Has anyone ever wondered why the price of real estate agents has been 5-7% for what seems like an eternity? I know I run a serious risk of stepping on a lot of people’s toes out there since this is a site run by realtors, but I really have been thinking about this a lot lately (particularly this morning after I read Greg’s articles). Additionally, several other articles got my attention (CNN Money, Business News, and The Wall Street Journal). If you stop to really think about this, you will realize that real estate agents have created one of the longest standing monopolies out there. Let me dust off my economics text book and delve a bit deeper into this subject. [Please note this is intended to spark discussion and not personally attack anyone’s profession. As I said before, I love a GOOD real estate agent].
What is a monopoly? Let’s simply define a monopoly as providing a good or service with very little competition. While this may be debated, humor me when I say that real estate agents have been providing their service with very little competition. This is evident in the fact that the price has stayed fixed for so long. One could argue that by using a percentage method, agents are simply hedging themselves against inflation. While that would partially explain this pricing phenomenon, the fact that the percentage has stayed the same despite significant changes in information control speaks of something else. In other arenas, when a significant technological advancement hits the market, prices typically drop accordingly or the level of service increase dramatically. Look at cars for example. As technology has improved cars have become much cheaper (in real dollars) than 70 or even 30 years ago. Additionally, an owner now gets many more standard services.
So do Realtors do more now than say 30 years ago? Of course they do. With the advent of new technologies, they provide marketing over the Internet, in newspapers, and perhaps even their own website. The more important question, however, is does the consumer get a higher value for the services they are being provided. Here I think the answer is no. This is not because Realtors do less, but it is because consumers now do more. Many consumers start their house hunt on the web. They have unparalleled access to listings. Typically, they go to a Realtor with a list of criteria and are generally informed about the process. This lessens the education burden on the Realtor. This is not to say that every consumer comes in with the MLS memorized, but to say that consumers on average have more knowledge today then they did, say, five years ago.
So why have consumers not demanded lower prices, or why have there not been more services springing up to circumvent Realtors. I personally think the answer is two fold. First, Realtors have a great lobby and great organizational skills. I once negotiated with a Realtor to reduce her commissions. She did so because this house was going to be a slam dunk and she knew we were fairly knowledgeable about the process. We almost had to sign a non-disclosure agreement with her because she said this was a very bad practice. Very bad practice?! I am a huge fan of pay for service. If I know I have a tough deal, then I have no problem paying more than the standard commission, but why should I not get a break when the process goes smoothly?
Second, consumers have no idea that they can negotiate commissions. Greg may censor this, but I think it is good practice to negotiate commissions with agents. Here is the process I recommend.
- Look at the average time on the market. If houses are moving in under a month, don’t pay the standard commission. I had a house sell in six days, with the closing following in another twenty. My agent remarked that this was the easiest deal she had ever done, then promptly took her seven percent cut (3.5% to be fair) right to the bank.
- Understand the closing process. Make sure that you are fully informed about your role in the process. The timelier you can be with information, the easier the process is for the agents.
- Last, simply ask. Interview agents and understand their process and ask if their commissions are negotiable. Hardworking agents are worth every penny, so don’t just go with the cheapest.
While this may be a controversial topic, there are many people in the Justice Department and Congress debating this very issue. This entry was meant to generate discussion. Services that help you sell your own house or provide access to the MLS online are growing. As much as Realtors fight these new technologies, I think it is time to ask why these services took so long to get to the market. Additionally, why are real estate agents so against them? I know they are not perfect, but shouldn’t Realtors help improve the process? Good agents will always have a place in the real estate industry, but isn’t it time consumers had more choice?
Brian Brady says:
“If you stop to really think about this, you will realize that real estate agents have created one of the longest standing monopolies out there”
I think you’re losing me a bit Michael. How are 3 million licensees in a nation of 300 million a monopoly?
You can list your home and have it entered into the MLS for $299 nowadays. Redfin, Zip Realty, Help U sell, iPayOne, et al have been offering a consumer discount real estate brokerage for over 30 years.
