Real estate commission story causes uproar

Editor’s note: Inman News Publisher Bradley Inman wrote a controversial blog about the real estate industry’s elephant in the room — falling commissions. It prompted a fascinating debate inside the Inman News blog — prompting more than 200 reader comments. The original blog entry is pasted below.

This weekend, I e-mailed an old friend Katie Beacock, a Realtor in Seadrift, an exclusive stretch of Stinson Beach in Northern California’s beautiful Marin County. I always dreamed of owning a home there and wanted to check in with Katie on any new or pending listings.

I have always used a Realtor when buying real estate and cannot imagine doing it any other way. As expected, Katie let me know about current listings, which I had already found on the Web, but she also told me of a house that might be coming on the market. I can also count on her to give me the scoop on the market in West Marin, navigate the issues of buying oceanfront property and closing the transaction without any contingent liability.

I recently bought a car from an independent car broker, used a nutritionist last year and probably should hire a personal trainer. Middlemen are part of my life. 

As I always use a Realtor, I also always negotiate the real estate commission, which I consider my legal and economic right. If intermediaries cannot take the heat of negotiation, they are in the wrong field.

Last week, I penned a blog about real estate commissions that listed 10 things that I believe may explain why commissions are under siege. As usual, I tried to offer our readers a perspective on a series of unrelated events and how they added up to some sort of tipping point on a bigger trend.

In my 25 years of writing thousands of stories, I have never written anything that sparked such a wide and diverse range of opinion. The comments section of the Inman News blog is loaded with intelligent reader commentary, some outrage, a couple of expletives and entertaining observations.

The reaction suggests two things: a segment of the public is outraged by the size of commissions, and some Realtors are either in denial, in fear or merely frustrated by the industry’s inability to communicate their value. Others recognize that we live in a wonderful country where the free market should live and breathe without interference, giving people choice and the best possible prices on services and products.

Here is a sampling of the feedback:

• Consumers should be able to choose a full-service broker, a discount broker, a flat-fee broker or no broker.

• How is it that homes sell for 11 percent more or better when a Realtor is involved? Give up 6 percent to gain 11 percent? That seems like a no-brainer.

• The industry is filled with people who go to an 80-hour class and can start selling real estate. Consumers and some real estate professionals like myself, question how a so-called professional with so little formal education should be able to charge so much for a job that often is filled with mistakes and omissions.

• As a consumer, I’d like to see agents itemize how much they are spending to market my home before I agree to hand over $30,000 in commissions.

• We would gladly charge you by the hour instead, but you couldn’t afford it.

• Commissions will continue to go down, way down to the sub-2 percent range, but transaction volume will increase because the barriers to sell (namely 6 percent) will decrease.

• Stock commissions used to be upwards of $29/trade and are now down to half-a-cent per share.

• As someone who came from the UK to the USA, the fees charged by USA Realtors are just madness. In the UK it’s 1-1.5 percent maximum, as it should be.

• Two reasons a buyer should use a broker over a machine:
  1. Brokers are the first to know a house is on the market;
  2. Brokers are the first to know BEFORE a house is on the market.

• This is one reason Realtors are still here, because we provide a very valuable service. We were supposed to be “obsolete” by 2000?

• I had to lower my commission because I was competing with a discount broker. At the end of the transaction, the sellers instructed Escrow to give me an extra bonus, besides the commission.

• Why not let the market decide?

• If Realtors as “professionals” suffer from image problems, they have no one to blame but themselves.

• When I am a consumer I want choices, price, quality and experience… I don’t understand as Realtors why we are resistant to our consumers having the same choices.

• Keep drinking the NAR Kool-Aid. Consumers just can’t figure out why agents charge two times as much for the same transaction: i.e., 6% x $300,000  = $18,000, 6% x $600,000  = $36,000. Identical transactions, different prices, why?

• There is no elephant in the room, just a prolonged great market that has bred a lot of companies that are getting their market share by cutting prices and unbundling services. The recent slowdown is a good thing. It will again weed out the weak competitors in the market and leave the strongest, including some of the newer more innovative companies.

• I find all these comments very interesting and informative. However, it is very discouraging to note all the misspelled words in the comment section! It doesn’t make us “Realtors” look very good!

Inman’s original blog entry, “Elephant in the room“:

Every few years, Realtors and their commission structure come under siege. It is happening now. Why?

1. Zillow’s coming-out party in February prompted the popular press to peel back the onion on the industry with tough questions. Do you need a Realtor? Do you need to pay 6 percent? Zillow launched a free home-valuation service, offering online access to value estimates and data on some 60 million houses in the United States.

2. The Justice Department lawsuit against the National Association of Realtors has brought heat on the industry, turning attention to commissions. The DOJ’s Antitrust Division has accused the NAR of being too restrictive about the display of online property listings.

3. Some strange industry events such as real estate veteran Steve Ozonian moving to a discount firm has prompted people to question the tried and tested model. Ozonian in January was appointed CEO and chairman of the board for Help-U-Sell Real Estate, a flat-fee real estate brokerage network.

4. Flat home prices and squeezed equity due to non-stop borrowing raises the economic question of what is an affordable commission in this environment.

5. Brokers have been complaining way too much and for too long about their business model being broken, begging the question that the pricing structure itself is in need of reform.

6. Fast-moving houses with fast-rising commissions, based on inflation not performance, has raised the “fairness” and the “greed” charge.

7. Sensitivity to price has never been higher with price-busters like Wal-Mart setting a new standard.

8. The Web has opened the debate, introducing alternative models and giving consumers more control. When we do more ourselves, we expect to pay less.

9. The industry is getting way too defensive; there is usually some truth when people get overly sensitive.

10. Realtors have been whipping boys for at least two decades, since David Mamet’s 1984 Pulitzer Prize-winning play “Glengarry Glen Ross,” a merciless satire of the profession. And every group needs one group it feels better than. Real estate agents have always suffered low rankings in the respected profession lists.

In the past, such storms have not led to significant changes. Most people still want a full-service broker and are willing to pay 5-6 percent. Is this a case of the elites being out of touch with what people ultimately want and will pay for? Are things any different now? What do you think?

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What’s your opinion? Send your Letter to the Editor to opinion@sandbox.inman.com.