There are people of a certain age who can still recall driving into a gas station and having the attendant clean your windshield and pump your gas while you sat in the car. The price of the service was baked into the cost of the gas, of course, but few people cared when gas was selling for 25 cents a gallon.
The same generation remembers meeting their real estate agent who would accompany them to home showings carrying an MLS book as big as a phone book, filled with property listings and prices. Sometimes the agent would rip a page out of the MLS book so the consumer could see what homes were for sale in a neighborhood. Back in the pre-technology era, that was a huge time saver over finding a For Sale sign planted in a front lawn, writing down the address, and asking your broker friend for the price of the home.
The commission back in those not-so-good old days, was typically 6% or 7% of the sales price of the home.
As when you could fill up your tank for $5 or so, the traditional commission didn’t seem so bad when homes were priced at $20,000 or $30,000.
Today, More than 90% of Consumers Start Their Home Search on the Internet.
Sites like Zillow and Trulia have changed the way consumers search for homes. MLS books as big as phone books? Heck, there’s a whole generation of home shoppers who have never opened a phone book and may not even know what one is.
And today’s commissions? Still typically in the 6% range. So what do real estate agents do to earn a $24,000 commission on a $400,000 home? Are the services agents offer worth 6% of your home's value?
Here is a Snapshot of Some of the Services an Agent can Provide:
- An agent can help you find a lender in order to initiate the pre-approval process.
- An agent can advise you on the price of a home you can afford to purchase, based on your income, employment history and credit score.
- They can comb the Internet and find a home that fits your pocketbook, the size you desire, and the neighborhood.
- An agent can give you insight about a neighborhood, such as the cute coffee shop or a grocery store that carries sushi and organic baby food.
- An agent can tour a home with you, pointing out various features, such as granite kitchen countertops and the number of bathrooms.
- The agent can provide you with information on comparable homes in the area.
- If homes are a bit too pricey in the neighborhood of your dreams, the agent can recommend other neighborhoods where you might get more bang for your buck with your home buying dollars.
- Once you’re ready to pull the trigger, an agent can help you determine the price to offer, inclusions to ask for, etc. .
- After the inspection takes place, an agent can help you come up with a list of things you want fixed before you sign on the dotted line.
- If you are selling the home, an agent can help you come up with a price, give you tips on de-cluttering and presentation, and market your home.
That is quite an impressive list - and those are just the services the agent is providing you. Without a doubt, the agent is sure to be spending even more time building his or her own business by sending out flyers to existing homeowners, researching information about home prices in neighborhoods, and possibly even posting blogs on everything from interest rates to hot trends in home design.
“Indeed, many REALTORs spend most of their time prospecting for clients than actually selling houses,” according to economist Alex Tabarrok.
No one denies that the a real estate agent's services are valuable.
The bigger question consumers should ask:
Are These Services Worth 6% of What is Most Likely my Biggest Financial Asset?
When you put these services under the microscope, many of them are equivalent to the gas station attendant cleaning your windshield. With today’s technology, consumers increasingly are doing much of the home searching homework themselves.
Need to scope out a neighborhood? There’s no problem viewing hundreds of homes with photos and videos available online.
Need to know "how much house" you can afford? There are plenty of apps for that.
Will the agent give you some incredible insight into a home by walking around it with you? With the popularity of shows on every aspect of the house hunting process on HGTV and other networks, consumers know more about what to look for in a home than anytime in history.
The same is true for home sellers.
Do you really need an agent to tell you that popcorn ceiling needs to go before you list your home? Heck, that was on HGTV’s “Designed to Sell” a decade ago.
Mike, a mid-level healthcare executive in the Denver area, spent about 10 weeks looking for a home in 2011 with a traditional agent. That was a time when there was a smorgasbord of foreclosures and distressed homes on the market.
Mike has an excellent salary and credit history. He also is old enough to remember the days when you didn’t pump your own gas when filling up at a service station. Mike realizes he is an indecisive and difficult client and is kicking himself for not pulling the trigger when he could have snapped up a bargain.
Yet, putting his “not-buying” remorse aside, Mike doesn’t think his agent brought a lot of value to the house-hunting process:
Donna, a traditional real estate agent for more than 14 years in Colorado Springs, disagrees.
Donna had been selling about 25 homes a year, which she said is more than two thirds of the agents in the Springs. Even working part-time, she expects to handle 15 or 16 transactions a year. When pressed, she admitted she typically puts in 10 hours a week to her real estate business, while putting in up to 90 hours a week building her fledgling IT company.
Yet, a growing number of experts are finding themselves siding with Team Mike, rather than with Team Donna, when it comes to paying the full real estate commission.
Economists points out that in other places in the world, agents perform the same services at a fraction of the cost.
This is how economist Alex Tabarrok, who is an associated professor of economics at George Mason University, described what he calls the Real Estate Commission Puzzle:
That is neither good for consumers nor real estate professionals, Tabarrok points out:
A trio of economists ⎯ Panle Jia Barwick, Parag A. Pathak, and Maisy Wong ⎯ examined 653,475 home sales from 1998 to 2011 and found commissions were “relatively uniform despite…advances in technology that have reduced search costs for buying and selling properties.”
So Why do most Consumers still pay the Traditional Real Estate Commission?
Nobel Prize economists George Akerloff and Robert Shiller, think the know. They addressed the issue in their recently published book, Phishing for Phools. In the book, the economists note there is an 80% chance you will own your own home by the time you turn 60 in the U.S.
One reason most Americans don’t question the need to pay a 6% commission, is since they buy so few homes, it never dawns on them to question the traditional commission structure. “The purchase of a home, for most of us is quite infrequent,” Akerloff and Shiller wrote.
Also, just like when we pumped out own gas, homebuyers often have the impression their broker is representing them for free, since the seller is paying the buyer broker’s commission.
For the seller, there is no difference between selling a home for $424,000 and paying a $24,000 commission, then selling the home for $400,000, with no commission. In both cases, the seller nets $400,000.
Mike, the healthcare executive who was hunting for a home during the Great Recession, is not only kicking himself for not buying a home, but for using a traditional real estate agent when he was looking for a home.
If Mike ever decides to enter the home buying fray again, he absolutely will not use an agent who expects to split a 6% commission with the listing agent.