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 3.)
Discounting may still be taboo to some real estate professionals, but a lot of full-service sales agents offer discounted services – at least for some of their clients, some of the time.
Agents have said that they might offer lower rates to a client who is working with them for both the sale of their current home and the purchase of their new home, for example, or give a break to friends, longtime clients or family members.
Some industry professionals claim that lowering costs for real estate services will drain quality from the real estate industry, while others say the industry is ripe for change – especially when it comes to a decades-old commission structure that has led to greater profits per transaction as home prices have escalated.
In some ways, the change is already here. New business models are challenging the age-old compensation system with flat-fee, menu-based and other limited-service options that allow consumers to cut costs, and some discounters are offering full-service at a reduced price. But these companies do not typically receive a warm embrace by agents and brokers working for long-established traditional business models.
Real Trends, a real estate research and publishing company, has reported that the average commission rate among the nation’s top brokerages dropped to about 5.4 percent in 2001 and fell further to about 5.1 percent in 2002, maintaining that rate in 2003. The company hasn’t released more recent data on commissions.
Meanwhile, median gross personal income increased an average 7.2 percent for all Realtors from 2002-04, according to a National Association of Realtors member profile released in August.
Brokerage managers had a median income of $86,000 in 2004, a gain of 26 percent compared to median income in 2002, and the median income for brokers who both manage and sell increased 19 percent to $82,200 from 2002 to 2004, Realtor Magazine Online reported. The median income of sales associates actually dropped about 8 percent from 2002 to 2004, “largely because of the influx of new licensees who typically take years to get up to speed in their earning potential,” according to the report.
So while commissions have been shaved down a bit in recent years, fast-rising home prices have kept broker profits at a high level.
Discounting is not a new phenomenon – companies such as Help-U-Sell and Assist-to-Sell have been around for decades and have grown to become major national brands. And offices affiliated with such big-name real estate brands as GMAC, Century 21 and HomeServices of America have also launched discount real estate offerings.
Blake GMAC in Wisconsin, for example, offers MLS listing services for a flat fee, along with fliers and Internet advertising, through an affiliation with HomesByOwner.com. And HomeServices of Iowa last year opened EquiSave, which offers flat-fee real estate services. Century 21 Clickit – another rare example of a flat-fee business model affiliated with a big brand name – launched in Georgia in 2000 and has since spread to Connecticut, Florida, New York and North Carolina.
J. Mario Preza, broker-owner at Daly City, Calif.-based Home 4 Less Properties, said his company charges 4 percent of the selling price to list a property for sale, which he said is less than the typical rate in his market area. That means that he typically will offer about 2 percent of his commission as compensation to the brokerage that brings a buyer into the transaction.
“I’m not so much revolutionizing anything out there – I’m just following a trend,” he said. There are some agents who may choose not to show a property to their clients if it is listed at a discount commission rate, but he said 2 percent can be a lot of money given the home prices in the San Francisco Bay Area. “Those are agents who will shoot themselves in their own foot to buck the trend.”
The 6 percent commission – considered a historical benchmark for the cost of real estate services – is becoming a rare thing in the marketplace, Preza said. It’s fairly common now to see listing brokers advertise a 2.5 percent commission as compensation to the buyer’s brokerage, which he said is more indicative of a 5 percent total commission.
So even while some real estate professionals may criticize discount companies – there are many who offer discounts compared to the traditional 6 percent commission, he noted. “If you can’t beat them, join them,” he said.
Michael Davin, executive vice president and director of marketing for CataList Homes Inc., a real estate company based in Hermosa Beach, Calif., said there are agents at major firms “who drop their commission to 3 percent or 4 percent … They do it quietly while their coworkers in the office complain about discounters.”
Brian Yui, CEO of HouseRebate, a real estate company based in San Diego, also agreed that many real estate professionals today are discounting their services, and some agents additionally are taking a cut on commission by paying a portion of this income to lead-generating companies such as HouseValues and HomeGain and LendingTree.
Yui also noted that 5 percent commissions are the norm in his market area. “A lot of firms charge 5 percent. Are they considered discounters because they are not charging 6 (percent)? I think what traditional brokers charge is less than five years ago. Traditional brokers are acting more like discounters than ever before,” he said. Also, it’s common to hear about agents who offer discounts to relatives and friends in a real estate transaction.
Consumers are still largely uninformed about the compensation process in a real estate transaction, though there are definitely those who shop for real estate services based on pricing, he said. As the industry grows its adoption of new technologies, Yui said he expects pressure to continue on real estate commissions. But there will always be room for discounters and companies with a more traditional price structure, he said.
“I think it’s a big enough market for everybody. I don’t think it’s going to be all discount,” he added.
Mary Pope-Handy, a Realtor for Intero Real Estate Services in Los Gatos, Calif., said that individual agents who offer discounts to consumers can lead to confusion about companywide discount practices – consumers may expect the same discount rate from all agents affiliated with that brokerage. “Really what is a problem for us as agents is when the public perceives that they can get full service for a discount within the same company. I think it is wise for the company to make it a little difficult to discount,” she said. “If we undercut ourselves, we all lose.”
In fact, many brokerage companies have rules about how low agents can go with commissions and require permission for commissions that dip below the company’s standard rate.
Pope-Handy also said that some agents do not realize the costs involved with the business. “I know the public perception is that we are overpaid and there’s a lot of ‘fat’ in the commissions. It’s far, far more expensive and less lucrative than most folks believe. That is the core reason, I think, why so many agents leave so fast.”
Paul May, a broker for Help-U-Sell Real Estate in Las Vegas, said he formerly worked as an agent at a company that allowed agents to keep the commissions they earned, and agents at that company were “a little more liberal with discounting” because of the company’s agent-centered commission structure. At more traditional business models, “brokers dictate what their commissions are going to be obviously to protect their fees,” he said.
Commission rates of 4 percent to 5 percent are not uncommon in the Las Vegas market, May said. “Obviously people think 6 percent and 7 percent have been steadfast for years and that’s just not the case,” he said.
Even so, May said Help-U-Sell recognizes that not all companies are discounters. It’s common for Help-U-Sell sellers to offer 3 percent or 2.5 percent to the brokerage representing the buyer in a transaction. “I tell my clients … you need to be at or maybe a little below the market,” he said, though the property’s list price is ultimately the most important factor in selling the home.
If other agents shun listings by discount companies then “shame on them,” May said. “Ultimately our goal is to procure the buyer anyway,” he said.