Let’s Lower Real Estate Commissions
Option 1: The "Discount Broker"
Is the race to the bottom the answer for the consumer public?
Over the past few years there has been an outcry for a more affordable real estate buying and selling option versus the existing “product.” Many people believed that the “discount broker” (e.g. “REX”, “Purple Bricks”, etc) would be the answer, and unfortunately it wasn’t. REX had its legs cut out from under them amid a crushing blow against them via Zillow, and Purple Bricks, an Australian-based discount fee brokerage that had failed and closed its doors years ago despite being a major company.
Discount Brokers:
“Discount Brokers” are generally forced to operate in volume, and when this happens, the obvious follow-up then occurs; to operate, they have to take on multiple clients simultaneously and oftentimes are more interested in “just getting the house sold” when compared to a traditional real estate broker.
You’ll find many instances where a discount broker may even confuse one client with another, or worse yet, forget to acknowledge a request or a requirement from a specific client due to being overwhelmed.
But being overwhelmed doesn’t only translate into having multiple clients simultaneously, frequently these brokers are also on a never-ending search for new clients to “keep the lights turned on” and “food on the table.” Either way, it’s a losing proposition.
Now, if you consider a discount broker who operates out of state or is a “one-person show, ” the issues can multiply quickly.
The consumer public has already shown that this isn’t the answer they’re looking for and have shifted to looking for new answers.
Option 2: File A Lawsuit Against REALTORS®
Greedy attorneys taking advantage of the misguided answer of consumers
The irony here is daunting; attorneys, who oftentimes demand an insanely high “standard fee” for their services, attack real estate agents over their high fees. It’s almost like one brother attacking another brother when the other brother is not watching, nor expecting it.
Recently, there was a lawsuit against the National Association of REALTORS® alleging several issues including how real estate commissions were not only artificially inflating home pricing, but also stating that homeowners should not be paying the real estate commissions of buyer’s agents.
The Lawsuit & The Commission:
I would argue that homeowners never paid a buyer’s agent. The seller’s agent was opting to take a portion of the negotiated commissions they receive from the sale and offer it to a buyer’s agent as an incentive to bring a buyer and the best offer possible.
Unfortunately for the National Association of REALTORS®, they lost the lawsuit which resulted in changes that were ordered to take place, including removing the buyer’s agent compensation amount on the MLS.
Ironically, the attorneys for the plaintiffs took a heavy percentage of the awarded amount and spread the remainder to the people they represented. How interesting is that?
Theoretically, the commission for a seller’s agent would be less since they have no obligation to pay a buyer’s agent which is further from what will likely happen.
The Potential Commission Result:
You wouldn’t take a pay cut at your job. Remember, the commission negotiated between a homeowner and their agent can be any amount. There is no standard. So if an agent’s “fee” is, for example, 6%, they are likely going to continue negotiating the same whether a buyer’s agent split exists or not. During the initial commission conversation with a homeowner, the seller’s agent discusses the commission due to them.
What does this mean? This means that homeowners are not poised to make even LESS money from a sale. Here’s the math.
BEFORE LAWSUIT:
6% Commission – 3.5% to seller’s agent, 2.5% to buyer’s agent – 6% Total Commission Paid.
AFTER LAWSUIT (potential):
6% Commission – 6% to seller’s agent, 0% to buyer’s agent, buyer requires 2.5% from their buyer clients, buyers offer is now 2.5% less – 8.5% Total Commission and impact to the home seller.
So homeowners everywhere can thank those near-sighted attorneys for their lack of vision and their overwhelming greed which came at the expense of the homeowner.
Option 3: Understanding Why They're "High"
Understanding why commissions are what they are to begin with and why
Interestingly enough, the reason for commissions being what they are and how much they are have everything to do with the literal financial abuse real estate agents endure.
Being a real estate agent is a career for many as it is being in a constant state of investment. Countless companies target real estate agents as “cash cows” and charge them exorbitant amounts for goods and services.
