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The Topic No One Will Touch with a Nine Foot Pole: “Agents are Overpaid”

Real estate agents are overpaid.

It’s a notion I’ve heard from many many people outside of the real estate industry over the past 8 years. And there are countless entrepreneurs who have thought the same thing, and actually tried to change it (because that’s what entrepreneurs do). PayPal veteran Keith Rabois, who is working on a startup named HomeRun, is the most recent. HomeCanvasr is making an attempt at it. As is HomeVana. You can buy homes on eBay. Redfin of course started hard in the camp of reduce commissions by giving rebates, though has shifted back toward more of a traditional agent model. As did Urban Compass (they’ve retreated back to traditional model). I’ve talked to 2-3 other entrepreneurs privately over the past few months who are working on projects focused on cutting commissions or dis intermediating agents entirely.

Disclosure: I have no idea whether agents are worth 6% of a real estate transaction. I’ve never bought or sold a house (& I don’t plan to soon), so don’t have an informed opinion to share on the topic.

sixpercentBut “are agents worth 6%?” is not what I want to talk about. There are clearly many many people who think the answer is no and working on solutions to change that. Many years and lots of money has been spent by some incredibly smart people trying to change the economics of real estate.

Yet commissions have not changed from 6%. Sure, technically, they are negotiable, but buyers and sellers don’t really know that.

The question is why none of those efforts have succeeded?

Real Estate Dynamics that Other Industries Don’t Face

Most people buy a home every 7 years. That’s a long, long time between transactions. Compare that to paying your credit card monthly. Or buying a plane ticket every couple months. Sharing a photo or sending a text daily. Looking at news daily. Writing a blog post every couple days. Eating lunch and dinner everyday. Buying a new shirt every 3 months. Etc.

For me to try a new website or app to find a plane ticket, is a fairly low bar. I ask no one before I make that decision, because the consequences of a poor experience are small. If it doesn’t go well, who really cares because it just cost me an extra 20 minutes, or $50. It’s not the end of the world.

Everyone knows, a house is the single biggest financial transaction most people ever make. People don’t make that transaction without talking to their friends, families, and professionals for advice. Those conversations take place over the course of months and years, the vast majority of which include iterations of “who is your real estate agent?”,” you need an agent to represent your interests”, “my agent did X”, and “you shouldn’t/can’t sell FSBO.”

Why? Because those people are just recounting their experiences, all of which included an agent. Point being, there is an incredibly strong social pressure to use an agent, since everyone else has — and you don’t want to be the sucker who tried to do it on your own, and got screwed out of $50,000 or $100,000 (or some other high $$ amount).

Lowering Commissions

There are two camps of those trying to lower the costs of buying and selling real estate. Those working on discount brokerage models and those trying to build a marketplace of buyers and sellers, connect them directly, and get rid of the agent entirely.

Discount Brokerage Models

The most well known discount brokerages are Redfin and ZipRealty. But there are a bunch of others, including recent entry Keyzio.

You can not sell a house with only one side of the transaction accounted for, meaning you need the cooperation of the opposing representation to finish a deal. The whole industry will battle you tooth and nail, the minute you start rebating commissions and cutting into standard commissions. Just ask Redfin, which has faced battle after battle from the industry over the last decade. And, of course, NAR is one of the largest and most influential trade associations in existence. There are a LOT more traditional agents than agents who work for discount brokerages — and they ALL talk, non stop…not much of which is favorable to discount brokers winning over buyers and sellers.

Can discount brokerages digitize the whole transaction, and cut costs to buy and sell at scale in the process? Redfin is making strides, but it’s still a long, long road to changing consumer behaviors.

Buyer – Seller Marketplaces

What is required to connect buyers and sellers directly? A large marketplace of engaged buyers and sellers to find and connect with each other. Delivering on that is easier said than done. Potential sellers need to be able to post their house, in a private and trusted environment, and receive serious buyer inquiries. Otherwise, it’s a gimmick. The chicken and egg problem is massive, particularly given the infrequency of people buying or selling. How on earth do you target and find home owners? You either need to get VERY, very geographically focused – ie convince every homeowner in a specific ZIP code to sign up, or you need massive massive distribution (ie Zillow or Trulia scale).

Zillow already did Make Me Move, which is an early indicator that someone might sell. How do you differentiate beyond that? Sure, many people don’t want to publicly state they are thinking about selling, but where can they post privately where buyers will actually see it? This gets us into the whole pocket listings opportunity.

I’ve talked to several founders working on tackling this, and I’ve yet to get past the “will this work at all?” question, let alone figuring out how to make money doing it (aside from pivoting back to being a brokerage).

An unlikely player that could emerge? NextDoor, since they are driving toward a daily use case for home owners — regardless of whether they are buying or selling. Zillow or Trulia could do it as well, but of course connecting buyers and sellers directly would cannibalize their entire business of connecting consumers with real estate professionals.

Entrepreneur Advice

Here’s my advice to entrepreneurs who believe commissions are too high, and intend to do something about it:

  • Go sell real estate OR work in the industry as a vendor for a couple years (on someone else’s dime).
  • Ask questions at every opportunity in your quest to understand all the behind the scenes industry dynamics that exist.

By doing those two things, at least you’ll have a very thorough understanding of the industry you aim to conquer going into it. You might find your strategy changes with that deep industry understanding, which is not a bad thing

Final Question

So, is there a viable strategy to lower commissions? If so, what is it?

[Graphic via http://www.infotube.net/]

About Drew Meyers

Founder of Geek Estate Blog / Geek Estate Labs. Zillow Alum. Travel addict & co-founder of Horizon. Social entrepreneurship & microfinance advocate. Fan of Red Hot Chili Peppers and Kiva.

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