Now, more than ever, are more choices available to the consumer
February 1, 2007 — 8:34 am
Michael Cook says:
Brian,
This is an industry monopoly more so than a 1 or 2 person monopoly. You mention a lot of discount brokerage services in your last paragraph, but the linked articles talk about the fact that they do less than 5% of the housing sales. Additionally, Realtors have been employing a variety of techniques to stifle these services.
I agree that now, more than ever, there are choices. My question is why are Realtors trying to stifle these choices, instead of working with them to provide better overall service to the consumer. It would seem to me that Realtors could partner with this services to provide better information to consumers because they still do all of the stuff Greg mentioned to keep their foothold on the business.
February 1, 2007 — 8:55 am
Michael Cook says:
Note, the issue is also around the price. If it were competitive, with 3 million people you would see some decline in pricing. Look at other commodities with a lot of producers and a lot of buyers. Prices are cheap and change often to reflect new industry circumstances.
February 1, 2007 — 9:05 am
Jeff Brown says:
Realtors must me the Einsteins of American business. We’re the only ones who can conspire for over half a century to control prices, and make it look like it’s simply market behavior and the free will of the users of our service.
We won’t even discuss the monster increase in operating expenses for the broker/owners of real estate firms in the last 35 years. No business I know has seen such a rise.
Since you can’t swing a dead cat without hitting an agent in the ass, even in East Toilet Seat Oklahoma, the concept of monopoly just doesn’t play.
Great post for discussion though.
February 1, 2007 — 9:22 am
Tony Arko says:
If you look at the average commission paid per transaction over the last 5 years you will find that in 2001 it was very close to 6%. Texas A&M does a study for real estate transaction costs and in the most recent study the number was 5.2%. The bulk of the reduction comes from the listing side of the equation. The question you should be trying to find the answer to is why does the seller still pay both agents. There is probably another 0.8 points of savings available if this was ever unbundled.
February 1, 2007 — 9:29 am
Chris says:
Look at it from our side, it costs a lot of money to advertise a house, set up an office and run the business in general. I could have $5k, or $15k into your house and the listing could expire and thats that. Poof there goes my money, that listing took 6 months of my time as well.
People see the commision checks but they don’t see the whole picture. Look at it like this, how much do you pay for labor to have your car fixed? Lets say its $80 an hour, how much is profit? From what I have seen $5-$10.
I’m not saying good Realtor’s don’t make good money, but we are not just pocketing the commision checks.
February 1, 2007 — 10:00 am
Michael Cook says:
“I think you’re losing me a bit Michael. How are 3 million licensees in a nation of 300 million a monopoly?”
If this were a competitive market, with 3 million competitive people pricing would vary more and be cheaper. Its hard to get three people to collude in pricing, let alone 3 million, which makes this situation even more odd. This gets back to the National Association of Realtors and the practices they have employeed to keep prices high. Much like Microsoft and Windows, they have done everything they can to keep competition out, hence the involvement of the Justice Department.
February 1, 2007 — 10:09 am
Agusto says:
Michael,
While your operating costs have gone up, so has the price of a home. Back in the 70s you can buy a nice home for 35K, realtors commision at 6% $2100.00. In todays market resaltors commision on a 300k home would be 18K. Your operating expenses havent increase over 1000%.
You dont have to control prices when you can control access to MLS and your commision.
February 1, 2007 — 10:11 am
Norm Fisher says:
Suggesting that Realtors have a monopoly on real estate is like saying that accountants have a monopoly on accounting, or car dealers have a monopoly on cars.
February 1, 2007 — 10:13 am
Greg Swann says:
Michael, you’re safe. I don’t tell contributors what they can and can’t say, and we talk about negotiating commissions all the time. But right now, in many markets, sellers don’t need Realtors who charge less, they need Realtors who charge more — and are worth it.
There is no monoploy, and you can find any price you want — including the $199 MLS listing I saw promoted on a truck Monday. But you are not paying for a special price, and you are not paying for fawning service. You are paying for a result. If you get it against the odds of the marketplace, you got what you paid for. The problem is not that Realtors charge too much. The problem is that many of them can’t deliver the goods any any price. It always pays to hire — and pay for — the best.
