The Discount Realtor Debate
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.”