with such a system. It does end up costing the consumer less over the long haul. But most buyers and sellers are resistant to it. The reality is that being able to utilize the services of an agent for free is too hardwired into the minds of the public to change readily. Therefore, these models haven’t gained the ground they need to become mainstream. It would take the industry deciding collectively to simply change the business model. Since getting agents and brokers to agree on anything is like trying to herd cats, I’m not holding my breath on that one.
© 2015 – Ruthmarie G. Hicks – https://thewestchesterview.com – All rights reserved.
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