Chipping Away At Realtors' Six Percent
Editor's Note: After our broadcast we heard from Stephen Cook, a Vice President of the National Association of Realtors. In his letter he said, "All real estate commissions are negotiable and the average is 5.1 percent, according to the most recent available data." That number came from an industry trade publication, REAL Trends, and was an estimate of average commissions charged by the nation's top 500 brokerages.
A critique of that survey, written by John C. Weicher, Director of the Hudson Institute's Center for Housing and Financial Markets, found REAL Trends' commission data limited by its focus on the largest brokerages and most expensive homes; the most likely situation in which agents charge a lower than 6 percent commission fee.
And, the Government Accountability Office – Congress' investigative arm – reported in a 2005 study that commission rates continued to be about 5 percent to 7 percent of a property's selling price "regardless of local market conditions, housing prices, or the cost or effort required to sell different properties."
Finally, in Cook's letter to us, he wrote, "The National Association of Realtors is a trade association and does not "govern" the real estate industry, and, there is no such thing as a national multiple listing service." In fact, there is no national Multiple Listing Service, instead according to the Justice Department, there are about 1000 multiple listing services, 80 percent controlled by members of the National Association of Realtors and governed by its policies.
We reported in our story entitled, "6 Percent", that an Internet-based real estate company, ERealty, went "belly up." To be precise, ERealty was purchased by Prudential Real Estate Affiliates, at a loss of about $33 million to ERealty's investors, according to one of those investors, Steve DelBianco.
Even with today's housing slump, real estate agents will pull in about $60 billion this year. And the reason is, as any homeowner knows, they charge a six percent commission on the price of every house they sell. So, for instance, a home that goes for a half a million dollars will net agents $30,000 right off the top.
For realtors, the six percent commission is sacrosanct. It's remained in place, even as the price of homes has quadrupled over the past 25 years.
But as correspondent Lesley Stahl reports, things are beginning to change. What happened to travel agents, stock brokers and book sellers – the encroachment of the Internet – is beginning to affect real estate agents. And the sacred six percent is under assault from online discounters.
Lehrer Willis and his fiancée Bridgette Takeuchi of Seattle, young and Internet savvy, took a big chance when they decided not to hire a traditional real estate agent. Instead, they both sold their old house and bought a new one online.
"What did you have to do yourselves that the traditional real estate agent would have done for you?" Stahl asks.
"Print out the flyers, you know, that would go on our signposts, and describe our house to potential buyers. And then we held an open house ourselves," Willis recalls.
What did they didn't get, says Takeuchi, was having a real estate agent to show the house and actively sell the property.
"Who's out there, really pushing for us?" Stahl remarks.
"And that's what I kept saying," Takeuchi acknowledges. "Those insecurities started to really seep in for me and I started to really question. It wasn't until the ink was dry on the paper that I was a hundred percent sold, to be honest."
Willis says they saved $26,000 by not going through a traditional realtor and paying a commission. "Now we can walk down the aisle. Actually, pay for people to eat at the wedding," Takeuchi adds.
They used a real estate company called Redfin, an online discounter based in Seattle. It has a cadre of e-agents who, for the most part, do their work on computers and on phones. Rob McGarty says early on a number of people called who were skeptical about the whole idea.
"Are there real people there? Is this just some shop in Bangalore! A call center taking real estate transactions? And, you know, after they talked to us [they] realize we were real agents in the same city they were in … they were like: 'Whoa, this is for real!'" McGarty explains.
Willis and Takeuchi's agent, Kelly Engel, used to be a traditional agent. "I had done quite a few deals where I spent maybe five hours total working on the deal. I never saw the house. My client found it online and, you know, I would make $12,000 for four hours of work. And I thought this cannot keep going on like this. Someone, I felt like I was going to get caught! You know, someone's going to see that this is happening and I think a lot of them hold that truth inside of them right now. They've got the clients that are finding houses on their own. They make $20,000 and did 10 hours of work," she says.
Glenn Kelman may look like a bike messenger, but he's an Internet entrepreneur, the president and CEO of Redfin. "Real estate, by far, is the most screwed up industry in America," he says. "And we feel like things that Amazon or eBay or Yahoo have done of other industries, we can do for the real estate industry."
Because of the Internet, he says, his agents can handle many more transactions and charge the clients much less. "Because they didn't have to sit in the back of a Lexus with a real estate agent, and use up all of this time, we're able to pass on a lot of savings to them," he says.
And he does mean "a lot" of savings. Usually, a seller's agent and a buyer's agent split the commission, so they each get three percent. But when Redfin represents the seller, it charges a flat fee of just $3,000, and that's it. That alone drives the traditional agents crazy. But then, when Redfin represents the buyers, they give them money back.
"We've refunded over $3 million in commissions to our customers," Kelman says. "When we're the buyer's agent, we take our commission, which is usually three percent. We keep one-third of it. And we give two-thirds of it back to the buyer. So, on a $1 million house, we would get $30,000 normally. But we only keep $10,000 and give $20,000 back to the buyer."
How is he making money?
"The average agent processes eight deals a year. We have an agent that can do that every week," Kelman explains.
"Are you spinning me?" Stahl asks.
"I mean, seriously," Kelman replies.
There's no way to independently check the number of deals his agents close in a week, but it is clear that they do make it easy for their customers who can sit home at night in their pajamas and click on the Redfin webpage to read critiques of houses in their price range, see what comparable homes in a given neighborhood have sold for and to even tour a house they might be interested in.
