Mandie Sellars, a homeowner in the Raleigh-Durham area of North Carolina, had the misfortune of buying a home and then almost immediately getting a new job about an hour from her new home. Not only did she want to avoid paying commissions to sell the home she just bought and to buy another, but the market was also hot in the area where she wanted to live.
“I knew I needed to move fast, and so when I saw a property online that I liked I contacted a company called SoloPro,” says Sellars. “Twenty minutes later I was in the house with an agent and two hours after that I made an offer. My offer was accepted by 5 p.m. that day after the home had been shown 17 times.”
What’s different about Sellars’ experience is that she opted for an on-demand agent service that doesn’t charge commissions. She paid $25 for email alerts so she could find a property, $50 for the property showing, $100 for an agent to present her offer and $800 for a transaction coordinator. SoloPro will give her a rebate of 3 percent of the purchase price – the equivalent of a typical buyer’s agent commission – at her closing, which she estimates to be about $5,700.
Technology has changed businesses in ways that were unimaginable a decade ago, but even industry insiders say that residential real estate practices have yet to fully adapt to the reality that buyers and sellers have unlimited access to property listings and other information that was once held firmly in the hands of realty agents. That access has led many consumers to question the fees they pay for the services of an agent, commonly 6 percent of the home sales price, including payment to a buyer’s agent and a listing agent, or $30,000 on a $500,000 property sale.
In 2015, the National Association of Realtors’ “DANGER” report – which stands for the Definitive Analysis of Negative Game Changers Emerging in Real Estate, written by industry consultant Stefan Swanepoel of the Swanepoel /T3 Group – rocked the real estate world with its acknowledgment that consumers are demanding lower commission rates and that brokers and agents are responding with new pricing models that “will most likely become commonplace in the next five to 10 years.”
International buyers are particularly shocked by the high commissions paid in the United States, because the average commission paid to realty agents in places such as the United Kingdom, Australia and Belgium ranges from 1 to 3 percent.
“Like any other industry, real estate has market cycles,” says Morgan Knull, an associate broker with Re/Max Gateway in Washington. “Back in 2007 through 2010, there weren’t a lot of commission discussions because sellers were happy to have someone work for them who could sell their house. Now that we have a high volume of sales, some agents are discounting their commissions to win listings.”
Knull says that in a flush market, agents and brokers can work on low margins, but once the market slows down, they won’t be able to sustain the volume of sales or their commission rate.
“I’ve definitely had more conversations the past few years about commissions, although I find that buyers and sellers in the city appreciate the value of a specialist,” Knull says. “Career real estate agents, the ones with the most knowledge and experience, are not discounting their commissions. Consumers are putting a lot of money on the line when they buy or sell a home, money they’ve worked hard for, so it’s important that they entrust that money to someone who is reliable and responsible.”
Although buyers ultimately pay agent commissions since they are built into the price of the home, sellers are typically more concerned about commissions because they see the fees subtracted from the profit on their closing documents. Yet the NAR, in its “2015 Profile of Home Buyers and Sellers,” found that the number of pure for-sale-by-owner transactions, without any help from an agent, dropped to 8 percent of the market, the lowest share since the association began profiling consumers in 1981.
“The FSBO market has changed in the past three years,” says Sissy Lappin, a real estate broker in Houston and co-founder of ListingDoor.com. “Zillow wasn’t as big and powerful in the past, which meant that the MLS (multiple listing service) that served Realtors was their ace in the hole. That barrier is gone. Recognizing the growing threats, the real estate industry is racing to automate and add technology. In every industry where this happens, margins contract. This industry is no exception, and commissions are dropping dramatically and quickly.”
Consumers who feel confident about their own ability to navigate the real estate world will find a variety of companies that offer reduced commissions, but they have different models for providing service.
Tommy Sowers, founder and chief executive of SoloPro in Durham, N.C., started his company about two years ago after he broke into a house rather than call an agent to see it.
“My wife was furious with me, but I didn’t feel like paying all this commission to an agent just to get a look at a house and make an offer,” Sowers says. “Other businesses like investment brokerages have eliminated the middleman in a transaction, but real estate hasn’t. A lot of people out there have experience with buying and selling homes, and they want to pay just for the services they need.”
SoloPro’s model is to unbundle real estate services for buyers and sellers, charge a flat fee for each and then farm out the work to experienced agents. Sellers pay $999 for a listing. The company, which functions as a marketplace rather than a brokerage for agents, has about 1,250 agents in 46 states, including 25 in the D.C. region. SoloPro’s technology sends instant alerts to buyers, sellers and realty agents. The agents are paid as independent contractors and can do this as a side business when they have time, separate from the arrangement they have with their broker.
Brian Wilson, broker/owner of Brian Wilson Realty Group in Arlington, also contracts out listing services to agents who are licensed with other brokers to keep his costs down. He says efficient technology helps him handle a high volume of transactions at a reduced cost to consumers.
“There’s been a fundamental shift in the way properties are exposed to consumers since 2009 and also on the back end where agents are handling transactions,” Wilson says. “I’ve been a Realtor since 1995, but my background is in taking technology to Fortune 100 companies to improve efficiency, so that’s what I’ve done with my real estate brokerage.”
Wilson charges a $500 fee upfront to sellers and o.5 percent of the sales price as a commission. If the buyers are not working with a buyer’s agent, then that is the total fee he charges to sellers. Otherwise, sellers pay the buyer’s agent commission, typically 3 percent of the sales price.
