The Discount Realtor Debate

Do discount brokers save money?

Below is an article I saw on CNN/Money. The debate is whether Realtors fix commissions and lobby for laws that make it harder for Discount Brokers to offer services. I’m not happy to see politicians involved in this debate. It is humorous that politicians, who perform shameful funny-business with money more than any other class of people, feel qualified to scrutinize the appropriateness of the compensation structure of the highly competitive real estate industry. The real estate industry is already very highly regulated by laws designed to protect the public, and the real estate business is extremely competitive. Ask any of the thousands of agents who wash out of the business each year.

The current system works well. Buyers and Sellers can, with little difficulty, find Realtors who are willing to negotiate lower commissions, or offer Limited Service arrangements, if that is what the Seller or Buyer deems most important with the agent they hire. There is no price fixing. We don’t blacklist Discount Broker listings as some suggest. (I’m going to write a separate blog article on the fallacy of this assertion)

We have several Discount Realtors in Austin (search Google for “Austin Discount Realtor” if you’d like to consider hiring one). These companies and agents have captured little market share in Austin though. For example, the most visible Discount Broker in Austin, One Percent Realty, ironically, has 1% Market Share in Austin. This despite massive media advertising by One Percent, including a barrage of radio ads that disparage traditional full service Realtors and portray us as sleazy, greedy money-grubbers who drive BMWs and own Power Boats. See the One Percent TV ads on the One Percent Website. Their marketing stategy seems to be a combination of stirring ill will toward traditional Realtors, and promising big savings to potential customers.

The owner of any business must decide what his unique selling proposition will be. Realtors are no different. Some attract customers with lower fees; some with exceptional service; some with unique and specialized market knowledge; others have very effective brand identity and marketing campaigns. Some industries do limit competition and create barriers to entry (the medical profession for example), but there is perhaps no business easier to enter than real estate. In Texas, two to six weeks of classes will qualify most people to take the real estate exam. More than half of those who take the test flunk the first try, but most pass by the third attempt.

Real Estate customers are free to select from a vast sea of agents who want to earn your business. I’m going to write more about this subject later on, but for now, the article below does a pretty good job of outlining what people are saying about this topic.

July 26 2006:
NEW YORK (CNNMoney.com) — The fight over competition in the real estate industry went to a new battlefield this week as representatives of consumer groups, brokers and government agencies clashed before a House subcommittee.

Few participants pulled any punches.

Steven Brobeck, executive director of the Consumers Federation of America, told the subcommittee on Housing and Community Opportunity that the real estate business model is a “cockamamie system . . . nonsensical and ridiculous.”

Among Brobeck’s beefs: He claims prices are rarely advertised, that restrictive state laws and anti-competitive practices prevent consumers from getting discount service, and that there are roadblocks to securing key product information through the Internet.

Aaron Farmer, a discount broker in Texas, described how full-service brokers discriminate against discounters: They refuse to show discounters’ listings, Farmer said; pressure home magazines to not accept advertising; and refuse to allow discount brokers’ clients to view home listings full-commission brokers control. They even destroy for-sale signs.

The full-service brokerage industry, as represented by the National Association of Realtors (NAR), has fought to maintain the status quo. In nine states, for example, there are minimum-service laws that effectively force all agents to provide full service – discounters would otherwise be willing to offer limited services and charge home sellers much less than the traditional 6-percent commission. There is move to pass such a law in Michigan.

Glenn Kelman, CEO of the discounter Redfin, had stark stories of threats and intimidation. “Sixty-three percent of our customers report meddling from other agents, who . . . make up grade-school legal mumbo-jumbo to scare our clients. One customer was so upset by an unsolicited hostile call he sat on the kitchen floor and cried.”

Kimberly Gorsuch-Bradbury, senior VP for the Real Estate Networks division of LendingTree, also spoke. Her company expanded into the real estate industry several years ago with an Internet enabled, discount-and-rebate business model.