February 1, 2007 — 10:23 am
Stephen Nestel says:
So let me get this straight…. As a property investor, you are advocating special price concessions when the sale is “easy”. Using this logic, it follows that you should offer your tenants price concessions in a hot rental market…
My advice for best service/price is to work with the same professionals as often as you can and ask for concessions based on volume of business.
But realistically, just as you are trying to maximize your investment property value, so too is the real estate agent trying to maximize the value of his time.
February 1, 2007 — 10:33 am
Michael Cook says:
Stephen,
I dont quite follow your logic. In a hot rental market, there is a supply and demand issue. I can charge more because there are so few units out there. There is no difference in work in a hot or cool real estate market.
The agent scenario is different because there is no short supply of agents. Quoting Jeff Brown, “Since you can’t swing a dead cat without hitting an agent in the ass, even in East Toilet Seat Oklahoma, the concept of monopoly just doesn’t play,” there seems to be no shortage of agents. Additionally, the work of selling a house in six days with a quick close is very different than six months with a long arduous closing.
February 1, 2007 — 10:40 am
Tony Arko says:
The brokerages want everything to stay the same, not the agents. You have to realize that agents are the middleman that gets stuck in between. We are just trying to work with buyers and sellers with the tools and standards of practice that we are forced to use. The NAR does not represent my point of view. The NAR is a good ole boy network of the worst magnitude. There were elections recently and I never once received any indication from them that this was happening until after the fact. And god know’s which yahoo they elected to carry on the status quo but there was no true election. Every problem you mention is caused by brokerages not agents. They think they are protecting the consumer and the agent but frankly I don’t need their help. They do more harm than good.
February 1, 2007 — 11:43 am
NYCJoe says:
Greg – by your reasoning, Microsoft had no monopoly either. After all, the vast majority of the 800 million PCs out there can run Linux just fine, thank you very much. There’s a ton of “choice” in the market, and if you’re not a geek, you could easily find somebody to install it for you on your PC. You could also just go out and buy a Mac.
The DOJ, of course, didn’t see it that way. The problem was not one of lack of choice or price. The problem was one of business practices.
Microsoft got into trouble because of the pressure it was applying on companies like Dell, HP, IBM, etc. to not offer alternative OSes on their computers, and because of Microsoft’s practices of leaning hard on software partners to not develop for competing platforms.
This is the same reason the NAR is getting “looked into” by Justice. It has already been demonstrated that the NAR’s member MLS organizations were specifically excluding listings that were not listed with a registered broker. That is clearly leveraging a dominant market position in order to stifle competition – the very definition of abuse of monopoly power.
By the way, Jeff Brown, this is exactly why Michael’s Microsoft comparison is entirely appropo, and is probably why DOJ is investigating the RE industry the same way they investigated Microsoft.
February 1, 2007 — 4:23 pm
Ryan H says:
First, let’s address your twisting of the definition of monopoly. The definition listed on the very link you provided is:
“In economics, a monopoly (from the Latin word monopolium – Greek language monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service. Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.”
It does not say “providing a good or service with ‘very little’ competition. Rather, the definition is “only one provider of a product or service.”
That said, monopoly is simply a poor choice of words, one which I personally find offensive. As stated several times here, there is no lack of competition in any way.
Secondly, you state “real estate agents have been providing their service with very little competition. This is evident in the fact that the price has stayed fixed for so long.” Then later you go on to talk about how to negotiate an agent’s commission. Which is it? Are the prices fixed or negotiable?
Stephen Nestel was close when he likened it to your being a property investor. It would be better asked, would you lower a tenants’ rent because they moved in to your property quicker. After all, you didn’t have to search as long for a tenant and saved money on advertising and carrying costs. Or would you lower their rent because they were less trouble than the last tenant you had in that property?
