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Zillow CEO: startups trying to disrupt real estate commissions will fail (2012) (geekwire.com)
177 points by gamechangr on Jan 16, 2019 | hide | past | web | favorite | 316 comments

Over the last two years I've bought a couple of properties and I see the value of realtors as professional negotiators and experts on real estate laws and contracts.

That being said, the National Association of Realtors (NAR) and their local branches are the definition of a cartel. My parents owned a real estate agency when I was growing up in the 80s and 90s. Back then, the cost of selling and marketing real estate was much higher. Most real estate advertising was done in print which the broker paid for out of pocket. Cameras used film back then which meant multiple trips to the property to take nice pictures. Someone had to always be manning the telephone because there were no mobile phones. The listing broker would have to arrange a showing with interested buyers and their broker. MLS was a huge printed catalog you would flip through to look for houses your clients may be interested in.

Nowadays, the cost of listing a house is nominal for a brokerage. Advertising is free because all of the real estate sites that consumers visit (realtor.com, zillow) pull directly from MLS. All cameras are digital so you can take that perfect picture the first time. There are now phone apps that automate broker access to houses to show their clients.

There are all of these productivity improvements for real estate agents on both sides of the negotiating table but the commission structure is almost identical to what it was 30 years ago. I believe the standard commission structure has gone from 7% to 6% in thirty years.

> "That being said, the National Association of Realtors (NAR) and their local branches are the definition of a cartel."

NAR was actually investigated by the federal government (FTC i think?), who concluded much the same, but lobbying buried the report and nothing came of it.

MLS's maintain power by strictly controlling access to information. they have the most up-to-date and the most detailed information about properties, buyers/sellers and sales transactions, among other things. this allows them to be the arbitors of deal flow, giving their members the advantage.

and this is the linchpin that props up the 6% commission rate. it's classic rent-seeking, since marketing costs have been dropping, as you mention. a truly competitive market would probably put the commission in the 1-2% range.

(i did my MBA thesis on disrupting the real estate industry)

edit: here's one, but i don't think it's the one i was thinking of: https://www.justice.gov/atr/competition-real-estate-brokerag...

Part of the problem is that most realtors want it that way. I live in Austin, and the push for a few years now has been to have a "silent market" where a buyer picks a "full service" realtor (AKA full commission), and gets a week or so jump on properties being listed in the MLS. This gives them a better chance to get the property before the MLS hordes descend and start bidding it up.

The part I've never understood is, as a seller, why wouldn't I want my property to have the largest exposure and the most interested buyers. Presumably, having people getting into bidding wars for something i'm selling is a benefit.

> "Part of the problem is that most realtors want it that way."

absolutely. the cartel doesn't help the top 2% of agents, because they're good enough to earn the 6% (or higher) anyway, but the monopoly works because the overwhelming majority of interested stakeholders benefit.

(that's not to imply that most agents are lazy though. a stat i dimly recall is that only about 10% of agents make enough to be full time.)

Well its a pyramid scheme like many of the state licensed businesses. The low level agents have to work for a broker who soaks up the majority of the commission. Only after being an indentured slave for a few years do they get the "privilege" of themselves becoming a broker. The problem is that once that happens no one will hire you, so your on your own for finding clients/advertising/etc. That takes capital most low level agents haven't managed to accumulate working for someone else. So its likely they need a significant other/whatever to support them while they build the business while competing with the larger agencies that have the money to plaster signs down the freeway and run advertisements.

Given some luck/skill and a lot of hard work, maybe they become large enough to start hiring agents themselves, and the cycle repeats.

Agents make at least 60% from day one. It is easy to find a brokerage who will offer 70-80% day one. So in that respect I don't think it is a pyramid scheme at all. Also, there are plenty of brokers who work in a larger organization without being the broker of record. But as you noted, advertising is not free. It is extremely expensive to market as a real estate agent, and that marketing cost is why most agents fail. It is just too expensive to start. In my area, I would allot at least 30,000 a year to get going as an agent for the first year, and more each year after that.

Source: On the fence about dropping my license right now.

yah, it's not a pyramid scheme so much as it exhibits power law characteristics (80-20 rule and such).

Sounds like software engineering today.

Where most engineering interns are probably paid more than the median national household income? Where starting salaries are in the 6 digits?

I mean come on, sure 120-150k starting salary out of university is only a thing in SF, Seattle etc but even in other parts software engineers are paid well. 80-90k in some city in midwest where housing is super cheap is a great middle class salary.

Only in Tech Hubs like NYC or SV...

How much lower is the starting pay in Boise, or Kansas City or some non-tech hub? My startup company pays well over 100k for college hires with no experience. And other companies pay more. Yes, we are in one of the tech hubs (Seattle). If other companies don't pay nearly as much, why would people work there?). You might pay 20k a year for your cool apartment in walking distance to bars, shops etc, but you have a great lifestyle.

One of the key functions of a broker is to provide plausible deniability, such as screening potential buyers who you think might waste your time or to avoid accusations of discrimination.

Brokers have to present all offers.

They may have to present all offers, but they don't have to present them in the same light. When I've been presented offers they DEFINITELY tell me about the strength of the buyer, what kind of financing, and what the deal terms are signalling. This stuff definitely matters to me because I've had to hassle with cash-poor buyers before and it just isn't worth the time, even in a buyers market.

The information about the strength of the buyer comes from their proof of funds or pre approval.

Legally the broker is presenting an off utilizing an agent. An extension of them essentially.

But at least they can waste the brokers time rather than yours.

Perhaps a pocket listing isn’t paying the Buyers Agent half of the fee, so saving 3% right there. Depending on the market that may be worth it versus going to the broad market and having to pay both sides of the commission.

Pocket listings still pay both halves but are often discounted down to e.g. 5% instead of 6%. The agent tries to spin the situation as a discount to the buyer and seller as they "save" 1% on commission. One of the main justifications for why the agent "deserves" a 3% cut of the deal is that they are working to represent you and safeguard your interests. That can't happen when they're representing both sides. It's as perverse as a plaintiff and a defendant using the same lawyer to save 1% on legal fees.

In a given market area there are literally thousands of real estate agents. Even with a 1% discount off the top, what do you think the odds are that the best offer on the market just so happens to be a listing that your real estate agent just so happens to be the listing agent for?

Real estate is a racket.

I get the impression the austin market is more formalized and is run more like a mini private MLS... (might be wrong), but part of the goal seems to be to keep out the discount realtors/redfin/etc.

Why would someone sell their home without listing it if they are still paying for a commission?

Zillow CEO argument falls on it's face. If this was such an important transaction, buyers would chose top dollar firms across the board, contractors, architects, masons, etc. Yet the fact all these survive the most competitive, bottom dollar market. Only realtors who carry no liability compared to the above, they still enjoy top dollar. This is a rigged market signal.

>Only realtors who carry no liability compared to the above, they still enjoy top dollar. This is a rigged market signal.

Realtors are among the most sued profession out there... I'm not sure why you don't think they carry any liability.

An engineer or an architects is responsible for life safety, structure, etc. All carry a substantial liability insurance. What could be a pitfall for a realtor if there is above the board transaction?

Nothing came of it? The whole Virtual Office Website (VOW) thing got created.. before meetings NAR and RESO intone legalese about encouraging competition. There's a lot of fear that the FTC will step back in and do something. With the level of MLS balkanization, innovation has a bunch of high hurdles.

VOW, and IDX also. The whole reason that sites like Zillow, Redfin, etc. exist is because of the (successful) lawsuit against NAR causing them to open up their data to third party companies.

I worked for a real estate company building an online real estate service since before the creation of VOW/IDX. Prior to that, the way we got access was through my boss's own real estate brokerage account with the state's main MLS. We expanded to support more MLS's in the area and each one was a huge pain in the ass. We had to have customers who were members of that MLS BEFORE they would give us access to their data. They would limit the data we had access to as much as they possibly could, and had absurd rules about what could/could not be displayed publicly, as well as privately when members of our customers' sites were logged in. It became much easier to get access to the data after the VOW/IDX implementations rolled out at each MLS.

Oh god the horrors that are idx. I just had flashbacks of dealing with the various schemas from different MLSs

i mean, relative to what they could have done (sued for damages and broken up the monopoly), structurally nothing changed.

but if you promote free and fair markets, you'd discourage/dismantle this kind of protectionism.

There's a reason that NAR has their logo on a nice building a few blocks down from the US Capitol (500 New Jersey Ave NW). :-)

> a truly competitive market would probably put the commission in the 1-2% range.

This depends a lot on the price of the house. Selling a million dollar home isn't 10 times more work than selling a $100,000 condo.

And handling a money transaction is mostly orthogonal to the amount yet many (most?) are charged as base fee + percentages.

But that's not really a competitive market either.

Yes it is. Becuase the hard part is not selling it, its getting the listing. And you bet your ass that a the 10 million dollar home goes to the well dressed, swanky offices top ads agent, not your "aunt's best friend".

You took my word "selling" replaced with "customer acquisition" then argued I was wrong.

You're right, that the majority of the work of a 10 million dollar house is customer acquisition. And this isn't true of a 100k condo.

But this was my point, 3% of a 100k home is close to the competitive market price. But 3% of a 10 million dollar home is pretty far away from the competitive market price.

