I was inspired to write this after seeing this Twitter post:
This Twitter post highlights some frustration around attorney fees. They command rates like these by virtue of the inescapable bind consumers find themselves in, Hence, Suhail Doshi’s comment:
“An industry waiting to be disrupted one day.”
Attorneys got through law school and passed the bar. If we can still notice how unfair attorney fees can be, thus, we should be utterly perplexed that consumers nearly always pay Realtors 5–6% of their home’s selling price without flinching.
In the history of United States capitalism, consumers have overpaid Realtors orders of magnitude more than any other service professional from any other industry.
I logged my hours selling real estate, as a seller-agent and a buyer-agent:
A cardiothoracic surgeon’s hourly wage by contrast:
The State Real Estate Commission regards the real estate salesperson profession to be of such little consequence, that anyone with 3 weeks and $300 bucks can obtain their license. Compare that with the implied seriousness of the state’s barrier to entry for real estate appraisers (3,000 hours), or a hair dresser (1,250 hours).
I’m not saying that Realtors don’t provide any value, I’m saying its an empirical fact that the value they do provide is grossly, disproportionately low relative to the fees.
There is no correlation between selling prices and effort involved in selling:
You may have already deduced from my logged hours, a $600,000 two thousand sq ft apartment isn’t inherently twice as hard to sell as a $300,000 two thousand sq ft single family home. There isn’t twice the paperwork, twice the marketing cost, the doors aren’t twice as hard to open, etc. Nevertheless, percentage fees double, triple and quadruple irrespective of how difficult the sale is. Economists refer to this phenomenon as a social waste: Fixed Commissions and Social Waste in the Real Estate Industry. Imagine the national outrage if accountants everywhere began charging a percentage of your income, irrespective of how difficult your returns were.
The US pays the highest commissions in the developed world. Europeans routinely ask: “Do Americans realize they are getting fleeced?” Our credulity is something out of a Twilight Zone episode, where a individual from a rational world wakes up and finds themselves in a new world where people are paying forty two thousand dollars to sell their home. He grabs people smiling ear-to-ear by the lapel and begs them snap out of it, to no avail. Or, it is as though we are living in a dystopian future, paying post-apocalyptic prices. Would you pay $26 dollars for a loaf of bread? Paying a Realtor thirty thousand dollars to sell your home is akin to burning money to stay warm.
I would argue the true, economic cost involved in selling a home is between $1,200 and $2,500. Photography, balloons, paperwork, consultation, drive-time, emails, all of it. Sold a $650,000 home? A $32,500, 5% commission is 13 times more than what’s necessary. When you pay a Realtor, it’s as though you are subjecting yourself to a hundred years worth of inflation, as though you are transacting in the year 2120, where things cost 13 times what they do today. Its a terrible irony homeowners pay inflated, futuristic prices on an industry way behind the technology curve.
I’d like to shut the door on the incoming argument that I know agents will make: “Realtors don’t make that much money!” “Average salary of a Realtor is $42,000!” etc.
There’s an obvious difference between the hourly rate and the number of transactions closed. Top producing agents rip people off once a week, but generally speaking, most agents only do a few deals a years, in response to there being two million agents but only 5.51 million resales. There’s just not enough homes to go around for everyone to make a good living. By virtue of this absurd oversupply of agents, homeowners have to overpay their Realtor — essentially float them, and pay their bills until their next deal, whenever that will be.
Venture Capitalists and entrepreneurs hard at work
Currently, homeowners begrudgingly pay their agent, either unaware of or unsure about firms that charge less. #proptech and #fintech alternatives to traditional agents are growing and scaling rapidly, and it is my prediction that when any one of these alternatives have a national presence and are available in every state, it officially activates the new selling category and consumes a much, much greater share of mind among homeowners. This evolution creates a market-share grab opportunity for savvy investors and entrepreneurs, as shifts in culture and conversation around selling fees take place. While contentious brokerages advance their mission to help people keep their equity, brick and mortar legacy brokerages will get crushed and devastated by giant anti-trust class action lawsuits targeting National Realtor Association corruption and extortion around buyer-agent commissions.
In the coming months, I am launching a social, peer-to-peer platform that encourages and facilitates communication between homeowners and homebuyers, who almost always find each other online and would be better served not overpaying into an outdated middlemen industry to oversee the deal.