Realtors are not worth the price

Over millions of generations, precarious environments selected for cognitive attributes that were advantageous to our australopithecine ancestors, but are not at all helpful when encountering 21st century snakes and bad deals. Perhaps you’ve noticed the banks own the tallest buildings in our cities. They are making a fortune that would not be possible without these cognitive glitches. For example, studies show you and I spend more when we swipe a credit card than when we hold the cash. A simple piece of plastic is enough to outsmart us and anesthetize the feeling of paying. Its pretty dumb, but far more excusable than the utterly insane sums of money otherwise intelligent homeowners agree to give Realtors, who are outsmarted by percentages and paper closing statements. The biggest exploitation of our neurological loopholes indeed takes place in residential real estate sales.

A bill is .0043 inches thick. Even if you’re a mathematician, it’s still gonna take a bit to work out how tall a $30,000 stack of $10 dollar bills is. It’s not hard to get to know the numerical answer, but it’s much less intuitive than how you’d feel holding a wobbly twelve-inch stack the money in the palm of your hand:

$30,000 / $10 dollar bills = 3,000 bills x .0043 = 12.9 inches.

If a Realtor said to you, “My fee is twelve inches”, my guess is you’d say, “Uh, what? That’s not an amount. Twelve inches of what?” Well, saying “My fee is six percent” is not any more grammatically acceptable. Percentages aren’t amounts either. They are innately volatile in that they cause the sum to skyrocket when the effort involved in the sale does not skyrocket right alongside. It is not inherently twice as hard or costly or time consuming to sell a $600,000 home than a $300,000 home, so why should the fee double? The $600k homeowner probably earns about twice as much money as the other, but accountants, or TurboTax, will not charge twice as much to file the returns of a person who makes twice as much as another. Could you imagine the outrage if accountants started charging people based off a percentage of their income, totally irrespective of how difficult their returns were? And yet, we quite happily pay Realtors $80 billion a year in commissions, the vast majority of which is this type of gross overpayment.

Would a homeowner ever hire a Realtor if they first held the money?

I would argue that nobody, absolutely nobody would use a Realtor if they first held the money. Similar to credit cards, funds being dispersed off a closing statement is abstract enough to anesthetize the pain of paying. Americans pay the highest fees in the developed world. By virtue of this neurological glitch, Realtors are able to charge inflated fixed fees, and then charge two, three, four, five times what they charged someone else for the same work.

Homeowners may know what percentage their Realtor charges, but they don’t quite as easily know what percentage of their equity is consumed by the fee. For example, if your home is paid off, the 6% fee consumes 6% of your equity. But if you sold a $500,000 home with $100,000 in equity, the $30k, 6% commission consumes 30% of your equity.

What would a 6% fee really cost you:

Example of someone selling a $250k home with $50k in equity.

This is not at all intuitive, and the reality often doesn’t sink in until settlement, when they see the closing disclosures and think, why the fuck did we pay our Realtor thirty grand to blow up balloons and take pictures?

The great awakening

Imagine Credit: The Irrationality of Payment Behaviour

U.S. Realtor fees have stumped economists and horrified anti-trust officials. Because the majority of people do what the majority of people do, we won’t see homeowners thinking too hard about this until the nascent, flat fee alternative brokerages cross the chasm between early adopters and the early majority.

http://themarketingstudent.com/crossing-the-chasm-summary/

A ‘great awakening’ will take place when the topic of commission surfaces to the front of the mind. The costs involved in selling will become conscious and planned when sellers are confronted with popular options that are achieving outcomes identical to those of traditional brokerages for a fraction of the cost. I do believe that by 2030, today’s 15 year old's will be 25 year old's buying and selling property and incredulously asking us,

“You gave your Realtor thirty thousand dollars to blow up balloons and take pictures?”

To which they will reply,

“That’s just the way it was. It is pretty embarrassing now that I think about it.”

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I used to add miracle grow to data-analytics firms, now Im a proptech founder bringing offline consumer experiences online.

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John Fulton

John Fulton

I used to add miracle grow to data-analytics firms, now Im a proptech founder bringing offline consumer experiences online.

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