I'll try to rephrase it:

100x the comission might have 100x the competition. As a seller of the house, you pay more but you also get better agents.

You're not getting a 100x better agent, and most of the best i.e. most successful agents I've seen weren't necessarily better negotiators, better at contracts, or more responsive. They were specifically better @ marketing and selling themselves.

The most successful agents I know close houses twice as fast as other agents. But they close them twice as fast as other agents because they're listing them under market value.

My wife was a real estate agent for 5 years but she got out of it because all of the most successful agents she met were more successful in ways that hurt the client not helped them.

Examples - convincing their clients to settle for homes quickly, convincing clients to list their house less than market value, weeding out easy clients.

My wife is also in the real estate market: the reality is that people's incentives are not maximized on house value, they also care about other things , like safety, patient, attention, etc.

It is what it is. RE is not a perfect market because goods really cant be commoditized.

I reiterate my point with one more argument: the average income of a realtor is very low: they make very little money. The number of active realtors is almost perfectly correlated with house prices: that means a highly competitive , and thus relatively efficient, system.

Looks like you've got a lot going on but I'd love to learn more about your thesis and thoughts on RE. I'm working on some projects in the area.

i'm a bit rusty on the details, but happy to help how i can. we were looking at the auction model as a potentially viable alternative to the commission model predominant in the US. we found this stranglehold by NAR & it's MLS network to be a key barrier to entry.

Property transfers, including buyer, seller, and sales price, are public record. It's all published in the newspaper. How can MLS control access to that information? Is it just that nobody else bothers to compile it from the county records?

As others have mentioned, that is after the property has sold. If you are looking to buy a house, that information is not going to help you. However, even for sold information, depending on the county you are in, those public records aren't always accurate. I don't know how frequent that is, but I suggested using public records when we lost access to MLS data a few years ago, and a coworker said they had problems with that data from some counties in the past.

If you are buying a house, the MLS is the place you need to go. And that is mediated by a Realtor or Broker in most cases.

Those are completed transactions, not properties listed for sale.

there's usually a 30-60 day delay on the public records. MLS gets that info in a day or two, if not hours, usually from the listing agent/brokerage iirc.

Purchase price is not public in all states

It isn't? What states don't put that information in the property tax records?

Montana for another. There have been attempts to change that which have all failed in the face of industry lobbying and (more importantly) a Republican controlled legislature

In Texas I was able to lookup the original mortgage amount on a house, but not the actual purchase price.

Texas for one. No duty by either buyer or seller to report the sale price.

That's not useful to someone looking to buy. Listing data is held exclusively by the MLS.

> Nowadays, the cost of listing a house is nominal for a brokerage. Advertising is free because all of the real estate sites that consumers visit (realtor.com, zillow) pull directly from MLS. All cameras are digital so you can take that perfect picture the first time. There are now phone apps that automate broker access to houses to show their clients.

There's a brokerage in Canada now called "1% Realty" which pretty much serves the purpose of getting your home onto the MLS, and doing some very basic sellers agent services. Its whole shtick is that its fee is literally one percent.

In my opinion that level of sellers-agent fee is much better aligned with the actual hours of effort, and operating costs on the part of the listing agent.

Those who are persistent can always eventually find someone willing to sell their property for 3%. That isn't some online discount scam, that's a local realtor with local billboard ads, regular newspaper inserts, and a respectable web presence who is will to take half to do this job. Maybe you're in a hurry, maybe you like gold-plating, maybe you have to use your sister-in-law as a realtor, but if none of those circumstances apply then a 50% discount is well worth pursuing...

Of course it's because of all the efficiencies you mention. Their job is significantly easier than it used to be. They can afford to charge less; they just forgot to tell the general public about that.

Maybe. One problem with listing a house for a 3% commission is the listing agent must put this in MLS. The buyer's agent's commission will be 1.5%. This could possibly put you at a disadvantage among buyers since you are competing with listings that offer a higher commission to a buyer's agent.

This is absolutely a problem. The buyers agent is a gatekeeper. They will not show your property if the commission is that low.

Source: I used to be a real estate agent. I left the industry because of BS economic incentives like that and others that incentivize you to not put your client's best interests ahead. That and the ripoff racket that is most brokerage licensing requirements and the arrangements enforced by law (that is heavily influenced by the NAR).

20 percent of home sales are due to a sign in the front yard. Open houses are statistically a waste of time. Simply not worth the effort for the agent or seller. It usually is the nosey neighbors that come through.

>commission structure is almost identical to what it was 30 years ago

Not to mention housing prices have greatly outpaced inflation and real wages over that same period.

Wow, in the UK it is about 1 - 2%.

Came here to say the same thing. My wife is from UK, and she's ... well, pissed at the expenses here (besides healthcare). We are in the process of selling some land, and the default for land is 8%. WTF. You don't "show" it. You don't stage it, or model it, or deal with keys or codes or anything else. But there were no realtors we spoke to who wavered from 8%. I suppose we could possibly have done DIY, maybe... ? But... 8% for land is just insane. The justification was "oh, it takes longer to sell". Again - you're not doing anything beyond perhaps taking a phone call or email. Granted, there may be exceptional properties that are hundreds of acres, have to deal with wildlife issues or other zoning whatever, and might have a whole lot of headache. Not a 1acre homesite in a subdivision.

I recently sold a home through redfin and was able to negotiate down to 3% total (2 for buyer 1 for seller)

if you have the time have you attempted hosting/selling yourself? I know it sounds ridiculous at mentioning but I purchased my current home without any real estate agents, we did work through lawyers and there were fees there... but likely minimal (I paid under $1500) and I actually enjoyed working directly with lawyers rather than having real estate agents inbetween, this would be my prefered method if I were to sell/purchase again.

I'd just get to know your local title company and list it as for sale by owner on the various real-estate sites.

In the US the title company does _all_ the actual work in a sale. And takes _all_ the liability. Everyone else is a middle man.

That much have been for relatively expensive land. I have seen 10% commissions for land under $50k

No (under $100k). Based in NC, and the 'standard' here seems to be 8% (couldn't find anyone under 8%).

The justification is that you did end up paying 8% instead of doing it yourself, so it was worth 8%.

If you think 8% is insane, then sell it yourself.

What would a commission pay in USD? Or 1-2% of what price?

I'm guessing it might be very similar in actual dollars, as there are a number of cities in the US where you can buy a house for $150,000. 3% would be $4,500 USD for a real estate commission. Then the broker would keep a good part. The agent might get $3,000 of it.

Fee rebates have become really common as well in my experience.

Yeah, what are you taking about?

Go to a broker and say "I'll use you if you split half of your commission with me." Or seek out a company/brokerage in your area that explicitly offers "commission rebates."

How do you find that?

Just ask. Or use Redfin.

What about services like redfin? They advertise their fee at only 2%.

Redfin advertises a fee as low as 1% in some markets as a listing agent, but this does not include the fees to the buyers agent so it is really more like 3.5-4%. And in markets where Redfin offers the 1% fee you could find full service brokerages that work for 4.5-5%.

How does that work in states where commissions are technically required to be negotiated per contract?

30 years ago in the UK 2 or 3% was the norm one has to ask why it was double

Because interest rates were much higher back then (12% vs 0.5% now) so house prices were a lower multiple of wages. (Mortgage payments tend to be similar to rent, so higher rates mean lower prices.)

What does that have to do with how much an estate agent/relator charges

Real estate prices being lower wage multiple means the agent has to charge bigger percentage commission to make same amount of money.

I see at least three counterpoints:

1. Real estate agents aren't often "experts" at real estate valuation, inspection or execution; They have dependencies on appraisers, inspectors, and lawyers. The work an average agent does is more or less cookie-cutter from my anecdotal experience, though I think there is a proportion of rockstar agents that do much more.

2. Not every buyer wants homebuying to be a client-services relationship. I'd rather have a trusted intelligent ratings system based on criteria like location, price and so on. I would hypothesize that there is a divide here with boomers and millenials / gen z. If I sell my house, it will be on a technology platform that takes 1%, not through an agent.

3. The vig an agent takes is insane in urban centers - 3% might make sense in areas where the avg. home costs 200-250K, and is harder to sell. In dramatic sellers markets where homes are in the 600K - $2M range, the take should be much much lower.

Most of the appraisers, inspectors and attorneys are filling a compliance role.

The reality is the real estate person usually drives the process. Good ones know which appraisers to call and which inspectors to avoid. There's no real professional ethics involved, so most of them have arrangements with preferred folks whom they get referral fees from. (It's one of the reasons why home inspectors are almost completely useless.)

Real estate is ultimately a shady business that is about who you know.

>(It's one of the reasons why home inspectors are almost completely useless.)

I think this is more accurately "home inspectors recommended by the realtor". Home inspections are extremely useful, so long as they are working in your best interest.

Yes but such a crap shoot. And you'll easily spend $500 paying for one. Best advice I ever got was to just hire a general contractor to do it for roughly the same price. They find way more stuff and generally know the codes better. I've had inspectors miss huge structural problems that destroyed me later.

You may hit a roadblock as the sales contract may require that any inspection be performed by a "licensed home inspector" not a general contractor. Its just another siphon in the residential real estate pipeline.