Gorsuch-Bradbury said that NAR’s own surveys revealed that “only 7 percent of sellers reported that they wanted the agent to help with paperwork, inspections and preparing for settlement and only 10 percent of buyers reported that they wanted help with price negotiations and paperwork.”

In other words, those services could be easily unbundled — and consumers could pay for only what they want.

Standing up for brokers
Full-service brokers also had their say. Industry competition is ample, argued Geoffrey Lewis, chief legal officer for RE/MAX International.

“Consumers are bombarded with choices. Home sellers and buyers can choose between full service, limited service, discount commissions, flat fees, rebates and other incentives . . . There is no evidence that free market forces are being impeded.”

Even RE/MAX, according to Lewis, does not lobby in support of minimum-service requirements nor does it oppose rebates, refunds to buyers or sellers made at closing that some states or state real estate commissions prohibit. “Brokers and agents should be allowed the ability to freely negotiate transaction service pricing with their clients,” said Lewis.

Speaking on behalf of NAR was president-elect, Pat Vredevoogd-Combs. She argued that NAR membership is open to all, including discounters. NAR does not encourage price-setting; it has a compliance policy in effect saying that pricing decisions are to be made independently by each firm.

As for the discount brokers contention that full service brokers often won’t show their listings to the discounters’ buyers, Vredevoogd-Combs argued that agents have a fiduciary duty to place their clients’ interests above all others, including the agent’s own. State license laws and regulations reflect that and commissions can investigate complaints and impose penalties if they find agents violated their duties.

As for commission rates, she said no evidence exists to prove that agents have agreed to fix commission rates. If commissions cluster within a narrow range, it’s only due to normal economic behavior: Competitors lose market share if they raise rates, and can’t cover their costs if their rates are too low.

According to Brobeck, however, “Since there are only about 7 million home sales each year, most brokers are involved in only a handful of sales . . . As a result, most enthusiastically support a system that keeps commission rates high.”

Posted by Steve
10 years ago
Steve

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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bill - 10 years ago

Steve, do you think it’s fair when someone sold a million dollar home paid much more commission to a realtor for the same amount of work as the other guy who sold a $200k house? I think this shows how illogical this 6% fixed commission scheme is.

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Steve - 10 years ago

Hi Bill,

Selling a $1,000,000 in Austin is not the same amount of work as selling a $200K home in Austin, but I understand your premise.

It’s a valid argument to make and the Seller of a $1M home is free to use that point as a negotiating tool with prospective listing agents.

There are vast differences, however, in marketing time and the level of service that must be provided to the higher end buyers and sellers as compared to the median range buyers and sellers.

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Jim - 10 years ago

Bill, working as a realtor is all about risk. What would motivate someone to take on a $1million listing if the money they get from this is not proportionally bigger.

People don’t GET IT that working as an agent is not the same as working a 9-5 job. You have risks, you’re running a business, you don’t know where your next paycheck is coming from, and you naturally expect rewards that are much larger than for similar work done for a salary. Hence that’s where commissions come from, instead of flat fees.

You can’t make a decent living even if you do 36 transactions a year on $200k homes, considering how much risk and work is involved. That’s why dicsount agents ultimately go somewhere else. They burn out, or build up enough clientele to start charging a normal commission.

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Jim - 10 years ago

Here are the #s:

36 * $200k * 1% * 70% (broker split) = $50400

36 deals a year is A LOT, and requires tons of work and only the very successful realtors get there. Who on earth would work that hard if they get an average amount out of it that can be made with some salaried job?

Now at 3%, you’d get $150k, which is a much more rewarding compensation.

People pay $200 or more for dinners or a pair of jeans, but when it comes time to getting competent real estate service that can save money, they suddenly get cheap.

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bill - 10 years ago

Jim, of course I agree that an agent sells a million dollar home should be compensated more than the same agent selling a $200k home, just not exactly 5 times more.

