Editor’s note: Every few years, Realtors and their commission structure come under scrutiny and it is happening again now. In this three-part series, we examine whether commissions are going up or down and what’s adding pressure to the debate. (See Part 1 and Part 2.)
Last year, Shaina Varia sold her Union City, Calif., home herself, saving about $50,000 in real estate broker fees – thanks in great part to the red-hot real estate market.
Now that the market has cooled, will consumers be less willing to try to sell themselves and more willing to pay higher commissions to motivate agents to get them the highest prices? Or will they try to negotiate commissions down or resort to discount services in hopes of saving money?
A lot of attention is currently focused on traditional real estate sales commissions as most markets are cooling off record housing booms and the industry’s major trade group, the National Association of Realtors, faces an antitrust lawsuit with the U.S. Justice Department.
A slowing real estate market raises the question of what is an affordable sales commission. A group of industry observers – longtime brokers, academics and established veterans – disagreed strongly on how a slower market may impact real estate commissions.
“I think commissions will strengthen,” said Dave Liniger, chairperson and co-founder of real estate industry powerhouse RE/MAX International. A Jan. 28 report in The Denver Post newspaper had credited the RE/MAX leader with saying average commissions would drop, a characterization he corrected in a February Inman News story.
A “normalizing” market such as the one currently in effect makes agents more valuable to consumers, Liniger said.
“If you have a market with 50 properties available and only four are selling each month, then it goes back to the professionalism of the real estate agent establishing a right price, or the company that brings the most prospects,” Liniger said.
Another factor affecting commissions is the additional expenses agents face in the changing market, he said.
“If a property is taking six or seven months to sell instead of two days, obviously the expense to the real estate agent goes up. The advertising expenses go up, MLS fees, the cost of handling the property and communicating with the seller is there,” Liniger said.
The chief operating officer of a for-sale-by-owner Web service disagreed.
“Certainly the market is cooling in key areas around the country,” said Colby Sambrotto, chief operating officer of ForSaleByOwner.com. “But our experience is that such situations tend to bring us the most customers.”
Detroit has been a “terrible market” for home sellers for a number of years, Sambrotto said, and the city has been one of the FSBO site’s most fertile grounds for clients. His site offers listing packages for home sellers, a directory of homes for sale by owner, city profiles and school reports as well as information on the home-selling process and a program to refer home sellers to real estate agents, among other things.
“For most Americans, it’s (the agent’s commission) an enormous amount of money. In a slow market they are going to need extra help and the marketing power of the Internet, and we bring that to the equation,” Sambrotto said.
New, so-called “creative” or “exotic” loan products such as interest-only loans distinguish this downturn from others, Sambrotto said.
“There are markets where homeowners have been able to get into homes with very little equity. They may need to sell them and may not have enough equity in the home to pay a real estate agent, and those are the ones who will use our service,” Sambrotto said.
For example, Sambrotto said, some consumers might have only 15 percent equity in their homes. “In that case, you are giving half of the equity you have in your home to an agent. Not gonna happen,” he said.
“From our standpoint, there will never be a day in America again when real estate commissions will climb. The new alternative models entering the marketplace, new Internet-related tools being available to consumers, have changed the industry,” Sambrotto said.
Though at least one industry insider says commissions recently have ticked upward in his Florida market. John Mudd, a Tampa Realtor with Exit Realty Suncoast, recently commented on the Inman News blog that, “Right now we’re seeing lower prices and higher commissions…Personally, I think the 7 percent norm will be back by next year, based on current trends.”
A professor from the prestigious Wharton School of Business disagreed.
“Commissions are flat to down. There is no way around it,” said Dr. Susan Wachter of the Wharton School of the University of Pennsylvania. “There is simply going to be less activity in the market and though agents are going to drop out, they are not going to drop out as fast as the business slows.”
A fellow academic said he believed commissions would neither drop nor jump.
In the opinion of James Barth, senior fellow at the Milken Institute and finance professor at Auburn University, the most notable pressure on commissions is online discount services, not the market.
However, Barth did say, “Now that the market is slowing, commissions will stay the same.” Though there is some small amount of room for negotiation, the professor does not believe prices will rise or fall.
Twenty-seven-year industry veteran Kenneth L. Jenny doesn’t see listing or selling commissions coming down due to a softening market.
“Sellers want to motivate buyers’ agents, so they will compensate them accordingly. They’re not going to cut the buy side of the commission. They want to make sure agents are incented,” said Jenny, CEO and managing partner of tranCen.com, a residential brokerage services company.
In Jenny’s view, because there are now fewer buyers and more listings, enhanced marketing is necessary – increased exposure through advertising and more brokerage events such as open houses and broker tours.
“In a fast market, these things are not needed. You stick something up on the MLS and it’s sold. People say, ‘I don’t need to pay this huge commission.’ Those times were here and they enabled discounters to get a foothold,” Jenny said. But, he said, those days are now gone.
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