Many GCs are licensed home inspectors because they give free estimates all day so they may as well get paid for a few of them. A lot of people buy homes then immediately get work done and if you're not an obvious scumbag the fact that you've already conducted one transaction with the new owner will not hurt you.

That is just made part of the offer. Take it or leave it.

After my most recent (second) home purchase I vowed never to pay for an inspector again. They assume no liability for the things they miss making them effectively useless if you have even the most basic knowledge of home issues. In both cases major issues were missed, most recently the complete absence of any air return ducts, and an illegally installed furnace. I had to find these issues myself later when constant HVAC problems finally drove me to take some time and climb into the attic/basement to investigate. Upon confronting the inspector, I was shown the portion of the contract indicating they had no liability and told even experts miss things. Luckily I knew the right people to put some pressure on and got my ~$500 back, but ultimately lost thousands to have appropriate repairs done for the work they missed.

"Good" real estate agents are interested in moving as many houses as quickly as they can, to gain as much vig revenue as possible.

"Good" real estate agents from the buyers perspective would be slowing down sales, reducing the overall price they make a percentage on anyway (which is why fixed rate for a "class" of real estate would work better) as a disincentive.

Why would a real estate agent dissuade someone from buying something? They can compartmentalize/offload the moral responsibility to the inspector (which are pretty hit or miss too).

> Why would a real estate agent dissuade someone from buying something?

Story time!

When I was looking at buying my (now current) house, I had a realtor on my side, and my wife actually found the listing (no knock on the realtor there - my wife was just that on top of things) and the house was actually for sale from a realtor at the same company as my realtor.

As we were doing the inspection, I had questions about the pipes (lots of trees, and I knew of some horror stories). I was told the required inspection only covered the house itself, and the pipes would be someone else. My realtor was careful (IMHO) to not dissuade me in any way, but neither did she encourage me. I could tell she wasn't excited about me getting the pipes inspected - in part, I would later find out, because anything bad I discovered would then legally have to be disclosed to future prospects, whereas ignorance was a shield. So she was not a very useful source of guidance for getting this thing done.

But I did get it done, and when the result was a clean bill of health (the inspector showed me the video and was remarking that the pipes were basically pristine, which was amazing for 30+ year old concrete pipes) she was suddenly much more enthusiastic about the inspection. All smiles and congrats and saying what a good decision it had been.

It was a revelation into the incentives involved. To think what might happen to someone else with an agent who would cross the ethical line instead of just being unenthused.

More than just not wanting to know about problems agents want to avoid any liability for when the home inspector misses something and it comes back to cost the buyer after the sale. Agents nowadays, at least at the franchise that I am familiar with don't want to recommend a particular inspector, they'll list a few decent ones and leave all of those decisions up to the buyer. They also try to avoid being present while the home inspector is there. There's just no reason to take on any added liability when there's no reward for it.

That's also not just hypothetical either, we've been sued a couple times as a brokerage because one of our agents recommended a particular inspector who missed major termite damage.

and the inspector is financially responsible for exactly the cost of the inspection.

No more.

I think you've really hit the nail on the head here. There's a built-in conflict of interest for the agent in every transaction.

They are rewarded by moving inventory, not serving their client.

I've forgone the home inspection during the most recent transaction. In the previous few houses, I've found things immediately after the sale, which the home inspector didn't find. OTOH, they find tons of trivial things that frequently don't matter (or are just plain wrong).

And of course, while they might be able to tell you if they find termites, or foundation problems, they aren't actually doing a deep analysis, so they will themselves tell you to get an engineer or termite inspector if your concerned about those things. AC/mechanical problems are in the same boat. The inspector will tell you something like "the AC is 15 years old, but has a 15 degree drop" (something you can discover yourself in 30 seconds with a picture of the nameplate) and a thermometer. Actually measuring the subcool/superheat, no way. The latter will actually give you a good idea about the state of the machine.

Making the seller pay for a home guarantee for the first year is probably a far more effective way to spend money. Although again, don't use them until you know whats going on. Your AC gets warm, they are just as likely to send a guy that looks the other way, pumps a 1/2 lb in the system and kicks the problem down the road a few months.

> and the inspector is financially responsible for exactly the > cost of the inspection. > No more.

And gets more business the more time he stamps yes for the realtor.

(also true of the broker and appraiser)

They might know the house will not appraise for what they're trying to buy it at, so it'd be a non-starter without additional substantial down payment that they might not have. there's non-permitted additions, construction is suspect, insurance will be crazy due to proximity to ocean bluff, etc.

Totally agree - my original post was too kind. I share your sentiment.

Add to that the title company which actually does much of important legwork of getting all the ducks in a row, and doing the research and insuring the transaction. I've never had a real-estate agent that did much more than recommend inspectors/mortgage companies/etc. In the end I've never actually used any of the recommended people because I've been able to find better deals on my own. Pretty much once the title company is named, its more a case of relaying all the information to them where they distribute it to interested parties.

AKA, much of what you think your real-estate agent was doing was likely the title company. Even more so from the perspective of the seller.


>The work an average agent does is more or less cookie-cutter from my anecdotal experience

indeed majority are uneducated, there is a low/no barrier of entry with a similar shark mindset as it exists in recruiting - a lot of promises by your employer (profit sharing etc) but the competition is fierce. I doubt it's an industry that can easily be disrupted. at least to date I've seen no tech proposals/ideas that can compete with this setup because it's already a race to the bottom (and unlike recruiting) requires interfacing with old-school bureaucratic notaries, legal advise etc. In the end you still need a human making an appointment with another human to view the property and a robot doesn't cut it.

The listing agent should have expertise in the valuation for the ask price. I don't think appraisers are generally involved. Appraisers are primarily working for the mortgage company. My last 4 appraisals have been within a couple thousand of the purchase price.

"My last 4 appraisals have been within a couple thousand of the purchase price."

Is that a reasonable metric, or is time on market?

I ask because there are a number of studies, that indicate that real-estate agent's houses themselves frequently sit for sale for much longer than the ones they are selling. The idea being that the agents are pushing the market and willing to absorb the longer time-frame in exchange for a much higher selling price.

OTOH, it seems sometimes the strategy is the reverse if the market is really hot. Under-pricing and getting a half dozen people into a bidding war which ends up being double digit percentages above ask seems a frequent strategy to get maximal returns and fast sales.

My take is that the appraiser is simply protecting the bank from making a giant mistake. They'll prevent a 100K house for getting a 200k loan. Our previous house sold for 330K when most of the previous sales had been 250-300 for the neighborhood. We even had a comp of the exact same floorplan/elevation at 275. Our agent thought we would probably find buyers at the higher listing price, but didn't know if the house would appraise without any comps in the ballpark.

The low price attracting a bidding war doesn't really work in our market. My brother had something like a dozen showings and half that many offers on listing day, but only got a couple thousand over list. My house had 4 offers, but everyone stuck to their initial numbers when we asked for best and final offers.

Since the market has been hot, there is a stigma of "something must be wrong with that house" if it's been on the market 90+ days. Our strategy has been to price at the top of the comps and reduce quickly if we're not getting good leads.

> it will be on a technology platform that takes 1%

1% sounds crazy expensive to me.

Indeed. Why would they get paid more if the house happens to be more expensive?! That's like a doctor charging 1% of the patients income... "rich people should pay more".

As a realtor for the past 6 years I can say a couple of quick things as to why I don't see the real estate industry going anywhere, even though I think that real estate brokers are extremely overpaid.

- selling your house, at the end of the day, is quite the undertaking. A lot goes into it, it can get emotional, messy, and sometimes quite complicated. Having someone that does it on a daily basis can be nice and really smooth things out.

- people are too attached to their homes emotionally. More often than not, when trying to sell on their home without a realtor they will not have it in a saleable condition and price it too high for the marketplace. It will sit and not sell, or they will get an offer that is appropriate and be offended and not sell it. A GOOD broker will bring facts, data, and logic to the table so that a person that is actually committed to selling their home will get the job done.

If people saw their homes for what they were when they decided to sell them, a product or a piece of property and nothing more, the real estate industry would die in no time at all.

Then again, there are a lot of swindlers out there too, so it's nice to have someone as back-up to watch out for those types of things as well.

The trouble is, your incentives are all wrong.

If the house would not sell at $900000, would sell in 15 months at $800000, or would sell in 3 months at $700000, or would sell in 2 weeks at $600000, what do you do?

You try to sell it for $600000. You tell the owner that that is what the home is worth, even if the owner is not in a hurry. Getting your share of the 6% (likely 1.5%) of $600000 in 2 weeks is better than any of the other alternatives FOR YOU.

A better way to align the incentives would be to give the seller's agent a percentage of the amount by which the sale price exceeds the price determined by an independent appraiser. The buyer's agent gets the opposite, getting paid only if the price is lower than the appraisal, and you don't get to be both agents at the same time.

This Freakonomics-style argument doesn't work. The only price that matters is the market clearing price. Appraisers don't know that more than anybody else. The only thing an independent appraiser would do is use (well-known) comps to anchor the price, which is not something a seller wants. Rather, a seller wants competition among buyers.

I used to think that real estate agents were a waste of time until I lived through several difficult transactions. Each real estate transaction involves negotiations for loans, inspection objections, and various legal details. For example, a good real estate agent will make sure the title commitment documents are in hand early enough that you have time to review them, because they often have a lot of mistakes. This can kill a closing and/or require post-transaction work to correct.