You did make a very good point there and you exposed the real problem of this pay structure: the broker split. That’s the reason why good chunk of junior agents are making almost no money. They are struggling not because they aren’t working hard enough. It’s because their brokers are taking a bigger chunk out of their hard earned money. When it’s 1% commission, I think the broker should get maybe 5-10% cut, rather than 30%. That effectively push the same agent’s yearly income to the $60k range. Even for $50,400, it’s not a horrible income, especially consider realtors don’t have to have any academic credentials such as college degrees. I work 9-8, 6 days a week, I have a master degree, and I am a engineer in a fairly large company, my yearly compensation isa bout that 50k range.

Now, let’s get back even more with the details. Those agents who sell 36 homes per year, I bet their total volume will be much higher than 7.2 million ($20k x 36). Because the medium house is gone up so much, their total volume is probably going to be much more. Say if they make 12 million total volume. Use your equition, their compesation will get to the $80k range. That’s already a upper-middle class income. I think it is very rewarding already.

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Jim - 10 years ago

Bill,

Even without broker splits, here’s an example:

1% * $200k = $2k

compare that to doing apartment locating, which typically brings in $500-$1000 in commission per deal and requires much less energy and no headache or responsibility. Tell me, is that fair?

Mortgage brokers typically make 1% – 3% of the loan amount with much less work and headache. Pharmaceutical or medical equipment sales people often make well over $200k, and even have a 6-figure base salary, and yet no one complains about them. How much profit does the clothing company make on that $200 pair of jean made with slave labor in a 3rd world country? A good realtor is well worth the money, I think, compared to what some other jobs make. The problem is with the bad realtors who give everyone the impression that it’s a do-nothing job that makes a ton of money.

It all comes down to motivation for someone to be in a certain business. The pay naturally gravitates to the amount that allows hard-working practitioners to get the benefit and compensation they want. Salaried work

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Jim - 10 years ago

Bill,

$80k is pennies. You’re forgetting that realtors are contractors who have to pay their own health insurance and have to pay 15% MORE INCOME TAX due to being self-employed. There are also ongoing expenses of driving around, and for every good deal there are 2 people who’ll waste your time with no return.

Real estate is a business so it has risk, and any businessman deserves to be compensated for risk by making more for a certain job than a similar salaried individual. This is the great motivator in a capitalist economy. If your argument was that an enterpreneur should make the same average amount as his equivalent corporate employee, there would be no business and innovation in this country.

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bill - 10 years ago

Jim,

How do you structure your income so that it will minimize income tax and other taxes is really your own choice. I bet Steve and Silvia here are incorperated and not paying the self-employeed tax. I am not aware how each brokerag firm handles employee benifits, but I think some brokers do pay some form of health benifits one way or another. C’mon, they collect 30-60% of your earnings and not using that for anything? Why are you still working for this Walmart company?

“If your argument was that an enterpreneur should make the same average amount as his equivalent corporate employee, there would be no business and innovation in this country.”

– Well, yes, entrepreneurs do take more risks and get more returns. However, I wouldn’t call a realtor an entrepreneurs. An entrepreneur is one business owner who get into a new market with a innovative new business type or new product. In this case, the real estate professional has been there for too long and there’s nothing new about it. In fact, the push of public to change it indeed created some “entrepreneurs” (such as discounters) who tried to create new models as well as new business opportunities. On top of that, there’s no rule saying that every entrepreneur should make more than every salary making corporate employees. It has nothing to do one another.

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bill - 10 years ago

“Mortgage brokers typically make 1% – 3% of the loan amount with much less work and headache. Pharmaceutical or medical equipment sales people often make well over $200k, and even have a 6-figure base salary, and yet no one complains about them…”

Jim, one wrong doesn’t make the other right. There’s a huge outcry about the medical and pharmaceutical industry and their hidden way to handle businesses. The overall medical cost in America is becoming so high that soon majority of Americans can’t afford them. Clearly, there’s need to reform there. My impression is that most realtors are feeling being singled out and picked on for no obvious reason. That’s not correct. I think there is a logic reason out there where the public is pushing for changes in this industry.

