First of, apologies for this visual, but can you believe this was an actual billboard for an agent? I shudder. I came across a most interesting article over the weekend from a site called Property Portal Watch: Why Redfin, Zillow, and Trulia Haven’t Killed off Real Estate Brokers. The article initially ran in Businessweek. Interesting, albeit long story, but I strongly suggest you read it. You know that 90% of all consumers now begin their real estate search for homes, condos or apartments on line now, right, this from the NAR. Still, brokers are handling more sales than ever and real estate commissions, in fact, have gone up, not down! The average real estate commission paid in 2011 was 5.4%, up from 5% in 2008. And U.S. real estate commissions are higher than the median commission rates abroad, with the exception of islands and resort properties.
“Ten years ago almost no one started their home search online. And yet none of that value has come back to the consumer,” says Glenn Kelman, Redfin’s chief executive officer.
There was a time, back in 2001/2002 when I clearly recall agents getting worried they would go the way of travel agents. In fact, the co-founder of Zillow is none other than Rich Barton, the guy who put travel agents out to pasture by creating Expedia.com.
Think about of that for a moment: does anyone use a travel agent anymore to make plane reservations? I buy all my tickets on my iphone or online. My millennial kids don’t even know what a travel agent IS.
The thinking back in 2004 was that perhaps real estate purchasing could be done much like buying an airline ticket, or booking a hotel. As you learn in this fascinating story, it was David Eraker, the original founder of Redfin, who first put real estate search on line for consumers. Eraker was a Seattle-based geek (who had dropped out of med school) who was frustrated he could not find a condo on line and thought the irrationality of broker commissions that remained fixed… regardless of housing supplies or competition among agents well, sucked. So in 2002, working with a Yalie partner who had a degree in electrical engineering, the dynamic duo went live with a site that displayed homes for sale on a digital map in Seattle.
Redfin’s initial philosophy was a bit different from the Redfin of today — I have a story on the Dallas Redfin group coming up, impressive group of agents. Redfin hoped to eliminate the agent or minimize his/her role in the home purchase, much like the Expedia model. That is not the Redfin of today. The idea was to save consumers money — whittle down that real estate commission.
Over at Zillow, the founders were thinking along those money-saving lines, too. At first they thought they could hold online auctions for homes as a way to disrupt the status quo of selling homes. Rich Barton soon saw that real estate agents were not anything like travel agents:
“It was obvious to us, regardless of how relatively frustrated consumers were with the whole process, how important the agent relationship was to customers. No robots were going to eliminate the agent,” Barton says.
No, no robots and no online platforms. Quicken and Quickbooks sure didn’t eliminate our CPA, just helped me organize financial information. When it comers to complicated, expensive, emotional, life-changing purchases, people still want someone with experience to guide them through.
According to this article, economic theory suggests that the relationship between an agent and a buyer is not optimal because of the diverging, almost conflicting, interests of the Principal (the customer) and he Agent representing him or her. Agents make their commission by selling the home. They also bear the brunt of marketing costs, though increasingly I am hearing of agents who ask the Sellers to cover the cost — the parties, the ads, the gas! Do some agents pressure sellers into selling quickly and accepting lower offers just to make a quick buck — we have discussed Pocket Sales here at length? The theory is that if the home sells for the maximum amount the market will bear, it’s a win/win for the agent broker and the seller. The conflict may be even worse for buying agents — do they pressure clients to pay too much to fatten their commission?
In 2008, Stanford University economics professors B. Douglas Bernheim and Jonathan Meer published the results of their study of nearly 30 years of house and condo sales on the university campus. They found that an owner’s use of a broker to sell their property reduced the eventual selling price by 5.9 percent to 7.7 percent, compared with homes sold by the owner directly.
Do you know what I think when I see a FSBO? I make it a mental game to see which agent will pick up the listing in 3 months. There are exceptions in hot neighborhoods and hot markets, but fewer than ever homeowners are selling their own homes without an agent:
Yet only 9 percent of homes were sold directly by owners in 2012, down from 13 percent in 2008, according to the National Association of Realtors. As one might expect, members of the housing industry argue that people simply value the expertise and service that agents can provide and are nervous about venturing out on their own or trusting an online discounter for the most complicated transaction of their lives.
What do you think about all this? Will the current model ever change? I think it may at some point, at some lower price levels, where the marketing costs and time input may not be worth the commission. Mid to high end homes will always, always have an agent.
Last October, at a Seattle technology conference, an audience member asked Spencer Rascoff, Zillow’s CEO, if sales commissions were ever going to decline. “There are other startups that are trying to break down those agent commissions, and I think most of them will fail,” he said. Rascoff said later in an interview that “consumers don’t really care about commissions. They say they care, and they talk a big game in the off-season. But when push comes to shove and it comes time to sell their home, the transaction is so infrequent and so highly emotional and expensive—and consumers are so prone to error—that they turn to a professional.”