I bought a house in the middle of a flood (Boulder 2013). The inspection objection had already been negotiated before the flood occurred. Getting the deal done was a huge task, because the seller was lying about the house being affected by the flood. I still wanted the house, but I needed proper compensation for the remediation. My real estate agent did an amazing job of bringing the deal together by tossing in some money and getting the other broker and seller to contribute a bit.

I'm now living with the above real estate agent, and she's on the phone right now at 7:45p working on a deal. I have watched her pull together deals, and the important thing is that all her clients are happy. I have met many of them, and they are very grateful for her work. I know there are many other agents out there like her (maybe not quite as good :-).

You seem to have missed the point of the appraiser.

The market clearing price is not set in stone. It is determined partly by the actions of the agents.

The appraiser's estimate of the market clearing price would set a measuring point from which the agent's performance can be measured. Agents are then paid according to how their performance exceeds the expectation.

Without the appraiser's estimate, the performance of the agents can not be measured. There is no way to reward good performance or punish bad performance. The agents are simply collecting their cut of the transaction.

A bad measurement is worse than no measurement. The appraiser’s estimate may or may not (likely not in hot or cold markets) off a useful benchmark.

In this case, bad measurements are OK. They average out over time. If the bias is one way, then one type of agent (seller or buyer) gets a bit more pay than the other, but this is not a disaster and is compensated by agents competing to work on the higher-paying side of the transactions.

You're not wrong about the incentives, but I think you miss a few things in practice:

1) If everyone else in the market is priced to move, and you aren't doing it, there is always going to be new housing stock that undercuts you. 2) A seller has to maintain insurance and the property, and typically maintains utilities (a house without water/electricity doesn't show as well). They sometimes have to pay a mortgage. And often people who are selling a house are also buying a house, and intend to use the proceeds from the sale to finance the down payment on their next house. Most people cannot treat the extra money from waiting on a better offer as 100% profit. 3) The primary purpose of an appraisal is to ensure that the underlying asset is sufficient collateral for the loan. If you manage to sell a house for significantly over the appraise value... guess what, the loan falls through.

Seems to me that having the commission as a % of the sale price is not the right way to go. You lock in with an agent for 3 months and agree to pay them a set fee when they/you sell it. You should pay as a buyer for an agent to represent you. Currently, if I'm not mistaken, all most all agents get paid by the seller and, if you are a buyer, the agent has no legal responsibility to watch out for your interests.

The current situation exist due to a slow long-term evolution of events but seems like won't change any time soon. Sort of like how wage controls during WWII encouraged businesses to pay for your health care and it is not taxed, but you don't get that tax break when you pay for it yourself. An insane situation, but next to impossible to change.

The buyer always pays the cost of both the seller's and buyer's agent in the same way that people who rent apartments do pay property tax. That cost happens to be hidden in the sense that there is no specific charge that the buyer sees but the buyer is the one who ultimately pays it.

Well, in that case I would say "Not really then". Landlords generally don't run on a cost plus basis. They don't add up their costs add 10% and make that the rent come hell or high water. They charge as much as the can to achieve the desired rate of turn-over. If they are a person instead of a company, they may give tenets who have proven not to be a hassle and they have a personal relationship with a bit of a break on the rent.

In some markets, like the Bay area, rents are much less than the cost of owning the property, and in others, like Kent, Ohio, they are higher.

Plus: If there is a willing buyer for something you own at price X and then someone takes 6% of that when the seller pays, true the sell pays it all, but the buyer also pays it in getting less money.

There are ethical and practical reasons to avoid a system where buyers have a financial incentive to go without representation. In practice buyers without representation are unlikely to close, and sellers are unlikely to accept unrepresented sellers because the sellers agent would charge more money because. Neither the seller or the buy would save a substantial amount of money compared to the old system.

Yet somehow people still manage to buy and sell houses in the UK where buyers have no agent representing them. Buyers pay a fixed or hourly fee to a lawyer for conveyancing and sellers pay 1-1.5% to their listing agent. Overall costs seem to end up well under half that in the US (5-6% of sale price).

I do often shake my head at the ideas of "normal" that different countries have.

I'm from the UK, but in Finland these days, and the way that both of these countries work is very similar.

In America a lot of things are very odd with regard for property, even common things like tenants paying rent by posting/delivering cheques!

Yes. One needs to get rid of the idea in everyones head that one needs a buyer and sellers agent. This is a pure network effect that is keeping this over-priced service intact. Similar to the AMA's restriction on medical school licensing.

You are free to get a buyers agent that does represent you. In that case, the buyer’s agent and seller’s agent split the cost.

I still don't understand this mechanism... the buying agent takes his fee as a percentage of the total house price? Doesn't this mean that both the selling and buying agents are incentivized to drive up the price?

In reality, neither is incentivized to drive up the price of the house. It’s all about selling fast.

Freakonomics talks about this all of the time.


Expecting 3%/$30,000 k for being "someone that smoothes things out" on a sale of, let's say a $1M home in CA, is theft.

What if their knowledge of the market and negotiating helped you get an extra $60k in value on the sale of your home vs. selling it yourself?

Then it would make sense to have a model where the agent gets a very small percent up to a certain price, and a much larger percent above that threshold. Does this ever happen?

Someone is paying. If the agent charges $30k + extra $60k you're saying buyers should avoid RE listed properties and buy direct.

Given the amount of weird and unrealistic expectations of both buyers and sellers nonstop in a transaction " the one smoothing things out" can be translated to "the essential element to actually closing the deal". There is a reason why most FSBOs wind up with an agent. They fuck it up.

I would argue that the reason is because they're tired of being pestered by would-be listing agents. I have a property listed as FSBO for the last 4 weeks and so far I have received 67 calls from listing agents, all documented in a spreadsheet so I can block them via Google Voice.

Or it may be that buyer's agents actively steer their clients away from FSBO properties which one person revealed to me during a showing even though the listing states I'll pay 2.5% to the buyer. I requested and now have that in writing from this buyer in case I feel like filing a complaint. You should have seen the agent's face when I said my email was in the listing and she could ask me any questions directly if she liked. An agent mortified by the thought of direct communication between buyer and the person who knows the property best.

Actual potential buyers send emails. Agents seem to only communicate via phone, probably because they believe they can charm you.

Totally agree.

It's like saying if I trained hard enough I could be in the NFL. Well - "training hard enough" is actually hard to do.

I purchased a home recently and my buddy tried to sell his FSBO. I told him to use the same title company, because we had a painless closing. The title company told him that they do not do title work for FSBO's because "not enough of them actually disperse funds, so we don't get end up getting paid on the title searches and work we do before the closings. We prefer working with clients that have a much higher probability of closing".

That's a title companies perspective. They are getting paid either way and don't get paid more if it's with a real estate agent or FSBO. That's about as unbiased as you can get in that market, one would think.

You dont need to use a realtor, its a voluntary transaction. If you find the price too high dont use them.

That's the answer that's supposed to end this argument, but real estate business is a cabal: if I'm agent-less or use one of the "disruptor" services, like redfin or openlistings, agents of the other party will simply steer clear of the transactions. Some would even say that to my face.

But thats only valuable because they steer buyers as well, and if you want access to those buyers you need to cater to the agents that won their trust by educating, managing, etc.

It's not 3% for every price range. For example, $1 M price ranges pay way less.

I fail to see how they are overpaid. If someone sells 4 houses per year for 1M for 1.5% fee, that's only $60k per year. That sounds like a mediocre income in markets where houses even go for 1M.

I am using numbers for the Bay Area that I have heard of. Maybe other markets are different.

It's more that they are collectively overpaid. As house prices rise the %-based commission causes new agents to flood the market, lowering the number of houses sold per agent. Agents then spend a lot of time acquiring clients in competition with each other.

If you think about what an efficient use of realtor labor would look like it would be ~2 houses a month or more with agents spending all their time on showings and contracts. In a market with $1M houses this would yield roughly 24M * 0.025 = $600K/yr and up.

Hence the market becomes flooded with people that would like to make $600K/yr on a educational investment period of 6 months or less (plus an apprenticeship-like paying job for a few years).

The industry is weird because the price of agent service is resistant to supply&demand forces for various reasons but the main reason is that it's impossible to know what the selling agent's contribution to the house price is, since you can't sell the same house twice under the same conditions.

In principle, a good agent can easily recoup their commission by adding a few percent to the house price, but in practice agents have a counter-incentive to this because the homeowner will never know what the added amount was and raising the house price a small amount adds less to the agent's bottom line than moving on to the next house more quickly. In most cases the agent is simply setting the price that will sell the house quickly for the local market. As a seller, you'd probably prefer to make an extra 20K on that 1M house by showing for a month instead of a week, but this makes the agent do 4x the showings to make 2% more commission.

Ironically, the buyers' mortgage lender will have an impartial professional estimate done after they've already agreed on a price with you. In a perfect world, the seller would get this estimate done up front and then the seller's agent would be be paid on a structure that incentivizes beating that estimate. But wait - if the mortgaged portion of the price is greater than the estimate then the buyer's lender will back out ($collateral < $loan). So if your market is mostly buyers doing 20% down then the price is soft-capped at no more than 125% of the estimate even for the best agents.

