Real-Estate Rebates To Spread in 2010?

(MoneyWatch)  The culture of the real-estate rebate might be spreading.

NJ.com, the website of the New Jersey Star-Ledger, reported Monday night that there's a bill in the New Jersey state legislature to allow real estate agents to pay their buyer clients a portion of their commissions at closing.

In the story, New Jersey state senator Nicholas Scutari is quoted as saying that Jersey is one of 11 states that don't allow the incentive. Why? Either restraint of trade (if you have the pro-shared-commission viewpoint, you see them as rebates) or an attempt to keep the industry from being riddled with corruption (if you have the anti-shared-commission viewpoint, you see them as kickbacks). To offer a little historical perspective, three years ago, a story by James R. Hagerty of The Wall Street Journal noted that 15 states didn't.

But even though a handful of states have yet to allow shared buyer commissions, three dozen states have. And yet the firms that share commissions -- ZipRealty and RedFin are the most prominent -- haven't taken over the real estate game. While ZipRealty is now a $100 million company in terms of revenue, it has lost money in each of the past three years. RedFin, which is private, doesn't disclose its financials regularly, but a 2007 disclosure to Guy Kawaski showed financials of a typical start-up, and the company didn't claim to turn its first profit until June of this year.

Why if shared commissions seem like such a natural idea are shared commission firms not taking over the world? Because personal service is expensive. It's why accountants are expensive, why lawyers are expensive, why walking into a doctor's office -- even before the medicine and the tests -- costs a lot of money. If you want the time of a professional who has amassed expertise, you're going to pay for it. (Disclosure: I am a licensed real estate agent in New Jersey, where I don't work, and in Manhattan, where I do. And yes, I went to a fancy college.)

Now you may flinch in horror at my lumping real estate in with all those "real" professions. And I think that's a disservice that the industry has done to itself, that we've kept barriers to entry so low that it's possible for a newbie with a license to work the territory of a 20-year-broker. But I can say, having worked with both, that there's a real difference in the level of advice and service that you get. The real estate industry should recognize this, and work hard to raise barriers to entry, standards and training.

But that brokerage won't be cheap. A few years ago, the British firm Foxton's came in to the Northeast, trumpeting that it was going to remake the real estate market with 2 percent commissions. They failed, and for one simple reason: 2 percent was not enough money to charge to cover the provision of high-quality real estate services.

Now you may say, "hey, I don't need high-quality services, I have the Internet." And I agree that the Web is changing the industry. Ultimately, I agree with Matthew Haines, the founder of real estate data site Property Shark, who once told me that more data will provide more liquidity, and that the liquidity will allow lower transaction costs. We've seen that happen in the stock market, and I think it will happen with the real estate market. Overall, I think that commission rates -- which rose in 2008 as agents had to work harder to sell properties -- will probably fall over the next decade.

But I think that there's only so far that they can fall, because there's only so much liquidity you can pump into a market for highly priced assets where there are a limited number of individual trades. Americans buy five million homes a year (six million during the boom), but they're not going to buy ten million.

What about the travel agent analogy? Well, the Internet has certainly helped make travel agents scarce (though I still enjoy using one), but the consequences of a travel misstep and a real estate misstep are not the same. If you book a bad flight to Paris, you're miserable for six hours. If you buy the wrong house, you may be in for a miserable six years.

We've seen from the unspooling of the market during the downturn, that making bad decisions has huge, far-reaching devastating consequences. I hope the shared-commission firms steer their customers away from those, and that their customers get the answers they pay for. But whether shared commissions come to Jersey or not, I don't think it's a death knell for full-service brokerage.

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