I could go on for hours picking apart different statements above but I simply don’t have the time right now. The fact is, just as in any business, there are plenty of agents out there who don’t earn their commission and make it easy for the general public to draw the conclusion that we’re all overpaid. I, for one, earn my commission and my clients get what they pay for. The problem is not the commission system in place, it’s the ability for any unqualified, money-hungry clown to get a license to sell real estate.
February 2, 2007 — 5:41 pm
Lucky Lang says:
Mr. Cook,
What is a “standard commission” that you referred to? You clearly don’t know my market. I’ve seen commissions from 2% to 10%. Where is the monopoly?
You even mentioned 5%-7% varied commissions. How is 5%, 5.25%, 5.5%, 5.75%, 6%, 6.25%, 6.5%, 6.75%, and 7% FIXED? Even from YOUR statistics (which aren’t accurate) how does 9 different commission rates equate to “fixed”? Look it up in the dictionary. Where is the monopoly?
You stated that you negotiated down your commission on the sale of your “slam dunk” property. You couldn’t have negotiated anything if it were as you called it “fixed”. Where is the monopoly?
The reason the Justice Department is looking into the real estate business is because of uninformed people like you whining about commissions. If there’s so much money to be made in real estate, why do 9 out of 10 people fail in the first year of the business? If there’s so much money to be made in real estate, why does our company (the number one company in sales in our region) only make an average of $140 per transaction? Where is the monopoly?
You commented, “So why have consumers not demanded lower prices”, what? Have you seen teachers salaries decrease? What about police and fire fighters? The reason most people’s income doesn’t go down is because of the free market system of supply and demand. You see, the average person isn’t interested in working nights, weekends, during their child’s soccer tournament, on a sunny Saturday when the golf course is calling, on their birthday, on their anniversary, getting calls at all hours of the day including dinner and sex, and most people don’t care to replenish their flyer boxes and try to drive in open house signs into the frozen ground when it is -3 degrees out like today! You see, it’s the tough ones that survive this business. It’s the value received by the consumers for services rendered that keeps the commissions at a fair level. Where is the monopoly?
You didn’t step on my toes, but you stomped on common sense all over the place!
Mr. “NYCJoe”,
Do you go into a private club and expect them to serve you dinner when you aren’t a member and haven’t paid your dues? What about a private golf course? Do you expect to play their course when you haven’t paid the dues that support their greens and staff? If you have a hammer and nail bag, do you expect a carpenter’s union to give you work when you haven’t served an apprenticeship or paid your union dues that support their organization? There’s another hundred analogies out there but hopefully you get the point. No one, including the DOJ, can claim a monopoly here when all someone has to do is pay a fee to join and pay a fee to support the services NAR offers to its members. Or they could go the more expensive route and start their own organization (and I’m sure that they wouldn’t want to charge anyone for providing all these services to them because that, in their minds, would be a monopoly).
Did General Motors cry “foul” at Ford?
Go on out and start your own association/organization if you want. Or join the rest of us hard-working, PROFESSIONALS in NAR! Wake up! There ain’t no free lunch in life!
IF YOU WANT TO DANCE TO THE MUSIC, YOU GOTTA PAY THE PIPER!
Lucky 🙂
February 3, 2007 — 8:03 am
Ryan H says:
Great post Lucky! I couldn’t have said it better myself!
February 3, 2007 — 4:05 pm
Athol Kay says:
Your house sold in six days, and the transaction went smoothly.
What the hell did you want to happen?!??!?
February 4, 2007 — 1:33 pm
Michael Cook says:
Athol,
I wanted one of those rebates everyone here has been talking about. I am sure this agent worked at most three hours on this whole deal.
February 6, 2007 — 1:30 pm
Greg Swann says:
> I wanted one of those rebates everyone here has been talking about. I am sure this agent worked at most three hours on this whole deal.
I did a spec home in December where the commission to me would have been $24,000. I gave $19,000 to the buyers as part of their down payment — so I only made around $500 an hour for my time. Resale is real work, and the way we normally do new builds is also. But a spec home is almost no work for the buyer’s agent. Even if you want to work, there is no work to be done.