Quite the free market, eh?

What realtors are you using that only charge 1.5%? It was 3% each to the seller's and buyer's agent last time I moved.

They do end up not being too rich on an annual pay basis where I live because the number of realtors actively working adjusts to the volume and pricing.

A realtor's income might be 1.5% (or less) because they split the 3% commission with their brokerage house, and sometimes with supporting agents.

All of the full time real estate agents I know sell WAY more than 4 hours per year.

It is an approximate number I have heard myself from agents directly.

The going rate is 2.5% to both the selling agent and the buying agent, each.

Even if we ignore the expenses, that's only $100k/yr in an area where $117k/yr is below poverty line for 4 person family.

Where is your 4 homes per year stat coming from? It's extremely low.

The key factor is that you don't have to sell houses where you yourself live.

An average of 3 months to sell a single $1M house in the Bay Area? $60k sounds like it would translate to a pretty good hourly rate.

You are not counting how many realtors there are, and how hard it is to get that listing.

A new agent might not get a listing in an entire first year. In places like SF, its all about how good you are about generating leads, the house sells itself.

Better than $15/h minimum in some cities, but definitely not 'extremely overpaid'. Note the 60k is for a year, not a single house.

Not my point. How could anyone possibly spend 40 hours a week for 3 months to sell a single home at that price in that market? It's not a realistic characterization of the job.

Think about the amount of work that you would do to sell (ignoring buys) 4 houses.. At most 2 months of work for them.

What you said reminds me of what the piano guy told us when we asked him to bid out my wife's childhood piano for a full restoration. "If Pianos weren't sentimental, I'd be out of business." We could buy a decent babygrand or a really nice upright for the same price. But there's just something about having a home with furniture from your past in it.

When I sell my house, it'll be 100% with a realtor. Is it expensive? Yes. But my home is quite sentimental to me. I don't know enough to break down that barrier. I'd rather pay someone else to do it for me. I look at comparable homes in my area and I think, "my house is $50k better than that." But I honestly don't know. :)

Do realtors have any advantage when it comes to seeing the listing for properties before they are visible on the common real estate website (zillow et al)? I always assumed it was so, but I’d love to hear one way or another.

Every property we have ever purchased, except the first one, was not on the open market and the result of an agent/broker "knowing someone" that had what we wanted and managing to work out a deal for us.

Usually they do; specifically the MLS has a listing type for before the house is on the market that only agents can see.

That's a bold statement. Still, the NAR has data that suggests realtors are more likely to be involved in transactions than 18 years ago:

87% of buyers purchased their home through a real estate agent or broker—a share that has steadily increased from 69 percent in 2001.

Source: National Association of Realtors (https://www.nar.realtor/research-and-statistics/quick-real-e...)

... But I'm curious if the definition of "broker" includes online marketplaces or other digital services.

It's true that realtors (and other players, including real estate lawyers) do have expertise that can help buyers and sellers deal with the unique issues that come up with each home, not to mention the mandated paperwork. Streamlining those requirements may be extremely difficult.

However, I think realtors have a demographic tidal wave about to hit them, consisting of first-time young home buyers and some slightly older home sellers who are used to doing things online and want nothing to do with realtor-mediated transactions ... or will scoff at the ridiculously high fees charged by brokers.

> However, I think realtors have a demographic tidal wave about to hit them, consisting of first-time young home buyers and some slightly older home sellers who are used to doing things online and want nothing to do with realtor-mediated transactions ... or will scoff at the ridiculously high fees charged by brokers.

No way. Find me the mythical millennial who wants to deal with a first-party negotiation.

In some fantasy land where you ride your unicorn to work and shop for pre-fabricated houses on Amazon.com, sure. The reality is that your bank demands due diligence, houses are always in some state of disrepair, and nobody wants to deal with that.

I get the due diligence part, which is where lawyers and inspectors come in. Not convinced realtors have to be the middleman facilitating those necessary transactions, let alone showing a home, making sure offers get to the seller, generating a list of comps from a database, etc., and charging huge fees to do it.

The buyer doesn't see the cost, although 3% goes to the buyer's agent, it all comes out of the seller's proceeds. As such, there's a lot less incentive for a buyer to go without an agent.

I'm a millennial, just bought my first home this past August. It never even crossed my mind not to use a realtor. Sure I did a lot of communication with my realtor over text and e-mail but I never even considered not using one. I had done a lot of research and looking around before going to our realtor but I trusted our realtor more than I trusted myself to make sure everything was covered. It was more of an ease of mind deal and our realtor wasn't pushy and let us choose homes we were interested in for the most part, only occasionally making suggestions.

Well, until they coordinate to change laws at the state and federal laws, facilitating real estate transactions as a non-realtor will expose such individuals to legal action.

Kinda like Tesla trying to sell in states that require a franchise dealership.

Also, the term commission is ambiguous in the context of the headline.

Do we mean a percentage of sales or an officiating body that controls an MLS or something at the state level, etc?

this is not completely true because a seller can negotiate on behalf of themselves for their own home and a buyer can negotiate for themselves as well. Which I suppose is obvious.

You can also have an attorney negotiate for you, at least in my state, and attorneys only charge a flat fee for handling a transaction in my area. A small percentage of what it costs to use an actual realtor.

That is still a two-party transaction. It is when a third party is involved, that gets you in trouble.

>I also think realtors have a demographic tidal wave about to hit them, consisting of first-time young home buyers and some slightly older home sellers who are used to online transactions and want nothing to do with realtor-mediated transactions.

What platform will facilitate these transactions?

It’s a essentially a giant network effect.

Practically, the #1 reason to use a realtor is that if there is an issue with the home that should have been known ahead of time, there is a chain of insured entities that provides legal recourse.

The shop and decide part is secondary to their value, but that is how they are so entrenched. The local MLS in any given area has the ability to cut off access to anyone. Some are even privately owned. In order to disrupt an area, you have to get a slice of listing larger than what’s available in the local MLS and then get more people’s eyeballs on those listings than the combined circulation that the existing MLS feeds were getting...and then still have some means of showing the houses in person.

And you have to do that for EVERY single market you enter.

A young buyer is welcome to shop for a home without using a buying realtor...but there are still very high odds that the seller used a realtor on their end. The only difference in that situation is that the selling realtor doesn’t have to split the commission and pockets more of it.

This is ironic too, because realtors are more valuable to a buyer in most cases and there is more work involved for buyer representative realtors with no guarantee of a payoff.

The entrenchment remains because realtors will often avoid FSBO showings and sellers aren’t interested in experimenting...they just want their house to sell.

> Practically, the #1 reason to use a realtor is that if there is an issue with the home that should have been known ahead of time, there is a chain of insured entities that provides legal recourse.

Other than title insurance (which is separate from and in addition to the 5-7% commission), what's the insured risk that could possibly be worth that percentage?

Hidden damage to the house that wasn’t found in an inspection and not disclosed by the seller. Low level water or termite damage that can’t be seen because a layer of wall was built in front of it.

Just as an example.

How often do those issues come up and what is the typical recovery? I’d guess under 1% and maybe $25K, implying a value of $250. The commission on my house was over 200 times that figure, making for incredibly overpriced insurance if that’s the primary value the fee brings.

I guess it depends on the cost of your house. Everything is relative.

You can always negotiate a flat rate with a realtor too.

> sellers aren’t interested in experimenting...they just want their house to sell

Presumably sellers also want to maximize the money they get when selling. Why wouldn't they be willing to experiment on increasing that number?

The rate is negotiable.

But usually it’s because people need their house to sell while they are still making payments. If there isn’t any urgency to sell, experimentation is fine.

In extremely high demand markets, you’re clearly better off experimenting too.

Not having a realtor as a buyer really helps, because you can add that 3% to the purchase price of the house saving you 3% which can be a huge amount in expensive markets like the bay area.

Not in any way a defender of the current real estate system, but I've never understood this mindset. It presupposes completely irrational behavior on the part of the seller- that they will choose to give you a 3% discount for.... no reason at all?

Rational agents want to get as much money as they can for their homes, and begrudgingly pay any fees that they are forced to. If the seller gave you a 3% discount here for no reason, it would be the same as if they'd hired an agent- except, they wouldn't be getting anything for it? So why would they discount you the 3%? It's a zero sum transaction where your gain of 3% (very significant money in the Bay Area, as you note!) is the seller's loss.

IRL, real sellers will charge as much as they can. They are not giving out 4 or 5 figure discounts randomly or because they're nice. Do you randomly give strangers 4 figures of money for no reason?

In IRL when I bought my house I factored in 3% to the buyer’s agent. I had offers from normal agents who get 3%, all manner of “kickback” agents who collect 3% and give some back to the buyer, and one agent less buyer that included an explicit 3% calculation in their offer.

While, sure, I would love to get more and pay less commission, I don’t care how that 3% is distributed. It’s fixed part of the transaction and is in the MLS listing because I was afraid of missing some buyers.

When I bought a house, my contract with my buying agent said that 50% of the buying commission came back to me at closing as a prepaid closing cost.

3% is what the buying agent asks for. Without a buying agent, that's 3% the seller doesn't have to pay.

