Why real estate commissions will fall
An industry insider itemizes the factors that will soon drive down brokerage costs.
By Les Christie, CNNMoney.com staff writer

NEW YORK(CNNMoney.com) - Factors beyond the control of real estate brokers will drive down their commissions over the next few years. That's according to Brad Inman, the founder of Inman News, an independent real estate news service.

The most crucial of the 10 factors Inman cites are:

Latest home prices

  • The recent launch of web sites that perform many of the traditional agent functions. These new sites will provide such services as free home appraisals, neighborhood information and advice to sellers on how to market their properties. They have prompted the popular press pose tough questions: Do you need a Realtor? and Do you need to pay 6 percent? And on the buy side, according to Inman, the Internet has become the de facto sales agent. "You're now doing 90 percent of the buy side work yourself," he says. "That should reduce the 3 percent of the commission that goes to the buyer's agent."
  • The Department of Justice antitrust lawsuit against the industry's main trade association. The legal issues facing the National Association of Realtors have turned a spotlight on the industry -- and its commission structure. The DoJ charges that realtors collude to prop up commission rates through such anti-competitive actions as "boycotting" discount broker's listings and lobbying state legislatures to enact regulations against unbundling of services.
  • The departures of some industry veterans for firms that practice new business models such as discount brokerages or fee-for-service models. Have they recognized that change is coming and want to be in the vanguard?

All 10 of Inman's factors can be read at the Inman News web site.

Reaction

At the end of his analysis Inman invited reader comment; he got it. The piece unleashed a blog-storm of reaction from brokers and consumers. Some of those responding thought Inman had lost his mind. One asked if he was on drugs.

But many of the responses were more measured. One blogger wrote that it was all about choice. "A buyer may choose a broker just to be the first to know when a property hits the market or even BEFORE it hits the market. Brokers know these things, not machines. A seller may choose one who has a reputation for getting the best price quickly (great marketing/sales skills)."

Many bloggers emphasized the skills and knowledge that experienced brokers bring to transactions and concluded that consumers are willing to pay for expertise.

But another comment pointed out that the industry is filled with brokers who merely attended an 80-hour class to receive their licenses. Vast number of people became agents during the past few years. How much in the way of expertise or experience do they provide to their clients?

One blogger cited the tendency for agents to show properties that paid them the highest commissions and said that because a flood of details on homes, including photos, are available on-line, that more consumers will begin to realize that not all brokers always act in the client's best interest. These consumers will then start to bypass the entire system and advances in information technology will give them the tools to do so. That's why, wrote the blogger, the market will change this time around.

Skeptic

Count Lisa Maysonet, a senior vice president of Prudential Douglas Elliman, a leading New York broker, as one who is skeptical that commissions will be forced down by the factors Inman cites.

"No veteran broker will take a listing at a lower commission," she says. "They are doing more work than ever and sellers expect more from them. That's especially true at the high end of the market."

She may be right. High prices make sellers nervous. When the stakes grow, they need the reassurance of dealing with an experienced pro.

That brings up the question, however, of why you have to pay twice as much or more in many markets for an experienced pro's service today than you paid 10 years ago, simply because home prices soared.

And, if the industry is truly competitive, why don't experienced pros offer to lower their rates in order to win more listings?

That speaks directly to Inman's point about the surprising departures of some industry vets to alternative business model. If the industry ever starts to experience a wholesale increase in the number of its star performers defecting from traditional brokerages to discount or fee-for-service business models, that could truly signal the beginning of the end for full commissions.

If sellers can get the same level of service and pay less for it, why wouldn't they opt for the discount broker?

Are you worried about your mortgage? With the real estate market slowing and interest rates on the rise, it may be time to rethink your loan. For an upcoming story, MONEY Magazine is looking for individuals and families in need of advice. For consideration, please e-mail your story in detail to realestate@moneymail.comTop of page



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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.