How Much Are Realtors Worth?

Many people don't want to pay the traditional 6% commission (3% to listing broker and 3% to selling broker) so they turn to discount brokerages in order to save a quick buck regardless of the service or competence of the agent they hire. But aren't some agents worth more than others?

If Ebby Halliday wanted to list your home, would you tell her she isn't worth 3% and ask her to reduce her commission? Would you tell Virginia Cook to take a hike because you would rather list your $1.5 million dollar home with a no-name, start up, discount real estate brokerage? Of course not.

If you list with a discount brokerage then you should expect discounted service. With all of the criticism surrounding Realtor commissions, how has no one come up with a commission structure that consumers are truly happy with after 106 years? The sad truth is that no one ever will because consumers will always be cheap and Realtors will always have a poor reputation.

RE: How do Realtors Get Paid?

I received the following comment from a reading posing a tough real estate question regarding Realtor commissions.

Selling a $250,000 house and selling a $500,000 house aren't all that different, but the commission is double on the $500K house. That makes no sense to me. What's the rationale behind it?

I wish I had a solid answer for you, dear readers, but unfortunately I don't. My only rationale behind comes from our friend Einstein's theory of relativity. This same argument applies to many professions and not just real estate. There are many people out there today with the same job description and responsibilities but are being paid unequal salaries across different companies and professions. Usually, the larger the company, the higher the salary. CEO's of Fortune 100 companies are getting $50 million dollars for simply resigning which doesn't make sense to the average person. This same disgust for overpaying someone unfortunatley applies to real estate for many people.

So what do I do differently for a $250,000 home versus a $500,000 home? Nothing. I work just as hard on the $250,000 home as I would on a $100,000. But why should the person selling a $100,000 home pay more than a person selling a $50,000 condo? This same logic can apply across the board. ($1 million dollars and up is a different story and the marketing level and dollars spent increase.)

There are many real estate business models out there offering discounts to the seller. They'll list your house for a flat fee, etc. But almost always, they will offer the agent that brings the buyer 3%. This is what doesn't make sense to me. Someone is willing to pay an agent 3% to bring a buyer whose job it is to help that buyer negotiate the LOWEST price for that home. Meanwhile the sellers want to give less than 3% - and sometimes nothing - to the representative that is there to help them negotiate the HIGHEST price for their home.

It is also important to note that many high end properties $1 million and up almost always utilize the assistance of a well known area Realtor. You rarely see these properties try to sell For Sale By Owner or hire a small real estate firm. (You will NEVER see a $3 million dollar FSBO or using a discount brokerage) Common sense would tell us someone who lives in a million dollar property is probably smart and more than likely business savvy and yet they choose to use a a Realtor to help sell their home. Even if they ask their agent to reduce their commission they are still being paid more than a $500,000 home.

So what's the answer? Is a new real estate business model needed? The current discount brokerages are not prevalent in Highland Park or Preston Hollow and are seen more in East Dallas in new construction homes. So this tells me the average consumer feels a good listing agent is worth what they are being paid regardless of sales price and percentage.

I should have an articulate and impressive answer but I simply don't. But I would love to hear your thoughts on the matter.

Stupid seller makes $6,000 mistake

True story that happened a few days ago. Some past clients and good friends of mine called me because they wanted to purchase an investment property in their neighborhood that had just been listed with this discount brokerage. They asked if I would simply draw up the paperwork for them to make sure the contract was written correctly but not to ask for a commission so that the offer will look more attractive to the seller (they would virtually save 3%). Being good friends and past clients I had no problem doing this so I typed up the contract for them and they submitted the offer. My client’s informed me a day or so later the sellers accepted an offer from a builder who was requesting a commission at the same exact price my clients had offered! Then I received this email correspondence in which my clients are explaining to the seller they really just accepted a lower offer. Painful.

Buyer/my clients: “Well congrats on selling your home so quickly. I did want to mention that even though I had a broker draw up the offer contract, if you take a look at the broker section of the contract, our broker was not seeking commission from the $217K offer.”

Seller: “ouch! double ouch! i did look through the contract but didn't notice that part of it -- i guess i just cued on what you and i had discussed and assumed he would want the commission. i thought i was making the best business decision... but perhaps it was not.”