Even in the best case of a FSBO home, the seller is not going to give you that 3%. The whole reason they are not using a realtor is so that they can avoid paying a commission. And if you are not using a realtor, they can find another buyer who is not using a realtor so it isn't like they would have to pay it if your deal doesn't work

in most cases the seller has already agreed to pay 6% to the agent for the sale of their home - then that selling agent agrees to split it with the agent that brings a buyer. If you come in off the sign you're basically handing the seller's agent another 3% commission - even if you "negotiate" 3% off the top of the house the seller is still paying that 3% to the listing agent.

In the eyes of the buyer it might not matter if you got your 3% off... but that seller probably isn't saving any money on his/her end.

The selling agent getting double the commission if the vendor accepts your offer over anyone else's sounds like it could be a lot more help in negotiating a quick and satisfactory deal than any negotiation prowess having your own agent might offer, especially if your own agent would be financially incentivised not to reduce the price...

No, you're asking the selling agent to give the 3% he would have given to the buyer's agent, and instead give it back to the seller.

Frankly, if you're worried about 3% on the purchase price of the house, you can't afford that house, regardless of the amount of money.

Particularly in expensive markets in the Bay Area, the real estate agent is there to tell you when you're being stupid - unrealistic with your demands (under or _over_ paying) and keeping you from stomping away in a huff during the stressful negotiations.

This is buying and selling the most expensive asset most people will ever own. People hire in help to buy and sell their business, this is equivalent.

I think this is pretty misguided. 3% of $100,000 is $3,000. Many housing purchases will be more than that, but let's just talk over $3k.

Some people will be very comfortable with dealing with negotiations, pricing their house (the quasi-ethical can even talk to a few realtors before hand to get their opinion), and doing the paper legwork.

Just because someone chooses to use their time and effort rather than forking out what could amount to several months salary doesn't mean they're stupid.

With that said, we've tried to sell a home by owner, with a good realtor, and a bad realtor (same home, different time periods with renting in between). The bad realtor was worse than doing it by myself (got 2 more offers doing it ourselves...we just felt it was worth more to us renting it than selling it at that time). The good realtor was fantastic and easily earned their commission by pitting buyers against each other and creating a bidding frenzy (it was a good market, but we got way more than we expected).

I would wholeheartedly recommend a good realtor, and say absolutely avoid bad ones. But how do you know?

When you're buying, a realtor will never tell you that you are overpaying -- it would be less commission for them and greater chance the seller will reject or counter the offer which creates more work for them.

When you're selling, they will always tell you that you are priced too high. They want a quick sale with minimal work.

I've used realtors on the buy and sell side of the first house I owned. I was disappointed both times in that they seemed to do almost nothing except show up at the closing for their take.

I've bought and sold two other homes FSBO since then, and the process was much easier.

When I bought my house my realtor convinced me to make a much lower offer than I had planned. Even after the negotiation was all done I still ended up paying less than I had been planning to offer initially. Cost them some commission, but I'll happily use them for any future transactions and recommend them to others needing a realtor.

Not all realtors are out to maximize the commission on a single transaction. Many are like lawyers and are working for the best interests of their client (which is also in their long term interest).

There's lots of things like this spoken about real estate agents that kinda make sense if you view humans as 100% money driven logic machines, but these are not the way humans necessarily behave.

Our real estate agent certainly told us if she thought a house was overpriced. And she told us when she thought we should avoid a house and why - e.g. one was a questionable "flip", another had a huge tree a bit close to the house that we didn't notice (think of the foundation).

We ultimately went for the cheapest house we saw. We had 20% more in our budget but the real estate agent was fine showing us houses that fit our parameters but were less expensive than what we could afford. I did some looking for houses to see too, and when I asked her about those she would say why she didn't show them to us.

I disagree a bit as when you’re buying the realtor doesn’t care which home you buy. So the incentive seems to demonstrate max value to you.

I think a realtor is not incentived to get you the best price once you select a home and are in negotiation because a few thousand doesn’t matter if the deal is skunked.

I’ve bought 3 properties and every time my realtor was really good about showing value and basis for valuation on tons of houses before we visited or offered.

I think it’s very different for selling because you only have one house to sell.

>I've bought and sold two other homes FSBO since then, and the process was much easier

Respectfully, I'm curious... How would doing it yourself be easier?

A good realtor will tell you if you're overpaying, because they want repeat business and referrals. Same for selling.

In the Bay Area, you're looking at 3% of at least $1 million.

Your annual property taxes (In San Jose) on that USD$1m will be on the order of $14,000. Your mortgage payment with a 10% mortgage will be another $4,255/month. That's $65,000/yr just to hold the house, with insurance adding another $3k (earthquake insurance!). Don't forget a maintenance budget of 1%/yr!

Additionally, you're going to be spending ~$8,500 in tax and fees just to close.

To repeat, if 3% is going to make or break your ability to buy the house, you can not afford that house. Imagine what happens when it drops 10% in value? What happens if it drops 10% in value, you need to move and market rents don't cover your mortgage[1]? The Bay Area has 30% swings from peak to trough, 10% is (slightly exaggerating) the peak to trough swing in a single year.

I never said that people who chose to go without an agent were stupid. I said agents were there to keep you from making stupid mistakes - but that was my experience. I had no concept of what the prices were in the area, or how to deal with selling agents who didn't want to close. The agent talked my partner down off the ledge a couple of times.

However, that doesn't mean that other people shouldn't consider managing their own purchase or sale. My comment was purely around the statement that saving 3% would allow you to buy a home.

[1] SF rent - https://medium.com/@mccannatron/1979-to-2015-average-rent-in...

Both redfin and Opendoor go through licensed brokers in each state so is agree with what you posit.

I thought Opendoor are themselves agents/brokers, no?

oops, I realize now that with the way I wrote that post, it reads (inaccurately and unintentionally) to mean that they go through a 3rd party, rather than my intent that one way or another a broker licence is involved.

They are, I just opened some junkmail from opendoor and there was something about OpenDoor Brokerage <MYSTATE> LLC.

Redfin itself has a licensed brokerage sub company in many states.

Real estate agents have three things they offer that until recently you could not get on your own. The first is listing on the MLS. The second is the MLS lockbox so other realtors can easily show the listed house. The third is access to the negotiated forms. All of these you can now get from a startup called Savvy Lane for a flat fee. We listed our house in Portland, paid Savvy Lane $495, and it sold 11 days later. I paid a full 3% to the buyer's agent (the buyer's agent actually plays a bigger role in selling your house than your agent), and still saved like $18k. I'm a big fan of Savvy Lane and hope they do well. Realtors are paid way too much for what they do, particularly on the seller's side.

When we sold our house, we found an agent who was also his own broker. We paid him $500 and he did exactly this. Gave us the forms, put the house in the MLS showing a buyer-side 3% commission, and then made a note that we were representing ourselves and we listed our phone number to call if you wanted to show it. I think we signed something saying he wasn't representing us too.

We had our house listed with a REALTOR for about 2 years prior to that (keep in mind this is during the market crash). But within about 2 months on our own, the house sold.

If you use a flat fee broker on my local MLS, you must respond to all requests for information or showing within 24 hours or the MLS will pull your listing. I was warned that agents are very aware of this and that you better be ready to answer calls at all hours, return every call you receive and to document the entirety of that process. Google Voice has been very useful in that regard.

The catch is you don't know whether you under priced your house for that or well more than that unless you paid an appraiser or broker to help you set the price. Most FSBOs sell for under market.

You don't need an agent or broker to get an appraisal. In fact an agent arguably has a conflict of interest because a lower priced house will sell faster with little effect on their payout.

I did mention that option. It is funny how some people are upset that agents might want to force the price up, and others that they might want to force the price down. Agents have a fiduciary relationship. They must look out for their client's best interests by law. Some are not great, some are not honest. But that is the same for any field.

In my experience most are honest and hard working, but the few with less scruples tend to be the highest volume agents. If someone were looking for an agent, if I knew nothing about anyone involved, I would recommend to start looking with agents with a number of years of experience but just average sales. A large reason for their average sales might just be integrity. Newer agents can be great as well because they will work three times as hard, but they are newer for better and for worse.

You can get a house appraised for around $1200 CAD in the town I used to work in real estate in.

Pay that instead.

You also don't know if you under priced your house if you go through an agent.

Normally your agents pulls comps from the MLS and can articulate their pricing strategy to you. They also watch the market and can articulate to you why or why not their should be a price change during a listing. Again, on average, FSBOs sell for less, enough to make up the difference on agent commission.

"Agents are entrenched, and they will put up a damn good fight to protect their margins" is how I read this.

Also this is a PR move for Zillow to tell agents that they're on their side.

> Also this is a PR move for Zillow to tell agents that they're on their side.

And more likely that they have something in the pipeline intended to do that exact type of disruption.

Or a competitor does and they are getting the agents on their side

Note that this is a 6 year old article. So we really should be discussing how that PR move worked for them. :-)

Also note that a lot of agents, at least in our area, HATE Zillow. I guess I haven't been to a Realtor conference in a couple years, but there were well-attended talks about "how to keep your property out of Zillow". Some Realtors wanted to work with Zillow, but quite a few were trying to keep Zillow out.

I've bought and sold on separate occasions through Redfin and saw no difference between their service for 1% and my previous transactions with a traditional realtor for 5%. They both took me around to see properties, provided neighborhood and property insights, acted as my negotiating proxy, and guided the closing process. I don't understand how Redfin can charge so little, but as it stands today I wouldn't dream of paying 5% again.

