Real Estate Agent Compensation
Are Commission Rates and Fees Too High?
At the risk of cutting off my nose to spite my face, the answer to the question, “Are fees too high?” is a foregone conclusion. Agent compensation is coming down.
Consider it axiomatic that there is no stopping the downward pressure on commission rates and fees.
I expect to feel the ire of real estate agents and brokers directed toward me relentlessly for highlighting the obvious.
What factors contribute to declining commissions?
Further improvement in technology via chip speed and methods of communication leads directly to lower fees and greater transparency. Additionally, as information is further googleized, a fixed commission structure makes less economic sense.
Googleization (to googleize) is the process of data addition to the Google database; transparency and access to information increase as data acquisition costs approach zero. The term's first use is credited (2003) to John Battelle and Alex Salkever.
I modify the definition only slightly to add:
When private or proprietary information becomes readily available without friction, such information and data sets are "cheap," i.e., inexpensive to acquire.
Numerous upstart firms and incumbents (Zillow, Redfin) propose and will create new or modify existing business models to bring buyers and sellers together to transact at lower fees. Traditional brokerages (Compass, Keller Williams, Coldwell Banker) will face increasing pressure to unbundle services and reduce fees.
Labor Force Reduction In The Retail Real Estate Sector
I rely on my own rule of thumb, which states that for legacy companies in industries undergoing disintermediation, I assume 80%-90 of the labor force will be made redundant or face drastic compensation reductions.
The 10-20% that can retain a relative safe status are exceptional professionals with specialized knowledge and skills and provide defendable value-added. Complex transactions will earn higher commission rates than simple, “vanilla” sales.
At the top of the pyramid remain the true professionals with value-added skills. The best of the rest will compete for a shrinking commission pool at the middle and bottom of the pyramid.
After reducing the number of real estate agents and brokers is complete, I'd expect the top 20% of agents and brokers to earn 50-70% of available commission dollars.
All that's left to this fight is working through the details. It is similar to reducing the commission rate a stockbroker (as we used to call them) charges. A combination of regulatory changes and technological advances led to the decline.
Similar To The Evolution Of Fees In The Securities Industry
In the early 1980s (think Liar's Poker), an institution was likely to pay 25 cents per share to trade shares. Today, they execute trades for what is effectively zero cost. Retail investors too buy or sell for nothing at many brokerages.
A 100,000 share trade had a $25,000 fee; now, $1000 would be considered the norm.
A salesperson would likely have made a cut of 15% or $3750 in the 1980s. You can see where this argument is going.
Wall Street Journal Article
On February 23, 2022, Lisa Ward penned an article entitled "How Should Real Estate Agents Be Paid?" She describes research and suggestions provided by a panel of three experts. The conclusions fall into one of three general frameworks:
Allow buyers and sellers to negotiate fees independently
A flat-fee model for service
An a la carte menu where buyers and sellers pay only for services they desire to use
She and her experts are correct in that the current structure needs reform.
In a November 2020 lawsuit and subsequent 2021 filing, the Justice Department accuses the NAR of anticompetitive practices which harm home buyers.
The legal action brought against the National Association of Realtors (NAR) may very well be the catalyst for change.
Technology has long been available that allowed for unbundling and the opportunity for multiple pricing structures in a free market. Securities trading, automobile purchases, and cable tv subscriptions have each been subject to price compression due to the free market.
It is illogical to continue to believe that the process of buying and selling homes will remain paper-based and subject to rigid pricing arrangements.
Upstart firms propose compelling business models that will bring buyers and sellers together directly to transact at fees substantially below today’s norm.
While it is true that a limited number of transactions will require specialized knowledge and negotiating skills, the vast majority of transactions will occur with much less friction and at lower fees.
Better. Cheaper. Faster.
The Author And Podcast Host, Tom Levine
Following a 25 year career in capital markets, Tom Levine founded Zero Hour Group in 2014.
The Los Angeles, California-based firm provides consulting, strategic analysis, and real estate services.
Services are offered nationwide and across a variety of sectors. The firm's clients range from family offices and high net worth individuals to institutions and professional investors.
Real Estate related transactions are brokered through our subsidary firms, Native Angelino Real Estate and WEHO Realtor.
Tom Levine is a Native Angelino and graduate of USC Marshall School of Business, Claremont Colleges, and spent a term at the London School of Economics. Additionally, he is a certified Short Sale Specialist under the National Association of Realtors.
The Native Angelino Podcast is underwritten and produced in conjunction with the Zero Hour Group, a consulting and strategy firm, parent to 1929, Native Angelino Real Estate, and associated real estate assets.
From the Native Angelino description found on iTunes:
“From a vantage point within sight of the Hollywood Sign, seated beneath a palm tree, Tom Levine takes you on a twisted, exploratory tour of popular thought, the upside-down theories of classical economics, politics, and other strange things.
Tom talks all things Los Angeles, bright new ideas, and complex topics of interest to creative thinkers and discerning skeptics.
L.A. locals state with pride, "You can surf in the morning and ski in the afternoon." Well, if you get a really early start, it's true. Sometimes.
Los Angeles is the City of the Angels, and Tom Levine is a Native Angelino”.