Yeah. A $6,000 bad decision. The seller’s REALTOR® probably never even saw the contract although I can’t blame the REALTOR® completely. This seller wanted to save some money on their commission so they exercised their right to hire a REALTOR® of their choosing whose website states, “We have saved our "smartsellers" over SEVEN MILLION DOLLARS in needless real estate fees.” I’d be more interested in how much money they have LOST for their “smartsellers”.

Discount Brokers

The CBS show 60 minutes aired a piece Sunday evening that is certainly causing a stir within the real estate community. But first let me clear up something that absolutely gets under my skin. The word REALTOR® is pronounced ‘REAL-tor’ NOT ‘Real-a-ter’. Tell your friends. Furthermore, a REALTOR® is someone who is a member of the National Association of REALTORS®. REALTOR®" is a trademarked term and should never be used synonymously with "real estate agent”. So now that we have cleared that up. I did not watch the show but feel inclined to throw in my two cents based on the flurry of blogs and emails I have read regarding the show. The CBS segment led by Lesley Stahl was supposed to examine the impact of online brokerages on the real estate industry. The show featured interviews with a representative from the now-defunct eRealty and the president and CEO of Redfin. Both of these companies are flat fee brokerages which are more commonly known as “discount brokers”. A discount brokerage’s philosophy is to give the real estate consumer full service at a discounted price. On the program they stated the 6% broker commission is “sacrosanct” among REALTORS® and the NAR feels threatened by these new online brokerage business models. They feel the NAR is pressuring the public to pay the full 6% commissions and is at the same time trying to force these online brokerage businesses out of the real estate industry thus limiting the consumer’s choices. Interesting that the Dept. of Justice and Federal Trade Commission released this report showing a 5.02% commission nationwide and still said commissions have been relatively inflexible. Leslie Stahl conveniently did not ask the National Association of REALTORS® to be a part of the program. NAR is America’s largest trade organization with over 1.3 million members. There are 2 main reasons for this.

1) NAR has consistently pursued minimum service laws for real estate agents across the country. Eight states, including Texas, have "minimum service laws" that require REALTORS® to provide a minimum level of service for their clients. i.e. If your home is listed with a REALTOR® all negotiations must go through your listing broker as it is unlawful for the seller to negotiate directly with the buyer’s agent. The discount brokerages certainly did not cheer when Gov. Perry passed this bill in 2005. Can you feel the love from this discount broker’s website?

2) Real estate commissions are 100% negotiable (again, look at the DOJ/FTC report). People have a plethora of choices when it comes to listing their home. These discount broker business models began popping up all over the country 3 to 5 years ago so I don’t understand the attack on commissions. Here in Dallas if you want to list your home in the MLS and get it on Realtor.com then go here. For $299 (plus the buyer’s agent commission) you’ll only have 1 picture and it doesn’t come with a lock box or a sign. Or you can go to this brokerage and for as little as $495 (plus the buyer’s agent commission) you can get your home in the MLS and a “for sale” sign but no Realtor.com presence.

So if I listed my home for $200,000 in the MLS for $495 and offered a 3% commission to the buyer’s agent I would save $5,505. But I would have to meet every showing since there is no key box. And with only 1 picture on the internet people are passing right by it in their nightly internet searches. Those looking for homes on Realtor.com expect multiple photos so when a property only has 1 photo, chances are they’ve already moved on to one of the other 68 listings with multiple photos. And with no sign in the yard weekend drivers casing the neighborhood for new listings have no idea it is on the market. One can only assume a home listed this way will result in many months on the market. When you calculate your monthly mortgage, taxes, etc. the $5,505 you saved by listing with a discount brokerage doesn’t seem like a savings anymore after 5 months on the market. Check out this listing. $2.9 million with no pictures and a poor description. This isn’t service but it’s what the consumer paid for. Have you ever heard of the old phrase, “You get what you pay for?” However we’re not talking about the discount tile guys you called in the Yellow pages to retile your bathroom for $500, did a terrible job then spent an additional $1,500 having it done right. We’re talking about what is most likely your largest financial asset EVER. So although I don’t understand why a person who obviously has the business sense to own a $2.9 million home would want to try to sell his home without pictures and a limited amount of service, I do understand it is his choice to do so. Click here for a true story and a perfect example how a discount broker can actually lose you money.