Redfin charges 1% for selling the house. They still pay 3% to the buyer's broker. The total fee is therefore 4%, versus the normal 6%, where both sides get 3%.

Why doesn't Redfin force you to use their buyer's agent? Buyer's agents are regarded as the ones at the bottom of the totem poll. Hardly anyone signs a contract with a buyer's agent. You almost always do with a seller's agent. It sounds like they've taken on the harder piece first...

Also, Redfin gave me 1.5% back when I bought a house. Ka-ching!

If you use a broker that returns 2% when purchasing the property, this basically drives it down to 2%. Which is far more reasonable than 6%.

redfin worked great for us as well. we were very happy with them

I used what was termed a "transactional broker" when selling my previous home - I paid a flat fee of a few hundred bucks to them as the seller's agent, plus 3% to the buyer's agent. As the article mentioned, there's not much value driven by the selling agent - I managed all the showings via an app and we sold it in a week. The only real value to me as a seller is someone who can bring me a buyer (hence keeping that 3% commission). Buyer's agents also spend time taking clients to see houses and provide some assurance that people aren't arranging viewings just to steal your stuff, so I see a continued role there.

Honestly, I've rarely been impressed by the real estate knowledge of either type of agent. Their general incentive is to make a deal happen - "seller's" agents will often try to talk up a below market offer if it gets them a commission faster. Likewise, I've only met one realtor who I felt was really trying to get me the best deal as a buyer.

I'm the founder of a real estate tech startup that caters to realtors.

This article was written before Opendoor and before a record breaking $10B was pumped into proptech in 2018.

The consensus now is that this industry is undergoing rapid change. At the bottom end of the market (maybe 10%), iBuyers like Opendoor will likely completely disrupt the traditional brokerage model. Next, you will see discount brokerages (Redfin, Purplebricks, et al) take more and more of the market. Full commission brokerages will still be the mainstream for the foreseeable future, but commissions will come down modestly, even for them.

As purchasing or selling a home is one of the most expensive, most emotional, and most intimidating transactions you will ever do, seeking the help of a real estate agent is generally a good idea. Increasing competition will create more options and more value for consumers than we've ever seen before and that's a good thing.

People love to complain about realtors. Companies like Redfin have been trying to disrupt this market for years. People on HN and other places like to complain that realtors are pointless and that the only reason they exist is they are entrenched.

I posit a different theory, which may well be controversial here, and that is that realtors continue to exist--and charge large commissions doing so--because they provide a service that most people want.

I think of it like advertising. "I never watch ads" is a common catchphrase when decrying ads but again, ads exist because they work.

The job of a realtor, and what they are incentivized to do, is to facilitate a transaction. People might point out that a selling realtor isn't incentivized directly to get the best sales price. They are correct. Why show a house 100 times in the hopes of getting $550k when you can flip it tomorrow for $520k and your work is done?

Thing is: that's what most sellers actually want, even though they might say they want the best price. Most of them are selling for a reason and they just need to sell it and move on with their lives.

Likewise, when it comes to buyers, they too are buying for a reason, typically because they need somewhere to live or they want to establish (more) permanent roots in a given community. The best thing for most of them is to pull the trigger, move in and get on with their lives. It's not to get the best deal. It's not to wait 2 years for the perfect property.

Realtors facilitate both sides of this equation.

Have you ever deal with a For Sale By Owner? I have. I refuse. I won't even go and look at a listing FSBO. It's a nightmare. Those owners tend to be cheap (hence not paying commission), have unrealistic expectations of their property's value, overvalue whatever "improvements" they've done and, worst of all, are emotionally invested so they re more likely to take a lower offer personally rather than as a negotiating tactic.

It's worth noting too that with negotiating in general, it's often better to have someone else do it for you. If you're the guy who can say yes or no you have no fallback. If you represent that guy you now have the position of "my client won't accept that". Think about the psychological difference of rejecting someone personally or just being the messenger.

So add fixed-fee home sales to the other startup traps like dating sites, travel sites and anything to do with "fixing recruitment" (you'd be surprised how many cold call emails I get about this one in particular). Hell, let's add blockchain to that list too, but I digress.

This is dead on. The HN crowd that prefers to buy on their own based on objective measures and data they can find on a property is a tiny minority. Most people want and need human guidance in a complicated situation like buying a house.

The flip side of that is many non-US property markets function perfectly fine without people using buy side agents. Unless you're a large scale property investor you're not buying a property on objective data or insider information, you're buying it because you've visited it and several others within your budget, and this is where you actually want to be. Having someone with financial incentives as strong as the seller's agent to tell you that you're not going to find anything better and you don't want to negotiate too hard on price along for a commission-earning ride isn't that big an advantage, and you'll be paying separately for the legal advice and surveys anyway.

There's also an interesting aspect to a realtor that fills a guiding role. They're the person who helps turn seemingly intangible preferences into tangible search criteria (which can be executed by either party on mostly-public databases).

In fact, in the long-term, as jobs are automated, I'd expect people to spend more time, not less, on taste clarification. Then the pattern is to think about how all guiding roles in society will form to tools that automate the simple bits and let humans spend time doing what they do best. Imagine how much better it would be as a realtor to spend time in conversations inside virtual homes rather than sitting in traffic, navigating database searches, or fiddling calendars.

I was home-shopping recently, and every time I looked at a FSBO home and tried to figure out what the price should be, I got the overwhelming impression I had spent more time looking up comps for the home in question than the owner had. I ran into realtor-sold homes that struck me as priced high for the market, but nothing like the FSBOs.

I agree that there's benefit in hiring a broker when selling.

But I'm not as convinced that brokers are necessary when buying; at least to me, it seems like selling a house will often be more work than buying one. When selling, you need to advertise the house, show prospective buyers around, research the market to better understand pricing, etc whereas for buying it seems less time intensive overall, and easier to find some reasonable options, meet with sellers or listing brokers directly, and write a persuasive offer letter.

I recently bought a condo in NYC without a broker, and if you're interested, I left a comment with more info about my experience: https://news.ycombinator.com/item?id=18927393

It may be a service people want but why do they almost all charge the exact same fee? The market would look less dysfunctional if they all competed on price as well as service.

FSBOs are a dream compared to REOs (bank-owned properties).

I'm in the process of selling right now and I can assure you you are wrong. I got a realtor out of fear that I would be missing out on buyers simply as a punishment for not going through the realtor system. After getting astonishingly little value out of the realtor for what would have been an almost 10k seller fee, I fired them and I did a flat fee listing service, and I'm seeing about the exact same foot traffic.

I have still left the 10k buyers agent fee because you will DEFINITELY be blacklisted by the buyer side agents if you don't pay their fee. So basically I'm paying 10k in cartel bribes to get my house shown to people who could have easily found it on their own on zillow or redfin.

The only reason people are going through agents is out of fair of being screwed over by agents who will push them out.

Realtors are the #2[1] lobbying group in the country, so it's a moderately safe bet in the short term at least.

[1] https://www.opensecrets.org/orgs/summary.php?id=d000000062

This article is from 2012.

+1 - has anyone successfully proved him right/wrong since?

Not quite answering your question, but a16z had a recent video talking about startups trying to disrupt commissions: https://youtu.be/IRPH3K1GXj0

I'm not familiar with landscape in Australia but there's two most popular websites not owned by real estate companies: realestate.com.au and domain.com.au (both owned by competing media companies!)

neither of them tries to touch commissions though.

opendoor.com appears to be doing quite well

As a back-of-the-envelope approximation, if the commission is 6%, and there's at least a 6% chance that having a real estate agent keeps me from doing something stupid on the largest financial transaction I will do in my life, it's worth it. Probably, they do nothing for me I couldn't have done myself, but there is that chance that I would have (for example) bought a house in an area where it could flood, and then not be able to sell it because of that fact.

There may be real estate agents that are not good enough to be doing the job, but a competent one is absolutely worth it for a person who does maybe 1 or 2 house transactions in their lifetime, just for the chance that they might make a really bad decision if they don't have someone experienced to help them think through it.

It can be both "worth it" and "horribly overpriced" at the same time. That's just how cartels and monopolies work. They charge you vastly more than their cost, and use the profit to legalize measures that inflate the "market" price to their desired level.

6 years old thread. Low end commodity RE commissions will be chipped at, but higher end you want an expert. Buying a million dollar house without an expert is fool money gone.

Weirdly I kinda think it should go the other way. Does it require twice as much work (or expertise) to sell a million dollar house than a 500k house? If not, why do agents get paid twice as much?

Because the $200-500k house will often (basically) sell itself.

An agent is incentivized to put in twice as much work (i.e. spending more time with the client, making the place much more presentable, etc).

As more agents enter the business, a lot of their time and effort ends up going into getting clients in the first place. You end up with lots of agents spending more of their time trying to get business, with actual home-sales work taking up a smaller proportion of their time. But the increase in home prices is enough to make up for the decrease in the number of homes sold per agent.

Point being, an increase in home prices, and the resulting increase in commissions (in dollar terms) doesn't necessarily result in any benefit to clients.

Maybe. I personally had a very different experience [1]

[1] https://news.ycombinator.com/item?id=18927393

In SV, million dollar house is a low end now...

