Fortune: Battling the 6% Realtor Commission

[powayseller]

Fortune story about new realty start-ups. Redfin is coming to San Diego.

[Bugs]

The 6% commission structure covers a lot of services. Scouting out properties for purchase or listing a property for sale are only a couple of them. While it’s true to some extent that the use of online services can in some fashion replace this portion of what a full service brokerage does, they can’t come close to replacing all the services that 6% covers. I think there will continue to be a place for full service brokerage for a long time.

That’s why in a real estate market where the average home is still selling for less than $200,000 the 6% commission structure makes a lot of sense. There are a lot of those areas in the nation yet. In a market where the average homes are selling at higher prices, that commission structure starts to look out of place.

Why should a Bressi Ranch tract home generate $60,000 in realty commissions if the same home in Riverside County would only $30,000 for the same service? Same thing goes for mortgage brokerage, too. It takes just as much time and effort to build a loan package in a $200k market as in a $1,000,000 market, why are the commissions not rated on a sliding scale?

[powayseller]

I agree completely. When we sold our house in 1/06, the title company charged double the fee from 2000 when we bought it. The realtor wanted double the fee. Hey, I said, it’s the same house. I called to complain about the exorbitant fee, but the title officer said they charge based on a commission scale. I couldn’t complain too much, because I made out like a bandit too and didn’t have to work for it. OTOH, appraisers and home inspectors charge a fixed fee. It doesn’t make sense. I think we need more fixed pricing with realtors, loan officers, and title/escrow personnel. They don’t take on more risk with higher priced products.

[an]

I think a fixed fee structure would make more sense. So instead of 6%, which is equal to $30k for a $500k house and $60k for million dolar house, how about a fixed $20k-$30k. I’m pretty sure the agent doesn’t work 2x as hard for a million $ homes.

[sdduuuude]

I always thought a fixed fee plus commission made the most sense, where the comission is 1/2 % or so and the fixed fee is whatever the market would bear.

[sdrealtor]

I would gladly work for $10K/house if I had some sense I guarantee that I would get paid. Heck, I’d work for half that if the client would cover all marketing costs upfront and assume all liability.

[rockclimber]

Do your marketing costs and “liability” (not sure what you’re talking about here) scale with the median price index?

I know a common agent retort to this argument is that, “The commission is built into the market…” What are your thoughts on that?

Is the sales commission an incentive for the agent to get the most money they can for their client? NOT! At $500k average per house, differences of $10k or so are peanuts with regard to commission… it’s gotta be all about volume.

Here’s my take. Agents do add value, but the value they add does not scale with the price of the house. Exceptions might be “hard to sell” property types that would warrant a premium.

[sdrealtor]

Marketing cost s scale with the price because the higher the price the higher the clients expectations of what marketing should be. Anyone with a house above $1.5M wants to see their home in Dreams Homes magazine which costs a grand or more. They expect professional photographers at 500 to 1000. They expect color display ads in the UT.

As for liability, any agent who has been in the business for any length of time will end up in arbitration/mediation/litigation etc. Even good and honest get sued because of dishonest clients. The comission is built inot the market because the system is what has created a fairly efficient market. Take out the variable incentives and lower the compensation and prices will drop. Most of you would argue that is a good thing….that is except when you become the seller that wants top dollar.

Personally I would love to work for a set guaranteed rate where the client bears the burden for unreasonable expectations (i.e setting too high a price and not selling).

[Author]

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