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RESIDENTIAL BROKERAGE COMMISSIONS – FURTHER UPHEAVAL

HUD housing and urban developmentRecent editions of the The Seattle Times (Sunday, November 16, 2014) and the Puget Sound Business Journal (November 13, 2014) discussed a new local "disruptive" company on the residential real estate brokerage scene, Surefield.com.  The Pacific Northwest, home to Zillow.com as well as Redfin.com, is known as an innovation hub in this industry.  Surefield is an online residential real estate brokerage, which plans on dramatically undercutting the traditional 6-5% real estate commission paid by sellers (usually divided 3 or 2.5% for the listing agent and 3 or 2.5% for buyer's agent), charging only 1.5% to sellers.

As quoted in the piece by Ben Miller, Contributing Editor of the PSBJ, David Eraker, Surefield CEO said:  "The U.S. real estate industry has been operating as a quasi-cartel for far too many years, just look at the high commission rates as proof of tacit collusion."   While commissions have been negotiable in theory, in practice, it has been challenging to find a good broker to vary greatly from the general price range and format.

Zillow primarily provides online property information rather than brokerage services, like Redfin, which allows property listings and has its own stable of agents to work on a seller's or buyer's behalf.  Redfin charges 1.5% for a listing (as opposed to the traditional 3 to 2.5%) and provides full service brokerage services accompanied by its online tools.  The commissions charged buyers are less than the traditional model, and based on the price of the property.  Redfin, like some other new firms in the space, pays its agents a salary rather than a share of the broker commission.

Other entrants into the tech brokerage market include UpNest.com, which allows residential real estate brokers to bid for a listing, competing by marketing proposal and commission rates.  There are also on line brokers like Shopprop.com, which have a set discounted listing fee, less than the traditional 2.5 to 3%, and a graduated buying commission based on the number of services provided and the price.  Seattle-based Findwell.com is another entrant into the growing online brokerage field.

What's the future of these and other online services, and how do you compare them to the traditional brokers?

In the past, one of the most important roles of the real estate agent was as gatekeeper to information about the market.  That is the most significant change.  Instead of asking your agent to locate and screen properties in the your price range and which otherwise meet your requirements, online tools now allow a buyer to view listings, filtered by price, bedrooms, location and amenities, often with interactive virtual home tours available.  The new portals, such as zillow.com, as well as sites from traditional brokerage firms, like windermere.com or johnlscott.com, have made the property search and identification process much more efficient.

Technology can also help foster competition and efficiency in selecting the agent who can assist you in the sale/purchase process.   One aspect of technology that I appreciate when I go out to dinner, stay in hotels or hire a contractor is the customer feedback/rating process.   Companies like Redfin and UpNest have internal ratings based on customer feedback.  I understand Redfin financially compensates agents who get great customer feedback.   I like that.  This screening function is helpful, but is not entirely new.   Brokers at good traditional agencies also screen agents working for them, a process I know takes place at Windermere and John L Scott.  Those that don't perform well aren't retained.  And as a real estate lawyer, I often get asked for and check with my colleagues about agent referrals.  It may be that with the right tools, quality will rise to the top even faster than in the past.

Is it good that there is a wider range of commissions offered?  Yes, unless you're on the receiving side of the equation.  There are times when a property will sell itself. In those situations, having the option of selling through a low cost brokerage with minimal agent involvement makes sense. More commonly, however, the process of properly pricing, staging and marketing/showing are as important as ever for a seller.  From the buyer's perspective, a skilled agent’s advice about the nuances of value, building issues, neighborhoods, negotiation and the buying process is also critical.   Working with smart, hard-working agents is as important as ever.   But from an agent's perspective, commissions are coming down.   The best agents will learn to use the technological tools to become more efficient, and will find platforms which cost less from which to deliver their services.  In residential real estate, as in most of the economy, the ground rules are rapidly changing, and for the most part, consumers benefit.   Here's to the future!

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We regularly update clients about changes in real estate law and on industry trends. This includes briefing clients on legislative proposals in the federal tax, housing and other legal areas affecting their businesses. Staying current enables you to anticipate and prevent legal problems as well as capitalize on new developments.
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