Evolution Shift
A Future Look at Today
June 26th, 2007

Disintermediation – Say Good-Bye to the 6% Commission Rule.

In the last year I have written often about disintermediation. It is a force that is affecting numerous industries. Residential real estate, as I have written here, is one of those businesses. Any business that has historically inserted itself between buyer and seller and has also kept market information to itself is a business that sooner or later will have to redefine itself in this Internet age. As mentioned in this column, both the stock brokerage and travel agent business have been substantially changed due to the disintermediating power of the Internet. I predicted last year that residential real estate would soon be facing a similar situation unless it adapted quickly.

The recommendation here has been for residential real estate agents to either lower their commission from the standard 6% or add services and create new value to keep their commission at that level. I want to be very clear: I am not arguing against the status quo of this industry, I am just saying that the trend is obvious and relentless and that it should be fully faced. The old days are over. Agents that do not believe this do so at their peril.

It has been no surprise to me to see numerous articles recently about the dramatic increase in discount real estate brokerages and the growing ‘For Sale By Owner (FSBO)’ trend. In a soft real estate market, brokers are no longer gatekeepers of listings but instead are looking for buyers. Sellers are open to finding ways to get their home sold. Mortgage foreclosures are rising and homes are being sold at auction. At the same time, an increasing amount of listings are on the web, available for all to see. The federal government has instituted restraint of trade law suits against the National Realtor Association. This is creating a perfect storm that will bring about dramatic change in the real estate brokerage business in the next two years.

A recent front page article highlighted the fact that of the six year period from 1998 to 2004 people in Madison Wisconsin who sold their homes through agents did not get a higher price than those who sold their homes themselves. When agent commissions were factored in, the for-sale-by-owner people came out ahead. This of course refutes one of the ‘axioms’ of the brokerage business, that people who use brokers get a higher price. The caveat to this story is that Madison is a city that has had a long and successful history of FSBO and that the local web site is well used and well respected. Therefore, this data is local and cannot represent the national market. However, this is the beginning of a trend. What did not exist ten years ago and now is growing rapidly is a trend to be considered. I regularly see FSBO signs in front of houses, something I rarely saw ten years ago.

There are now state and regional discount real estate brokerage firms that are expanding aggressively across the country. A recent story in a Chicago paper profiled what happens when this new trend butts up against the old way of doing business. A young couple had chosen to sign up with an on-line discount broker. The deal was simple: the couple would do all the leg work, the discount broker would handle the paper work, and upon closing would rebate 75% of the 2.5% commission paid to the buyer’s agent. The couple spent a lot of time looking for the right house. When they found it and contacted the traditional broker that represented the seller, that broker refused to work with a discount broker. It took the buyer’s attorney to firmly suggest the illegality of that to bring the traditional broker around. Shortly after the closing, the couple received a check for $13,000 from their discount brokerage, money that traditionally would go into the broker’s pocket. A key component to this story is that it will only work for buyers — or sellers- who are very comfortable with being on-line, as that is where most of the interaction takes place.

A majority of real estate listings are now on the web. Vast amounts of real estate data, including sales prices are also on the web. If buyers or sellers are interested in doing the work, doing the research and spending some time on the effort, why should the broker be paid full commission? To those real estate brokers who might be angry reading these words, please let me ask you a question. If you had researched a stock, had made the decision to buy, would you pay full commission on the transaction, or would you go to a web based discount brokerage firm? If you do all the work and know what you want to buy, why should you pay the full service brokerage fee? Ten years ago full service stock brokers were resistant to change, and look what happened to them.

This force of disintermediation is too powerful to resist. By the time the national real estate market fully recovers from its’ current recession in 2009 the residential real estate business will look distinctly different that it did in the heady marketplace of 2005.

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