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A Peek into the Future of Real Estate Commissions

sixpercentAs I’ve written previously, the topic no one ever wants to touch in this industry is commissions.

Yet I hear pitch after pitch from entrepreneurs on this topic.

Changing consumer behavior is insanely difficult.

I honestly have zero idea how long it will take (we’re talking years, not months in any case), but do think the industry will eventually shift the commission structure / options — though only in markets such as New York, San Francisco, Seattle, Los Angeles, and Boston where home prices (and the resulting commissions) are insanely high. My gut is the commission model isn’t inefficient in most markets throughout the country. It just happens media & tech in the country are largely based in areas like LA, San Francisco, and New York where high home prices exist. Thus, the topic gets more airtime and entrepreneur attention than it would if the center of media and tech was in the middle of the country where home prices are more reasonable.

In travel, there is zero doubt the Couchsurfing travel experience of staying with locals (which we are aiming to facilitate more of by enabling it inside existing communities) is the best way to experience the world. At the end of the day, knowing that doesn’t matter — most people have no idea Couchsurfing even exists, and many that do have serious privacy/trust issues preventing it from happening at broader scale. Eventually, I firmly believe there will be a much, much, much larger percentage of people who travel that same way Couchsurfers do via existing communities (and via other communities people don’t know exist yet). That said, actually putting the right product out that alleviates the trust/privacy concerns, grows virally, contains strong host incentives, works across all devices…at the exact right time when consumers are starting to get comfortable with the concept — well, that’s an insanely difficult proposition, and timing is definitely a massive component to success.

cracking-nutKnowing a market will shift eventually doesn’t matter in terms of business success unless you can be catalyst for the shift and end up with a defensible moat on the other side. Yes, lots of entrepreneurs believe agents are overpaid. But how exactly do you change the real estate consumer mindset and action given the social contracts, trust, incentives, market dynamics, competition, etc that exist in the real physical world?

I haven’t heard a “how” I believe can work yet. Someone, please prove me wrong. I’ll be anxiously waiting to see if, and when, anyone cracks the commissions nut open — just as I’m anxiously attempting to be the one that cracks the community travel nut open.

[Photo via http://www.bakersfielddressage.com/]

About Drew Meyers

Founder of Geek Estate Blog. Zillow Alum. Travel addict & co-founder of Horizon. Product & Marketing for 360modern. Social entrepreneurship & microfinance advocate. Fan of Red Hot Chili Peppers and Kiva.

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  • Couldn’t agree more. Improving things 2x – only gets you so far and likely does not give you time to create a moat or capture enough attention. When obvious problems/inefficiencies appear, it is likely that simple answers would have been attempted already. These problems/inefficiencies generally persist until someone gets the strategy right for that problem. – My favorite example is not AirBNB or Uber, which both arguably existing in a grey market, but rather something like Slack or even Facebook. – Both markets existed for years until someone got the strategy right and built the right tech around that. – Good luck with doing the same to the P2P budget travel market. 🙂

  • There have been discount commission companies for decades. There are hundreds available to consumers, everything from flat fee $500, menu options, 1% rebates, etc, right in my local MLS. Consumers who want a discounted commission have always been able to find that company.

    Redfin is successful because of its tech, and honestly its profitability suffers at this point because of its discount model. It’s a gimmick that they don’t need.

    Tech money in real estate rarely looks at the true logistical manpower necessary to run a quality real estate organization before it falls over itself in a commission reduction model. It fails, over and over again, until it realizes there’s a heavy load of labor necessary to get a real estate transaction done well.

    • “Consumers who want a discounted commission have always been able to find that company.”

      Right, but most consumers don’t go find it. I think, that’s the part that will change over (a long) time.

  • Steve

    If you haven’t already seen this, it’s a good read on this topic! A Critical Assessment of the
    Traditional Residential Real Estate
    Broker Commission Rate Structure
    (Abridged)
    By Mark S. Nadel. http://baker.realestate.cornell.edu/crer/images/uploads/article/Abridged_RateStructure_Nadel.pdf

  • It’s like journalism. People said the internet was going to hurt the dead tree publications. The newspaper industry said their revenues were hitting records each year. Then the cascade. After 2005 the mighty newspaper industry tanked. Where are they now? Half of the ad revenue as in 2005?

    It will be like that for real estate.

    Despite all the new buyer options, once sellers see (somehow) that they can likely sell for around 3% without paying anything to the buyer’s agent, the cascade will begin. Then 5 years later, half of buyers will not be using a buyer’s agent.

    • I definitely agree there will be continued downward push on the buyer’s agency.

  • Peter Liem

    I wished I read this before spending 4 months on my startup …but we pivotted and this article just make me feel much better that I took the action. I completely agreed with you Drew…..as long as consumer still think they can call realtor, ask them to show them houses and don’t have to pay a thing until closing, commissions are here to stay either discounted rate or full rate 6%..heck some Real estate coach even recommend 7% ….and they did..

    Agent still relevant even in this market…..as long as consumer still think they are.

    • What was your first iteration, and what did you pivot to?

      • Peter Liem

        In the beginning, I want to build real estate marketplace connecting consumer with real estate agent that willing to work using hourly-based compensation. The idea is to let consumer decide what part of services they want their agent to provide and for agent to get pay on all his/her work.

        Now we are working on Contract management system that try to help agent communicate to all parties during escrow process…sort of like Slack for Real Estate….

        • Is the product live? Are you beta testing already?

          • Peter Liem

            Not yet Sir…we should have the beta by mid november. I’ll let you know thru email once we have the beta release.

          • What’s the status of your product now?

          • Hi Drew, wow it is super awesome that you still remember me, we going to release it on closed beta end of this month for 20 of my agent-friend. Public beta launch in May 4th. Would love to show it to you!

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