Why are real estate commissions so high?

Sky highReal estate commissions are always on the minds of home sellers and real estate agents. Commissions are high. Too high, most home sellers argue, especially after the inflation of home prices over the past 15 years. The prices of homes has generally doubled in the past 15 years. At the same time, the typical real estate commission rate has effectively only fallen from 6% to 5%. In 2000, the commission for the average home ($180,000) might have been $10,800 whereas today the commission would be 5% of $340,000 = $17,000. That’s about a 60% increase.

Yet, few Realtors will compete for sellers by advertising that they will work for less than full commission.  Recently Inman.com asked why is that?

 

Why have commissions not come down?

Philosophically opposed

1. Mostly it is philosophical. Organized real estate has developed into the largest segment of the economy. It is a big, BIG industry with parameters well established and relied upon by supporting industries, other clients, real estate agents, brokerages, photographers, real estate associations, media outlets, home builders, mortgage agents…One consumer asking for a cut in commission is not going to do well in the face of so many other players and established rules.

 

Does not work

2. It does not lead to the home seller making more money. Most Realtors feel that home sellers should focus on getting the most out of their Realtor and the best price for their house rather than trying to save a few thousand dollars in commission.

 

Bad for business

3. Realtors say that by reducing the overall commission, cooperating brokerages are reluctant to show and sell the listing. It leads to the listing taking longer to sell and selling for less.

 

Can’t afford to

4. Realtors have high expenses and margins are thin. They can’t afford to reduce commissions. If you have to compete on price, that is a race to the bottom. No company that competes on price lasts very long.

 

Don’t have to

5. With the strong real estate market and business coming from past clients, established real estate agents have enough business already. It takes 3 to 5 years to break into the business. Once established, agents don’t have to reduce commissions to attain listings. Listings come to established agents without commission reductions because home sellers trust we can get the job done.

 

What about those agents that are successful competing on price?

Discount brokerages and brokerages that take advantage of new technology and new ways of thinking are experimenting with sustainable formulas that allow them to compete on price and win more business.

 

Lower overhead

Among those Realtors who to compete for listings on price, 55% said they are able to do so because they have lower overhead expenses than full-commission brokers or agents.

 

Cost saving technology

52% said they employ technology that makes them more efficient, generating cost savings that they can pass on to consumers.

 

Cutting the fluff 

Cutting back on newspaper advertising and other marketing expenses is the third reason given (by 32%) of respondents. Few real estate agents have actually sold a house because they have advertised it in the local newspaper and glossy real estate magazines.

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