As real estate agents and brokers watch their bottom lines find new lows in the post-boom world, the very way most of them earn a living — the commission system — is coming under increasing attack from consumer groups.
By law, commissions are negotiable. Whether consumers take advantage of that and negotiate, or find a willing agent, appears to be the heart of the issue.
In June, the Consumer Federation of America accused the residential real estate industry of functioning "as a cartel that tries to set prices and restrict service options," in the words of Executive Director Stephen Brobeck.
The desire of traditional brokers to maintain the 6 percent to 7 percent commission, "and the opportunity for a 'double-dip' — one broker collecting the entire commission — lies behind almost all of their anticompetitive actions," Brobeck said.
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"In nearly all areas of the country, traditional brokers have tried to charge commissions of either 6 percent or 7 percent, although many sellers of higher-priced homes have been able to negotiate reductions of one percentage point or even more," he said, quoting survey results.
The common perception "is that we make millions of dollars a year because we get to keep a 6 percent commission on every house," said Michael McCann, a broker with Prudential Fox & Roach in Center City, Pa. "As any agent knows, after the broker takes out the expenses of doing business, the agent gets only 2 percent, from which he has to pay his own expenses and taxes."
Surveys show that most consumers believe commissions are too high, and the growth of the for-sale-by-owner segment of the market during the recent boom was an indication of that. Other alternatives to the commission system also are growing, including discount brokerages and fee-for-service.
Less service, lower cost
Discount brokerages offer a reduced package of services at a lower cost to the seller. Fee-for-service operations offer consumers a variety of services for specific fees.
For example, the 6 percent commission a traditional broker requests from a seller goes as low as 2 percent for a discount broker such as Assist-to-Sell, HouseRebate. But the package likely won't include all the standard services a traditional agent provides.
Traditional brokers don't like discount brokerages. A study by Abdullah Yavis of Pennsylvania State University's Smeal School of Business and Ron Rutherford of the University of Texas-San Antonio said the Realtors association's lobbying had "led to laws in 15 states making it difficult or impossible for consumers to use discount brokers."
The association's Walt Molony responded, "No, there's been a lot of misunderstanding about that. Most discount brokers are NAR members, and they've been an important niche market … since the early 1990s."
The Yavis-Rutherford study showed that while houses sold by discount brokers got the same prices as those listed by traditional brokers, it took five days longer and the listings were 12 percent less likely to sell.
Fee-for-service
A fee-for-service setup — such as that offered by Help-U-Sell — "unbundles" the services that a traditional broker provides and develops a price list for each service, such as staging the house for sale, providing advertising, and holding open houses.
Unbundling services and charging a fee for each is what Nadel advocates. "Consumers would benefit most from a fee-for-service approach — combining flat fees, hourly fees, and bonuses, including percentages of extra value created," he said.
Fee-for-service isn't new, but it hasn't caught on as quickly as its proponents had hoped. Part of the reason is that traditional agents often confuse it with discount brokerage or decline to cooperate, even though that is illegal, said Frank McGuiork of ReMax Gold in Media, Pa., a fee-for-service broker for almost a decade.
When Michael Lee, a Castro Valley, Calif., real estate broker and consultant, introduced fee-for-service in the San Francisco area in 1988, his competitors also accused him of being a discount broker.
"But I think working for free is the biggest discount," said Lee, referring to work real estate agents do but don't get paid for unless a sale goes through. He was able to find 100 services that he performed for clients for which he could charge by unbundling them.
Julie Garton-Good, another advocate of fee-for-service, has found that consumers are willing to pay "for stuff that we give away for free." One example: comparative market analysis. "The reason is because it is tangible," she said.
Lee said fee-for-service increases the professionalism of the industry.
"After all," he said, "your doctor still charges you if he saves you or not, so why shouldn't a real estate agent be paid whether or not he sells your house?"
The proliferation of options should help consumers, said the National Association of Realtors chief economist, David Lereah
"The diversity of real estate firms and business models allows both large and small firms to compete side-by-side, spurred by the growth in technology," he said. "Different business models help to match consumer needs to services, and technology has streamlined many operational activities, allowing for more efficient communication with clients — but it's no substitute for personal contact."