Redfin displays, for free, information that's part of the package you pay a traditional agent to get. "So, for example, if we were looking for the turkeys in this market, we could find properties that haven't sold in the past 45 days," Kelman explains.
If you like the house, you can click the "start an offer" button. A Redfin agent at his or her computer in the office contacts the seller's agent and negotiates a price. Redfin then coordinates all the paperwork for a loan and closing the deal.
Willis and Takeuchi say the Redfin agent helped them come up with an asking price. Eventually, they sold for $10,000 under, which Willis says they're happy with. It was in their range, he says.
"But perhaps they've left quite a bit of money on the table if it had been put in the hands of somebody that really knew the business," argues Deborah Arends, who has been a top RE/MAX agent in Seattle for 18 years. She says that Redfin customers get the "Wal-Mart treatment" when what they really need is an experienced, hands-on professional. And besides, she says buying a house is a high-touch business, not high tech.
You have to go and see it for yourself. "This is not like buying books on Amazon.com. Real estate is typically people's largest investment," Arends argues.
"If someone comes and challenges you and says, 'You don't do enough for the six percent.' What's your response?" Stahl asks.
"My response is, 'I'm not the agent for you,'" Arends says.
Some agents have been known to lower the commission, but Arends says to give clients her ultimate, she needs to charge the full six percent.
"Now here's what Glenn Kelman of Redfin says: 'The price of homes has gone through the roof, pardon the pun, over the last several years. And yet your commission has still stayed at six percent,'" Stahl remarks. "You're not lowering your commission to give the buyers this advantage. You're just raking in the money?"
"Wish that were true," Arends says. "I think what's happened is a lot of expenses have gone up, everything from postage to gas, which affect real estate agents' profits."
She says she has to spend money to make money for her clients, especially when they're trying to sell a house in today's down market.
To move a property, Arends comes up with a strategy, then creates buzz by blanketing neighborhoods with fliers and sending postcards to notify other agents. She also spiffs up a house for viewing. As an accredited "staging" professional, she polishes, re-decorates and de-clutters.
"It is the single biggest moneymaking thing a seller can do, because getting their own belongings out will allow buyers to imagine themselves in the home," she explains.
When the house is ready, she then targets potential buyers as well as agents, and holds an open house to dazzle them.
"Redfin very proudly says that they returned in rebates $3 million last year to its buyers," Stahl remarks. "You can't boost of anything like that."
"Absolutely not," Arends acknowledges. "I don't know how to answer that one."
Other agents have an answer: try to drive the discounters out of business, which is what happened to Steve DelBianco.
He helped launch the first Internet discounter, eRealty, in 1999 in Texas. No sooner than they were up and running, the local agency in Austin that regulates the industry adopted a new rule that effectively barred e-realty from listing houses for sale on its Web site.
Then, DelBianco says, "They sued us for breaking the rule they created to shut down eRealty's ability to compete."
"Was the main objection, do you think, the cutting of the commission?" Stahl asks.
"That was the only objection," DelBianco argues. "Realtors embrace the idea of some automation and some use of the Internet. But the minute it cuts into their pocketbooks, well, all hell broke loose."
eRealty won the lawsuit. But then it ran into the National Association of Realtors, the industry's powerful governing body. In 2003, the association issued new rules of its own, ones that threatened to block Internet discounters' access to the multiple listing service, or MLS. That's the data base that lists virtually every home for sale in the country. It's the lifeblood of any agent or brokerage, including discounters like eRealty.
"The threat of the new rules meant that our investors closed their pocketbooks and new investors wouldn't answer the phone," DelBianco explains.
"'Cause they knew if you couldn't get access to the MLS, you were dead anyway, and they knew that," Stahl remarks.
"They cut off our air supply. They knew it," DelBianco says.
In the end, eRealty went belly up. DelBianco says the company lost $33 million.
The Justice Department is now suing the National Association Of Realtors, or NAR, for adopting policies that are "fundamentally anti-competitive and harmful to consumers." The NAR told 60 Minutes those accusations are untrue.
"Now the NAR argues that it's their agents who contribute to the MLS. That's their listings, and that they should, therefore, have the right to withhold them since they belong to the agent. Doesn't that make some sense?" Stahl asks DelBianco.
"I don't think so," he replies. "When you hire an agent to help sell your home, you're paying them a six percent commission to put your home in front of as many possible buyers so that you get the best possible price in the shortest time. How does it serve your interest then if they suppress the showing of your home to a whole category of realtors who show it online?"
NAR has suspended the rules pending the outcome of the case, which is scheduled for trial next year. But Redfin's Glenn Kelman says the effort to shut down the discounters continues.
"The traditional brokerages have figured out nine ways from Sunday to try to screw up our business," he says.
Asked if they're targeting him, he says, "Oh, absolutely."
One way is to influence local and state legislation and rules. The brokerage industry has a powerful lobby.
"The people who made the rules are the real estate agents themselves. And almost all of the rules are for the benefit of those agents. They have control of this industry and they intend to keep it," Kelman argues.
Eight states have "minimum service laws" that require realtors to provide a level of service many Internet discounters can't afford. Eleven states flatly prohibit rebates.
"Oregon is a perfect example of that. We would love to go into Portland, Oregon. But there's a law against giving people who buy a house part of the commission back," Kelman says.
"Are you going to try to go national?" Stahl asks.
"Our goal is to get in every major market in America by the end of 2008," he says.
Asked if he expects the fighting to get more intense if he goes national, Kelman says, "We expect it to be hand-to-hand in every market that we go into. And so we're just going to go door-to-door, house-to-house, and try to change this industry."
Produced By Rich Bonin
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