Let me give you a couple of examples of what we call THE REAL ESTATE TAX:
The Real Estate Commission Tax:
ZILLOW.COM:
For a real estate agent to survive many are compelled to look to Zillow, and Zillow is a beast that needs feeding. Zillow has a program where agents can pay to receive “leads” (buyers click on interested properties they would like information on or to view) to grow their business and ultimately make a living. Nothing wrong with that, or is there?
Zillow charges agents anywhere from $100 to over $2,000 monthly to be a part of their platform. The lesser amount gets you a minimal number of “leads,” if any, thus creating a “bidding” platform, where multiple agents in a single zip code can see each other’s monthly payments to encourage them to compete to outbid each other.
Whatever an agent pays per month other agents will see this and opt to pay more, driving costs upward.
Zillow – $100-$2,000+ per month
REAL ESTATE SOFTWARE:
Being an agent doesn’t just mean you have to worry about “leads” it also means that you need ways to service those “leads.” These services include a real estate website, a CRM (Consumer Relationship Manager – email system, customer database, etc), software to help market yourself and the homes you are hired to sell, and more.
Real Estate Website – $500 per month
CRM – $100 – $1,500 per month
Marketing software – $100 – $1,500 per month
YOUR APPEARANCE:
In real estate, you’re only as good as you look. Have you ever watched a real estate reality show and seen actors walking around in cargo shorts and a tank top? Nope. How about a real estate agent driving a 1994 Honda Civic? Nope.
Monthly: $1,500 – $3,000
OPERATING EXPENSES:
Don’t forget that being a real estate agent is a BUSINESS, not a job. To succeed, you will have regular operating expenses, some little, some not so little, but they’re consistent and they add up:
GASOLINE COSTS: Approx $400 Monthly
BUSINESS ITEMS: (pens, brochures, etc) Approx $150 Monthly
NECESSARY TOOLS: (Phone, Laptop, Tablet) $3,000 Total (Phone cost may be paid monthly)
RECURRING COSTS: (cell phone bill, data plan) $125 Monthly
REAL ESTATE AGENT FIRM EXPENSES:
The very office an agent belongs to will also charge real estate agents for the privilege of existing there. No favors are done here at all, and it only gets worse the more you know about it:
Agent Insurance: $250-$500 Annually
Various Fees (desk fees, copier fees, technology fees, etc): $100-$500 Monthly
THE “BROKER SPLIT”:
Anytime a sale is completed the real estate office will take a percentage of the commission. This comes in the form of a percentage. For example, if the real estate office has a “70/30 split” (which is a common split) that means the agent has to pay 30% of the commission, the agent gets the remainder.
70/30 Split: $10,000 Commission is $7,000 to the agent.
THE FEDERAL/STATE TAXES:
The government hits real estate hard when tax time comes around. Real estate commissions are also paid in “gross” so no taxes are withheld from their check. It becomes the responsibility of the real estate agent to handle their tax responsibility.
Average set aside for taxes: 33% of commission after Broker Split.
FINAL COMMISSION TALLY:
A $10,000 check can very easily be as little as $1,500 or, maybe, $2,000 at the end of the day. The “huge commissions” aren’t huge at all. Agents get stripped away from the moment the check hits their account.
If an agent were to take lower commissions under the present system, then the career choice would simply be unsustainable. Few people would ever reasonably argue that someone should work for free or work to be in debt, real estate agents are no exception.
How To Resolve This Issue, Happily
How to actually lower real estate commissions, fairly
We’ve learned that discount services don’t work, the lawsuit against the National Association of REALTORS® was a cash grab for greedy attorneys who took advantage of misguided homeowner anger, and lastly, we also learned that real estate agents are heavily “taxed” which helps create the “high commissions”.
So what do we do to create an environment where agents can live sustainably while homeowners can keep the most money in their pockets?
Help reduce the cost to real estate agents! Companies have been targeting real estate agents for too long. The “Real Estate Tax” is too heavy and the companies who charge a reasonable amount for services should come forward.
Also, the government should consider introducing tax breaks for real estate agents, allowing them to keep money in their pockets, thus lowering the supposed “standard” real estate fees.
If you are a start-up company, or, an existing company who would like to take charge of this new lower-cost initiative and put yourself and your company in front of agents looking for cost-effective alternatives, then let us know! You could be the start of a new hero story!