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Jim - 10 years ago

Ok, I’m tired of this debate. You won’t GET IT unless you try working as an agent. All I’m going to say is, there is competition, people have options, and so far, discounters and various BS websites like homegain or zillow haven’t gotten anywhere so obviously consumers are choosing full service. Commissions are also negotiable. Just because few agents take less than 3% doesn’t mean you can’t offer less.

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Jim - 10 years ago

Btw, forming a corporation doesn’t save you from that added tax bill. When you work for a company, they pay it for you, so if you’re running your own INC, you’ll have to pay your own additional taxes out of the company funds. It only serves to reshuffle the tax liability, but not eliminate it.

An INC is usually done by small business to avoid liability, but professional services like doctors, lawyers and realtors can’t do it, since it would open a door to fraud.

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Steve - 10 years ago

Actually, there are in fact income tax advantages to running an S-Corp. Not all revenue is treated as “payroll” income if you set it up properly. A good accountant can outline the pros and cons of this, depending on a business owner’s tax bracket and level of income. And yes, real estate agents are business owners regardless of whether the fly solo or work under a large National brand name office.

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bill - 10 years ago

Most real estate firms are LLC type companies, S-corp is a little over kill unless you have a prospect of getting much bigger and sell shares to other owners who don’t participate the daily works of the company.

Jim, you cannot use “you are not an agent, so you don’t know, so you are wrong (the GET IT part)” as a logical argument. It’s a type of logical fallacy you learn from your freshman year philosophy 101.

I tried to negotiate commission before, but I sense that most agents especially those work for bigger agencies are under huge pressure from their peers and the company to not allow any room for negotiation. This is the price fixing part most people are talking about.

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Jim - 10 years ago

Um, that’s not logic, Bill. That’s from experience. Just like people complain that doctors make a lot, but don’t realize that insurance keeps paying less and less, and malpractice lawsuits keep getting more and more expensive. I know for a fact of several people who had no idea just what is involved in being a realtor until I told them. Others don’t get the concept that if I make a time investment to run a business, and I successfully make it efficient, I DESRVE to get more for my time than some other agent who is slower, or some guy getting a corporate salary. It’s why, for example, engineering contractors make much much more than salaried engineers for doing the same work. It involves risk, and in this world risk is worth money.

I don’t know about negotiations on commission, but there’s no pressure from any brokers I’ve ever worked for. What you’re finding is that people are unwilling to work for less, plain and simple. If your boss came to you tomorrow and said “Bill, how about I give you a 30% pay cut” what would you say? You got into your job (whatever it is) expecting a certain level of income. If someone told me ahead of time that I would only make 1% as a realtor, I’d never even bother with it. I’m also reasonable, and if I sell someone’s home and help them buy another one, I’ll give them a 1.5% or so rebate on the purchase, as a discount for doing two deals. Again, it’s all about risk vs. reward tradeoffs.

The price realtors charge is such that it allows good realtors to get up and going and realize the kind of income potential they expect for putting in the tremendous effort and risk. Movie stars make millions for doing much less, but they keep making it because people keep paying $9 to see a movie.

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Jim - 10 years ago

…so you are welcome to try discounters and see how you like it, but if you get burned, don’t complain about 3% commissions. You’re willingly paying it to get the benefit of better service.

Truth is, as Steve pointed out, all those discount broker, FSBO sites and others have had plenty of time to steal away market share but none succeeded. Apparently people are voting with their $$$.

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Claudine - 10 years ago

Don’t forget us poorer folks. I bought a HUD home short of two years, valued at 100K. Because of financial reason, I can not afford to keep it. After I figure in all the money I stuck into the house, plus what it costed me in closing cost, ect. I will take a lose if I have to pay 6%. 6K is a lot of money for me to pay someone and I take the lose.

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