“When we represent buyers, we rebate them 1 to 2 percent of the commission paid by the seller’s agent at the closing,” Wilson says.
Wilson says his services work best with buyers who are completely ready to buy, with a loan pre-qualification and a specific location.
“You can’t be casually looking,” he says. “We work with buyers who are laser-focused, not ones who need a lot of babysitting or who don’t know what neighborhood they want to live in.”
Wilson says that even if the market slows down, people will prefer to pay a lower commission.
“This area is dynamic, with a lot of turnover of people and jobs, so I expect the volume to stay high enough for us to continue to be profitable,” says Wilson.
Lappin co-founded ListingDoor.com in 2015 as a service for homeowners who want to handle many of the selling details themselves but need help getting their property exposed to buyers. Sellers can pay a flat fee of $429 to gain access to a program that generates a market report, including a recommended listing price based on current market conditions.
“It’s as simple as using TurboTax, where you can click on certain tabs for more specific information,” says Lappin.
ListingDoor.com sends the listing information to Zillow and promotes it through social media, although not to the local MLS.
“About 70 percent of our customers choose our PRO package, which costs $799,” Lappin says. “We build your marketing for you, including a brochure, sign and mobile-friendly website with the property description written by one of our professional writers. We hire a professional to photograph your home and create a virtual tour.”
Owners.com, founded in 1996, allows sellers to choose only the services they want and pay for each on an a la carte basis. While it has long been known as an FSBO site, the company in 2015 became a nationwide brokerage so that homes can also be listed on local MLS sites. In addition to a database that includes Owners.com listings and other FSBO listings, the site includes bank-owned foreclosure listings and MLS listings. Consumers can use the site to find and pay for appraisals, transaction assistance, auction services, mortgage financing, escrow and title insurance, home warranty services and handyman services.
“Depending on what homeowners choose, they can sell their home for as little as $400 to $500 for a listing and brokerage services and then just pay the buyer’s agent’s commission,” says Steve Udelson, president of Owners.com in Luxembourg. “We’re not a discounter: We just sell what a modern consumer needs and throw out the pieces they don’t need.”
Udelson says that there will always be a need for some level of full-service real estate agents for buyers and sellers who want that assistance.
“The direction of the market now is to bring in the missing piece of the transaction and save money by just paying for that part,” says Udelson. “The market is gravitating to a la carte services in the same way that investors have started to gravitate to buying and selling their own stocks online.”
SRE, a real estate brokerage that started in Hawaii in 2014, embraces a hybrid model of traditional and discount real estate practices.
“We provide everything a full-service agency provides, but we are able to reduce the cost to consumers because of our technology and because our agents work on salaries and bonuses rather than a straight commission,” says Rob Young, executive vice president of SRE in Honolulu. “We make more money from our technology platform than by charging commissions.”
The tech platform, when complete, will earn money from ads by vendors such as appraisers, lenders, home stagers and insurance brokers.
SRE has opened a second brokerage in San Diego and expects to be open in all 50 states and the District by the end of this year.
“It’s important that we find brokers who understand the trend toward lower commissions and see the value of our technology,” says Young. “We hired the best computer engineers to develop our system so we can get all listing information as a live feed. By the end of 2016 we expect to be connected with every MLS in the country.”
SRE’s model is to rebate to its buyer clients any commission its agents are paid above 1 percent. Sellers who list their home with SRE typically pay a 2 percent commission, 1 percent of which is paid to the buyer’s agent. Young says the sellers can choose to pay a 3 percent commission, 2 percent of which would go to the buyer’s agent.
“Our salaried agents get bonuses for excellent customer service and for completing transactions, and we also provide all their leads,” says Young. “They can do more transactions because they aren’t spending their time chasing down leads.”
High commission virtual brokerage
Although lower commissions could be the wave of the future, one new company, started about 18 months ago, is taking the opposite path and using technology to provide a virtual real estate brokerage with full commissions and full service.
“We’re a tech-powered real estate brokerage with only one brick-and-mortar office in New York,” says Tamir Poleg, chief executive and founder of Real, a virtual brokerage in New York City. “The money we save by not having offices and with super-efficient technology goes to giving agents a higher commission split. We don’t charge agents any monthly fees and we give agents 85 percent of their commission, even when we provide them with leads.”
Although commission splits between agents and brokers vary by company, a typical split allows the agent to keep 70 percent of the fee. Agents often are required to pay fees to their broker in exchange for services and office space.
Poleg says that Real has attracted 360 agents in 12 states, including about 15 agents in the D.C. area.
“Each agent can set their own commission, but 90 percent of our agents say that a 6 percent commission split between the seller’s agent and the buyer’s agent is typical,” says Poleg. “The majority say they wouldn’t go below 5 percent as the total commission.”
In addition to the higher commission split, Real provides an app that can be branded to each agent and tech support. Poleg says the real estate industry is shifting away from brokerage branding to agent branding, with most agents preferring to be as independent as possible.
Udelson says he expects the real estate market to look different in a few years.
“Over time, full-service transactions are likely to be about 20 percent of the market at most and probably reserved for ultra-wealthy people,” says Udelson. “The mainstream, with about 60 percent of the market, will be the a la carte model, with most people using minimal service. Another 20 percent of the market will be completely self-directed buyers and sellers.”
Regardless of what you pay your agent, it’s important to do the research and take the time to find someone who will responsibly advise you during one of the most expensive transactions of your lifetime.