Real Estate Services Cost Too Much

That is not a very popular statement within the real estate industry. And, to be fair, I can only speak to the costs incurred by consumers in Maryland and Washington DC.  Let me also add that I, as an individual agent, am powerless to change them. I should also add that the services I am referring to are those provided by real estate agents. While the cost for other services (mortgage origination, home inspection, settlement, etc.) vary from provider to provider, I don’t know enough about their cost structure to honestly include them in this piece.

Real estate services (in home sales) are paid primarily out of funds that transfer from the buyer to the seller at closing. In sales that involve a listing entity (either a broker or a builder) the amount of monies paid are dictated by the listing agreement between the seller and their broker (in new construction, the broker is often just another division of the builder’s corporate umbrella).  All commission rates are negotiable.  For as long as anyone can remember, individual home owners, wishing to sell their home have been presented with a commission rate of 6%.  This rate is not set in stone. It just happens to be the rate that almost every major broker begins and ends their negotiation.

There are federal laws prohibiting brokers from colluding with one another to set any rate. Most of them just happen to (wink, wink) offer the same basic rate.  The figure is so entrenched in the public’s consciousness, any deviation is referred to as a “discount” rate. Within the industry, those attempting to offer a rate below the “standard” are viewed in a negative fashion. The actual rate that consumers end up paying does vary. It is usually somewhere between 5% and 6%.

It has always been that way.

Ask any of the major brokers why the 6% figure is etched in proverbial stone and they will immediately share there is a cost to providing the services and over time it has averaged out and in order to do the things necessary to sell a home, it will usually cost 6% (this includes legitimate profit that any business has a right to seek).

There was a time when an agent listing a home in this area did have significant cost associated with the sale of the home.  Regardless of broker affiliation, an agent had to create several copies of the disclosures signed by the home owner. The agent had to make several copies of the listing to place in the loose leaf binder listing book that would be available to potential buyers that visited the office. The agent would have to create and print brochures to be placed in the home. The agent would have to order a sign to be placed on the property advertising it for sale. The agent would have to have extra keys made for the home to facilitate viewings. The agent would have to place a lock box on the property. The agent would have to design, print and mail postcards announcing the availability of the home. The agent would have to place ads in the Washington Post and local papers. The agent would have to hold open houses so that potential buyers could view the home. The list goes on and on. In addition, the listing agent has to share a portion of the commission with the agent that is representing the buyer of the home. (Strange. The seller has always been asked to compensate the individual that is working hard to have their client purchase the home for the least amount of money and under conditions that are favorable to the buyer.)

Times change. Commission rates remain the same.

The internet has changed the landscape significantly. There are no more loose leaf binders. As a matter of fact, the need for anything printed is fast dissolving into bits and bytes saved in clouds. The signs placed out front and the lock box on the door are re-usable items. Of course, they have a shelf life, but the cost is not a one time – one use event. Ads in the Washington Post and any other publication are done online (if they are done at all). Every broker has the ability to syndicate the listing of a home in literally thousands upon thousands of websites. It is one of the side benefits of being a member of the local multiple listing service. List is once and the information becomes publicly available all over the world.

Times have changed. The cost incurred by an agent selling a home should have decreased. (I do accept that as much as it would seem that costs for manufactured goods should decrease with the increased use of robots and overall costs for many things that should go down….they don’t. Savings from cost cutting measures are rarely passed on. Those savings are rerouted to the coffers of ownership under the guise of “rewards of capitalism”.)

Another mystifying fact is that the commission structure seems to be the same, regardless of the location of the property. This has been explained away with “everyone must be treated the same” and “the higher the value of the property, the greater the amount of marketing dollars needed to sell.”.  It does not matter if the subject property is a one bedroom condo located in the heart of the city or a three bedroom home in the suburbs or a two bedroom cottage in a rural area.  The commission remains the same if the home is 600 square feet or 6,000 square feet. There is no difference if it sits on .15 of an acre or 15 acres.  Most of the time, a seller has to pay 6% to sell a $100,000 home or a $500,000 home. The commission doesn’t change.

It would seem rather obvious that the amount being charged has no relationship to the item being sold other than it is a percent of the final sale.

One of the closely held secrets in the real estate industry is that often it takes more time and effort to sell a lower priced property than a higher priced property. (Note: this is a general rule that excludes distressed properties and vanity properties priced well over one million dollars).

From time to time, there are brokers that attempt to challenge this price structure. There efforts are impugned and ridiculed by the bigger players in the industry. It used to be, the only way to reduce the commission offered was to either offer an “a la carte” menu of services for a certain price or offer limited services for a certain price.  Now, it is quite feasible to offer full services at a price point below the industry “standard”.

All commissions are negotiable. The broker draws the line in the sand for how low they are willing to go. Agents, in this area, have to work under the supervisory umbrella of a broker. The broker has the final say. It does not matter what the agent believes, the agent can only do what the broker allows.

I am an agent. There are those that would suggest, if I don’t like being subjected to the final say of a broker, I should take the steps to become a broker myself. No argument from me on that. I just do not have the time or wherewithal to move forward in that direction.

I have just always wondered why real estate services cost too much.

I will end with yet another question….”Why does it cost the consumer the same amount of money if their home sells in one week or one month or one year?”

Note to any Federal authorities….I have no influence with any brokers and nothing shared is to suggest that anyone should collaborate on rates. I am willing to accept that it is just coincidence that all major brokers appear to charge pretty much the same rate.

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