February 6, 2007 — 1:38 pm
Anonymous says:
Real Estate brokers make 6% commision sometimes more, Mortgage Brokers make 1%. When there was a post to reduce the mortgage brokers fee there no uproar, but try and have a discussion about lowering the real estate agent fee and you get get your head handed to you on a platter. Mortgage Brokers are the Rodney Dangerfields of the real estate industry and that attitude comes from realtors.
February 7, 2007 — 12:41 pm
Richard Marcum says:
Michael Cook – “There is no difference in work in a hot or cool real estate market.”
Are you serious? Was that a typo?
February 8, 2007 — 5:24 pm
Frank Scaff says:
bottom line general thinking is that selling or buying a home requires little to no effort so why should a consumer pay a broker’s fee at all? the answer is simple, there is alot more to the real estate game then most people think. A broker’s job is to produce a transaction between a buyer and seller and then gets paid a fee for making that happen. If a home owner can sell on their own, and in a real estate boom that’s possible, then they should go at it alone however, realize that when your neighbors are selling their homes and are getting plenty of offers and the exposure, I’m pretty sure any home owner would then consider listing through a broker as well. the broker has an extensive client list, can get potential buyers set up with mortgage lenders, has relationships with closing attorneys, access to marketing materials, comparables as well as other resources (like time and agents) at their disposal. For a home owner to want to do this all on their own would be foolish and not worth their time and effort. Spend the time with your family instead and let the real estate professionals handle the sale. It’s strange but it seems like the real estate boom and new found attention has caused many people to think that they actually know everything there is to know about real estate but like other industries, there are ups and downs and in a down market….you’ll be more then willing to list with a proven broker to protect your best interest.
March 12, 2007 — 2:18 pm
Tesh says:
“…so I only made around $500 an hour for my time.”
Wait, did I read that right? You’re actually complaining about making more per hour than most people make in a day or even a week? It’s hard to be sympathetic to that position.
I don’t mind paying people for work. Honest day’s pay for an honest day’s work and all that. If I could hire a realtor for a reasonable rate, say, no more than $40 per hour (which still outpaces a lot of people), I’d have no problem with the transaction. When they get a chunk of the cost of a home, regardless of how much work they actually do, something is wrong.
Especially in these days of the information age. My wife did more work than the realtor looking for a new place, and to pay him for happening to be in the right place to “broker” a deal is galling, especially when he asked that we sign a non-competition contract before he even showed us a single home. If we bought a home anywhere in the county within a set amount of time, regardless of whether he lifted a finger or not, he got 3% of the sale, just for being the first one on the scene.
March 28, 2007 — 1:16 pm
Cathleen Collins says:
Not a complaint, Tesh. That was sarcasm.
April 2, 2007 — 12:02 pm
Marie says:
As a professional in a real estate related field, I can tell you that some of the larger Real Estate companies here in Ohio, would love to have a monopoly. They now have ownership interests in title insurance companies and mortgage companies. They are doing everything possible to drive away the competition by “suggesting” that their agents use the in house services. Of course they will tell you that the agents, or buyers/sellers can use any other company. However, they offer compensation in the form of points, etc, to the agents, which can be used at the end of the year toward gifts or some form of rewards, making it difficult for the agents to go elsewhere. Many are also charging a transaction fee ,from $119 to $300, in addition to the commission. The pricing for using in-house services has not proven to be consumer friendly. Every consumer should research independent title insurance and mortgage companies.
Now, I have heard from different independent Realtors that the larger companies will not show the listings of the Mom and Pop businesses. If they can’t buy them out, they will force them out.
Everytime I see a commercial for the large nationwide real estate companies, I want to scream “That is where the commission really goes!!!” Just think about how expensive advertising is, and you will get an idea of the amount of money this industry rakes in.
Any broker from a nationwide company will tell you that these tactics are not in practice, just sour grapes. They are smart enough to keep everything just above legal. However, everyone in related fields knows it it true.
As a 25 year+ veteran of my field, I can tell you,if I couldn’t sell my house on my own, I would only use the services of a local independent Realtor.
April 5, 2007 — 11:34 am