6 Questions Realtors Can’t Answer.

A Realtor sits down at a dinner table prepared to give his listing presentation to a couple of empty nesters. His blazer is pressed, brochures are glossy — he’s ready to go. Before he has a chance to regurgitate his Mike Ferry listing presentation script, the homeowner says,

“Just to be totally transparent, we’ve also interviewed with Houwzer. They are full-service, use professional photographers, they’ve closed over 500 homes in the last 12 months, and are selling homes just as quickly and for the same amount of money as you are. They charge $2,500 to list. What could you possibly do to justify getting $18,000 more to sell my home?”

After a little uncomfortable silence, the Realtor says, “Uhh, my kids went through the school district, and I really know the area. I’ll work really hard, and I have years of experience.”

More and more homeowners are making value the focus for listing conversations, as alternative brokerages like Door, Houwzer, Reali, REX, Trelora, Homebay and Homie continue to grow and scale, advertise and popularize the idea of fair fees. Tens of thousands of financially savvy homeowners have enlisted the services of these next generation brokerages to sell their “biggest asset”. After all, your home is not a good investment if you blow the returns on a huge real estate commission. Consider, a 6% commission on a $350,000 home is $21,000. If your equity stake in the home is $125,000, that 6% fee is 17% of your equity. Could you imagine having $125k in stocks and paying a stock broker 17% to free that equity? Of course, there is more involved in selling real estate than stocks, it disingenuous to suggest otherwise. But Realtors argue in bad faith by not acknowledging the issues that come with accepting an 80 year old fee while 21st century technology has increased productivity and eliminated much of the work that used to consume their time. They are now paid in excess of the value they provide, and pocket that surplus payment. Economists refer to the billions in superfluous commissions Realtors accept as social waste. Homeowners are beginning to question how fair it is that Realtors are still cashing in on the 6% tradition, and are actively looking or could be easily persuaded by other options that can help them accelerate their net worth by retaining more of their hard-won equity.

There are fewer Realtors in denial, the threat has found its way to major markets and is leaving Realtors struggling to coherently defend their industry and their fees. National commissions have been declining each year, commission compression and prop tech disruption is a hot topic and hundreds of millions of dollars in venture capital is backing firms constraining and reforming traditional commissions. Realtors are arriving at a juncture that will define their character. They can bravely and honestly accept the facts, admit there are flaws and allow logic and rationality to charter a path into a future focused on innovating for the betterment of homeowners, or they can throw a fit and accomplish nothing by doubling down on their excessive fees, refuse to accept what’s true about the problems with fixed commissions and just believe what feels good to believe.

From the article, “The Key to Science (and Life) Is Being Wrong.”

Regarding value, in residential real estate sales, the only measure of value we have is what the seller nets on the sale of their home. It’s certainly not how the home is sold or how well we preserve an old fixed fee and the feelings of Realtors and others that benefit from it. REX charges 2% total. Their sellers do not pay the buyer’s agent. You can imagine how livid this makes Realtors. Just read the reviews they are leaving on REX’s Facebook page.

REX is onto something. Have you ever wondered, why should the seller pay for the buyer’s agent? Trelora offered buyer’s agents a flat $2,500 fee and Realtors responded by throwing rocks through their windows at headquarters.

The USA is an outlier, charging the highest commissions to sell real estate in the developed world. Many European countries are configured so the buyer pays their own agent. This prevents buyer’s agents from holding their buyer hostage for an inflated fee. On a side note, much of this is monopolization is being addressed in a recent class action lawsuit against the National Association of Realtors. So if REX or anyone else is netting the seller the most amount of money, even after the lack of MLS exposure, then they are the most economic option for sellers, and REX and company is the better option than the Realtors who aren’t netting sellers the most money possible. Val Mazon, above, needs to demonstrate that Realtors are in fact netting the seller more money than REX, to show their concern for the homeowner’s well-being isn’t completely fake and self-serving.

Here are five questions Realtors must be prepared to answer if they want to stand a chance at surviving the collision from the giant asteroid headed toward traditional five and six percent commissions:

1. Why should someone selling a $700,000 home have to pay twice as much as someone selling a $350,000 home?

How is there three times as much work involved in selling a $900,000 home than in selling a $300,000 home? Demonstrate exactly why someone selling a $500,000 home ought to pay twice as much as someone selling a $250,000 home.

2. How can somebody be worth a fixed percentage?

Realtors are fond of saying: “I’m worth the full six percent.” Or, “I don’t discount my commission”. Six percent is not a defined amount. To say you’re worth 6% is a grammatical error, because we don’t know what six percent is until we know the value of the house. How can one be worth $15,000 and $30,000 simultaneously? Where you underpaid or overpaid?

3. Why do buyers agents feel entitled to 2.5–3% no matter what?

Buyers agents seem to know they want no less than 2.5% before they even know the value of the home? It seems to me they feel entitled to surplus compensation. 1% of $750,000 is the same as 2.5% of $300,000. What changes when your buyer happens to approved for a larger loan that would entail receiving two-three-four times the commission of a smaller property? How does your value increase? Are the doors harder to open? Is the paperwork more difficult?

4. Why should homeowners pay for a Realtor’s “downtime”?

Realtors commonly defend their fee by pointing to the unpredictability of their business and their next deal... There are two million licensed agents, and roughly 5.51 million resells a year. This leaves about 2.75 homes to go around per agent. That’s just not enough for everyone to make a living. The incredibly low-barrier to entry into real estate guarantees a supply and demand imbalance that keeps commissions high, when in any other free market we would see this imbalance corrected. Sellers end up paying artificially inflated rates to pay their agents bills and float their agent until their next deal. The second largest lobbying organization in the world, the National Association of Realtors, would not want to see the agent population thinned out or a taller barrier to entry, as it would decrease their membership revenues.

5. Why do Realtors keep referring to competitors that charge less as “discount brokerages”?

Why use this term if not to avoid the hard work of innovating and improving by calling the credibility of competing firms into question? They are full-service firms, selling property for just as much money in the same amount of time. If Realtors can’t point to a single compromise, it is reasonable to conclude that there is no discount, just a reasonable fee. It reminds me of when JC Penny would raise the prices right before “discounting” them. Realtors overcharge and then refer to alt-brokers charging less as “discounts”. It seems dishonest to use an arbitrary six percent fee as the benchmark and then refer to everything less as a discount.

6. How is a Realtor’s broker-split and other overhead the seller’s problem?

Realtors will point to their expenses as justification for steep commissions. “I’ve gotta pay my broker, my NAR dues, taxes, insurance, etc., etc.” This is called “bundling” and inadvertently makes a case for the much more nimble and efficient alternative brokerage. It wouldn’t matter if their brokers took a 50% split. If that’s what Realtors are pointing to justify their rate, they are simply underscoring the problem with the brokerage industry and the needless brick and mortar overhead stemming from an expensive recruiting model. Bundling all these costs into a fee will drive sellers into the arms of firms that salary their agents, operate virtually, have low overhead and pass the savings onto the consumer.

I’ve asked the smartest brokers and Realtors I know to address these points and have yet to get an actual response. They double down and say, “I know I’m worth the full six percent”, “Try walking around in my shoes for a day” and other non-answers. It’s just a matter of time until the world of real estate sales evolves into something much more consumer-centric. Conscientious entrepreneurs, investors and real estate experts go to work each day with the goal of helping homeowners keep their hard-won equity. The side of fairness is keeping their head down, continuing to innovate and produce products that place the benefits of the homeowners above the benefits of the old fashioned industry.