Internet-Based Home Sales and Cheap Commissions Rock Residential Brokers

Today, the real estate broker as an intermediary is facing intense competition from internet sites that connect buyers and sellers directly. A good analogy can be found in the travel agent industry, in which travel consumers have turned to the internet for a vast portion of their purchases and information needs, and travel agents have been forced to downsize or become providers of enhanced services, unique expertise and value-added packages.

The days of 6% commissions for real estate brokers are under pressure thanks to maverick real estate brokers such as Foxtons in London. Instead of the usual 6% commission, a small number of upstart brokers’ fees are as little as 3% of the selling price. They are able to cut costs by capitalizing on the power of the internet to advertise homes for sale, listing homes with accompanying photographs and virtual tours, but not always including services such as conducting in-person showings and open houses or negotiating prices.

SPOTLIGHT: Redfin

Redfin (www.redfin.com) is a technology-powered real estate brokerage firm which provides information on real estate listings, home appraisal and past record sales while allowing buyers, sellers and renters to connect with real estate and mortgage professionals. In contrast to traditional firms, Redfin agents do not receive a full commission from transactions completed. Instead, a portion of the commission is refunded to the customer and usually applied to closing costs. The Redfin Estimate tool gives homeowners real-time data on the estimated value of their home. The company offers services in 100 markets in the U.S. and Canada, and partners with many other real estate agents across the country to service areas not covered. Title Forward offers title and settlement services in 27 U.S. markets.

Another discount alternative for a seller is to pay a flat fee (usually around $500) to a discount broker to list their home in MLS. Sellers then do the showing and negotiating themselves. A different tweak to this option is ForSaleByOwner.com, where owners choose from packages of services at modest prices. For an upgraded fee, the property may be listed on MLS.

Some online home-selling sites regularly mine MLS listings and then post those listings on their own sites. In order to have access to MLS data, a broker employed by the site must be a member of the local Realtors organization. Some online sites have been known to hire a member Realtor to feed MLS data to them. Disputes frequently break out between local boards of realtors and such sites as to whether MLS data is proprietary. The National Association of Realtors (NAR) has spent millions on television and radio campaigns that highlight the benefits of using a realtor and the difficulties homeowners face when selling on their own.

Landmark court rulings in 2023 began a major shift in the way that real estate commissions are set. In October 2023, a jury in Kansas City, Missouri awarded sellers of more than 260,000 homes in the Midwest, who claimed they overpaid commissions to brokers belonging to the National Association of Realtors (NAR), almost $1.8 billion in damages. The ruling widely impacted the status of potential real estate fees, which, previous to the ruling, had been generally set at 5.5% to 6.0% when a seller listed a property. Standard fee arrangements called for selling brokers to get one-half of the standard fee, with the listing broker getting the other one-half. (If the listing agent happened to also be the selling agent, then the fee earned is effectively doubled.)

This arrangement was a detriment to buyers. When they selected an agent to represent them as purchasers, they were effectively unable to negotiate a lower agent’s fee. Even if they decided to make the purchase without the assistance of a buyer’s agent, they were thereby unable to get the final price of the house reduced. It was also detrimental to sellers, since the fee was not reduced if a broker represented both the seller and the buyer. This kept the total fees much higher than those seen by home owners and buyers in other nations that operate under different standards. Going forward, due to court settlement, parties are far more enabled to negotiate fees. Brokers’ commissions are expected to fall to 3% to 5% of a property’s selling price in many cases, and the number of real estate brokers in the industry is expected to decrease.

SPOTLIGHT: Compass, an Innovative Nationwide Brokerage with Aggressive Marketing

Growing numbers of experienced realtors are abandoning their positions with traditional realty firms to join Compass (www.compass.com). The firm offers top realtors generous commissions, with some agents collecting entire fees for up to their first eight sales (with no cut going to Compass). The company also pays sellers to stage or have cosmetic repairs made; a practice traditionally funded up front by the realtors themselves. In addition, Compass offers a bridge-loan program for motivated sellers, enabling agents to rack up more listings. In total, these aggressive recruiting and marketing practices are giving Compass a great competitive advantage, but at a steep cost. The company employs a team of software engineers to support agents with online listings and streamline contract generation.

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