Why flat fee brokerages struggle
1. The national presence effect
No flat fee brokerage has a national presence yet. The category isn’t officially installed in the minds of consumers, they are stuck in the introductory phase, only appealing to early adopters, not the mass market.
2. Flat fee firms salary agents, traditional brokerages don’t pay their Realtors.
Traditional brokerages don’t pay Realtors anything, so they can begin doing business before doing any business, allowing them to scale way faster. Flat fee firms have to grow and scale in proportion to profits gained.
3. Only the listing fee is a low flat-fee, these firms still recommend the seller offer the buyer’s agent 2.5%.
Homeowners are already under the false impression that there is risk involved in a flat-fee alternative, then they’re told they still have to compensate the buyer-agent a traditional 2.5% fee or they may not show their home. I think many times they throw their hands in the air in a fit of pique and just hire the traditional Realtor.
The United States pays the highest commissions in the developed world. Europeans find out what we pay, and that the homeowner also has to pay their buyer’s agent and ask, “Do American’s realize they are getting fleeced?”
Consumers don’t do what’s best for them, they do what’s familiar.
This is why your product or service needs to cross the chasm between early adopters and the mass market. There is no product or utility in the history of innovation, no matter how benign or helpful; neither electricity nor push mowers, that isn’t met with skepticism initially.
Case in point:
Before germ theory of disease, in the 1850s, almost half of women died in hospitals after childbirth from sepsis. Obstetricians would handle cadavers, then deliver babies and unwittingly infect them through the genital tract. Ignaz Semmelweis instituted a hand washing protocol at his facility and nearly eliminated all deaths. He told physicians, they rejected it, offended at the suggestion that a “gentlemen's hands could be dirty”. He told men and women they could save their lives and some were indifferent, some skeptical. This drove him mad and he wound up divorced and in an institution where he was later beaten to death by guards.
Consumers aren’t rational calculators, they lead with emotions and become the protagonist in the story they tell themselves when considering products and services.
The three prevailing reason why flat-fee brokerages struggle.
When new tech is introduced, for some period of time consumers choose to keep paying inflated fees over a cheaper, easier, faster option. Flat fee brokerages are stuck in the introductory period.
Door.com, Homie.com, Homebay.com, Trelora.com, houwzer.com, are doing well in their respective markets, but none of them are available in every state. There isn’t a single flat fee broker that has a national presence.
- Call it, the national presence effect.
When one becomes available in every state, it will activate the category in the minds of homeowners, making it official, and consume much more share of mind than they are currently. It is a tide that lifts all the boats. Products and services must cross the chasm between early adopters and the early majority, mass market. Becoming available in every market is extremely time consuming and expensive, its not like a SaaS product you can just roll out.
These firms will not shake the stigma that cheaper is risky until its obvious that cheaper is not a symptom of compromise, but rather the benefit of efficiency and honesty.
My email exchange with Seth Godin:
The real irony is that not only are alternative brokerages more affordable, data shows they sell homes for more money than Realtors desperate for a commission. Homeowners are paying more money to sell their home for a lower price…
Of course, it doesn’t help that Realtors perpetuate the notion that “you get what you pay for”, as if taking pictures, blowing up balloons and pushing paperwork is worth tens of thousands of dollars. But therein is the uphill battle for flat fee firms; you wont get far downplaying the difficulty something is, even if it is easy and people are getting ripped off under the guise of its difficulty. People want to hire the person who believes its gonna be tough, and are gonna work their ass off. Homeowners sell once every 5 to 15 years, a lot is on the line, they are prime targets to be taken advantage of by iBuyers or Realtors . They take the path of least resistance, costing them years worth of their savings.
2. Flat fee firms salary agents, traditional brokerages don’t pay their Realtors.
Salarying your agents, offering benefits, etc., requires flat fee firms grow and scale in proportion to profits gained. Traditional brokerages don’t pay Realtors anything, so they can begin doing business before doing business, allowing them to scale way faster.
The State Real Estate Commission has separate licensing for brokers and sales people in each state. It takes a while to catch on regardless of what you’re selling, let alone having to catch one state at a time. Contrast this to what Airbnb was able to accomplish in the timeframe they did, per the lack of licensing requirements.
Flat fee brokerages salary their agents. That is an expense. Traditional brokerages do not salary their agents and have nothing to lose by expanding at a break neck pace. When you have agents working for free, you can open up shop with less overhead, initially. Its true to say this overhead later becomes a disadvantage, as flat fee firms don’t waste space on non-producing agents.
3. Only the listing fee is a low flat-fee, these firms still recommend the seller offer the buyer’s agent 2.5%.
The risk reward analysis is different if you own a $250k home versus a $500k home. If the flat fee company your contemplating is Door.com, for example, they charge a flat fee of $5,000, and ask you pay the buyer-agent 2.5%, thus the total fees are $11,250. For god’s sake you’re only saving a $1,250. If a homeowner with a $250k home transacted with them, it’d have less to do with the savings value proposition and more to do with their branding and marketing. I have written in the past that some percentage of Redfin client’s have no idea Redfin charges less, and don’t really care. Now, some flat-fee firms charge $2,500, sweetening the deal. Homie charges less than $2,000, they offer full-service and their data shows they are actually selling homes faster and for higher selling prices than their traditional counterparts, making it inconceivable that anyone wouldn’t list with them, and instead flush tens of thousands of dollars down the toilet.
Traditional 5/6% fees will be extinct by 2025
As will traditional Realtors and brokerages to the extent they can’t be untangled. It is likely to be the case that Door.com, homie.com, or Rexhomes.com, will be the first three alternative brokerages to be available nationwide. When this happens, we will see national changes in discussion around the cost to sell a home, and a devastating shifts in mark share, where the traditional brokerage assets become liabilities compared to the lean infrastructure and business models of the flat fee brokerage. The arrangement where sellers pay their buyer’s agent is also in jeopardy, as Cohen Milstein, arguably the world’s largest class action law firm, has rightly noticed that this is arrangement enables agents to hold their buyer hostage, part of overarching collusion strategy to keep fees fixed, an anti-trust violation. They are seeking a permanent injunction that would require the buyer pay their own agent, which would, of course, evaporate half the revenues of the defendant brokerages overnight, as buyers are not going to pay them 2.5%, proving it is sum not collected by free market means but through extortion.