Having bought and sold quite a few houses now I can say I won't go down the FSBO route anymore. I successfully bought my first house this way, but selling it was a train wreck. Not fun dealing with selling your own home at all. I eventually listed it with a realtor and sold it a few weeks later.

Later in life though spending larger amounts of money on a home I would always recommend finding a good realtor. Someone friends/family can recommend. There are just hundreds(if not thousands) of pitfalls to buying or selling a home.

On a different note I did have the opportunity to build several data driven local realtor sites a few years ago. They were deceptively simple looking on the surface, I mean all you do is sort and filter house results right? The process of syncing to the RETS system proved to be really clunky and complex. Imagine building a site on top of a database you have to query to discover the tables, fields, and datatypes, and oh by the way it could CHANGE SCHEMA at any time. If your broker was part of multiple MLS (Multiple Listing Services) then you could have to deal with completely different structured DBs. I handled these issues by building a normalized table for listings I could map the data into. MLS data was pulled into a 1:1 mapping table of the same name upon querying the schema. I had to build a Sql Script generator to create the tables. It was very frustrating dealing with schema updates.

The whole process was interesting to me though as to how your listing data is handled when you list a house for sale and how others can gain access to it. Long story short you have to pay to play. Zillow for example is paying (or should be) to access your for sale listing data once entered in the a regional MLS. This is likely several thousand a year conservatively (per MLS). This gains them the right to access the data, however, many times these agreements are 20-30 page legal documents. My first time seeing one of these was extremely uneasy (I nearly didn't sign it). Again fascinating in the case of Zillow I know for a fact they are violating this agreement in our particular region when they hold onto listing data and images past the duration of a listing (sold or removed). They simply just keep it indefinitely it appears. On the other hand keeping up with 100+ MLS agreements across the US would be impossible as well.

IMO, agents are not almost always not acting in buyer's interest. The percentage based commission is twisted in getting the buyer to bid for as much as they can pull.

So, realtors at least for buyers, not such a great value, other than getting you access to lock box to view a property.

That may be true for simple home purchases, but I know some active real estate investors and they really value the services of buyer's agents. These guys don't buy something in the hopes that it will appreciate in future. They buy something only when they know they're stealing it. ("Victims" vary: could be an out-of-touch heir, an overextended builder, a bank that's held onto a repo for 11.5 months...) On the day of the closing, they've already made their money. The right buyer's agent knows the business, the locale, the seller, everything he needs to know. When asked, however, he doesn't know his employer's name. That's valuable.

Agreed, but that's not the market Zillow/Redfin are serving.

In fact, I think, the right term for those kind of agents is whole-sellers, who scout around for kind of deals you mention.

The SF bay area is ripe for disruption and is being disrupted. Buyer's agents here don't have to really put any work together - I know from experience having worked with a couple realtors. Most homes sell here completely free of contingencies (loan, inspection, appraisal), thus once you as the buyer commit, you commit.

Sellers here don't tend to be sentimental. Just because you attach a nicely written letter with a photo of your family and your dog doesn't mean the seller will turn down an extra $20k.

Thus, a buyers agent really won't be able to negotiate a better deal for you than you can get for yourself. It's highest bid wins, and buyers' agents will always tell you to bid more so you have a better chance to win the house (something obviously self-evident).

Also in the bay area, especially the south bay, housing prices are at the $1.5 - 2.5m range. Tell me how whatever service for the buyer can possibly worth $45k - $75k for putting together an offer for maximum amount with no contingencies. Realtors are entrenched but there's a reason why these real estate startups are proliferating.

Homie is a VC backed startup replacing real estate agents in Utah and Arizona and they seem to be doing very well. Massive adoption over the last year. I feel pretty confident that agents will eventually be a thing of the past.

I hope you're right, but I bought my current house with Homie and it was a nightmare. Their website is a pile of crap that is so riddled with bugs. I was a buyer but got several emails regarding the "sale" of my house (I wasn't selling a house). Their website was so broken that I couldn't even fill the forms out, and ended up making phone calls.

Then they face a basic blackout from the entrenched real estate mafia. No selling agents want to work with buyers from Homie because the buyers agents are supposed to show the house. But when you have no agent, it falls on the seller, and they flat out told me no several times unless I agreed to buy it through them. I can sympathize with this, but it sucks as the consumer. This is a problem they will need to overcome.

I love the idea of Homie, but if you're going to push the software/automation angle, you better have software that works. You also gotta figure out how to twist the arm of that cartel. I believe in their mission enough that I actually looked into applying there so I could fix those bugs, but I get the impression that they don't hire in-house engineers and possibly use contractors. I'm a senior engineer who worked as a real estate agent for a couple years, so I think I would have been pretty valuable hire for them. I'm also super passionate about disrupting that industry because I feel they've taken advantage of me in the past much. But, alas, what can you do.

One of the ironic parts of "Homie" is that they're value proposition depends on existing real estate agents.

They claim to charge sellers $1,500 to list and no more. Sounds good so far. How do they get buyers?

They claim to give buyers $5,000 back at closing. Cool, but where does that money come from you might ask?

The FAQ's imply by only buying listings currently available with a traditional real estate agent.

Exact wording from their FAQ's: "If a non-Homie seller has listed their home on the MLS, they’ve agreed to pay a buyer agent commission (BAC), usually around 3% of the price of the home."

The more sellers choose them, the less successful they will be at attracting buyers.

That's why so many of these "Billion dollar disrupters" go under. They need the existing system to succeed.

This entirely depends on the real estate agent. For the company I work for, a decent amount of purchases are made from afar, where an agent really helps with finding and buying a property. Some of our purchases come through with "pocket listings", where an agent knows of a house or piece of land that someone would sell, and approaches the seller with a buyer already. How would you do this with tech?

There's also the agent's access to their rolodex, which new agents will not necessarily have, they'll depend on leads from zillow, trulia, knocking on doors, etc.

It's also "free" to buy with an agent.

For most higher end listings, it is expected that you do participate in the monthly mailer real estate magazines, that's just the cost of doing business. Brokerages do buy these in bulk, and can offer the discounts to an agent to participate in this sort of marketing.

All of this is pretty tough to do, you can't just wrap the MLS in a skin, make some signs and be in business. Real estate isn't just a tech problem, though there are some things you can do with tech to make the buying, researching and selling process easier.

You have to have distinctions for your specific market, some of these don't make sense nationwide, but are very important locally. For example, a "deep water canal for sailboat" is a term that comes up pretty often in Florida, an Ohana Suite is something that is often requested in Hawaii. Local knowledge matters unless you're in suburbia where literally every house fits into a formula consisting of: ++school - commute time + square footage - age of house +++in monthly payment. The formula would be different for every buyer.

Disclaimer: these opinions are my own, not of the company i work for.

Weird/unrelated anecdote: Nobody in Greece uses realtors.

I can't remember the exact historical reasoning, but it starts with the Ottomans. The Ottomans controlled the Greeks since about 1453, and when they were finally overthrown after the Greek War of Independence, there began about 120 years of political turmoil until the end of the Greek Civil War.

So, post-civil war time. Tons of people are in exile, the country is torn by rival factions, and everything is in an even worse state than when the Germans occupied it. After hundreds of years of being occupied by foreign powers, there isn't really a clear indication of who owns what piece of property. Most of what you went by was "Well, somebody in my family used to own it." Cool.

When it comes time to buying or selling property, there aren't really well defined "properties" per-se, or even a market for them. Somebody might just come up to you and tell you somebody else wants to buy your land, and if you just give them some cash up front, they'll get you a really good deal. So you give them some cash, and either they never return, or they come back with a really horrible deal. If they claim they're going to help you with the legal paperwork, they'll almost definitely sabotage it.

Today, if somebody tries to help buy or sell a home in Greece, the average Greek will think they're a grifter trying to make a quick buck. To make matters more difficult, apparently there's been multiple confusing ways of legally registering and searching properties, and the red tape involved with completing the title transfer is crazy.

So there's very few registered realtors in Greece, and basically nobody uses or trusts them. Meanwhile, the country is fucking stunning and there's abandoned property all over the place that nobody can shift. An ocean front property in the Peloponnese can go for a hundred grand. But good luck finding it or having any help in acquiring it, because they're all FSBOs that pin an advertisement on a telephone pole in the nearest city.

I don't know much about the subject, but one google search and it looks like that's not accurate. They call their real estate agents just "estate agents". There are many... https://www.justlanded.com/english/Greece/Greece-Guide/Prope....

Interesting when you read this and have just started a real estate startup [1].

There are many segments in real estate that are ripe for disruption, Zillow is not the end all be all of real estate. Take cap rate calculation for instance, this is something very important to real estate investors, but Zillow hardly has a product that addresses it and tries to predict it accurately. Their strategy seems to be let's go after mom-and-pop buyers who just learnt how the internet works. If Zillow could bring in a fraction of tech you see in a product like Facebook or Github for instance to the broken industry of real estate instead of just showing pictures of properties with a few other metrics next them then the industry could be disrupted.

[1] https://caproi.com

Your company as an idea is a really interesting foil to that of Robinhood and the like, but as an aside, having the text on your landing page being unselectable is a strange design choice along with the ominous graph at the bottom of the page that is very nondescript for users outside of the market.

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