Flipper/Rehabber · Golden, CO · Member since 2013 · 590 posts · 319 votes
Interesting read about Denver company Trelora, trying to take down the commission structure in Real Estate. Seems like agents are up in arms over this. Article below.
Flat rate Real Estate Brokerages have been tried in the past. Given that the commission percentage model is still the norm, will give you an indication of the success of these endeavors.
It's the norm because there's a lot of vested interest in keeping the current system. The Realtors association represents a large number of people who make a lot of money the way things are now. I think it's hard to argue that agents aren't overcompensated.
Here's why this will fail: "Trelora's model is also different in that it pushes for flat fees on both sides of the home transaction, something traditional brokers argue will trigger a destructive race to the bottom."
Seller agents won't show these houses because they won't make as much money. So the houses won't sell, and people will switch to another agent.
The part about the "race to the bottom" is only destructive to the agents, not the clients!
@Adrian Tilley I see what your saying about seller agents not showing the houses listed in this fashion, but if the buyer wants the house the agents are not going to leave money on the table.
For example, I just bought a house in July that I found myself and called my agent about. I was extremely interested and contacted him about it. If this home was listed using Trelora (it wasn't), I doubt he would have refused to show me it. The agents might not have a choice if motivated buyers are out there searching for houses on their own. Right?
I agree. If a buyer finds a house that happens to be listed by Trelora and asks to be shown that specific house, I doubt the agent will refuse. If the buyer wants to buy that specific house, the agent will certainly do it unless they are crazy. But showing one house and closing a deal is well worth the $3000 fee. If the agent is just finding houses to show, I strongly suspect they will not present those that are listed with Trelora. I suspect this would violate come Realtor code, but what do I know...
@Adrian Tilley True, and I'm sure most people aren't out there looking on their own. They probably see what the agent feeds them. For that reason, I can see the point of the company not lasting long..
Adrian, and others, why do you say agents are over compensated? Is it because of the fee you see, for just the work you see on that transaction? What about the work and time that lead up to that transaction, and all the work that agent does on deals that never result in any commission at all? Small flat fees will never last, as the good agents will leave the industry.
The average house price in the Denver metro area is ~$255,000. At 2.8%, that works out to $7,140 for each of the seller's and buyer's agent. My broker has told me that if you do it right, a deal should take about 13 hours, from acquiring the client through closing. Let's triple that and say 40 hours per deal. Even assuming that time requirement, that's $178.50 per hour. If you represent someone in selling their house and buying another, you effectively double your hourly rate. If you bring the buyer to your listing, it's tripled. The reason that agents spend so much time per deal is that they have to put a lot of effort acquiring clients...because there are so many agents...because the compensation is so high...see where this is going?
Mark Furgeson just started another thread about the difficulty of getting a license, but it's still only 1 full time month of classes and one 2 hour test. Maybe it's just me, but the per hour compensation seems out of line. Even assuming that you work a couple deals that don't close for every one that does (I'm not sure how common this is, as it seems to me when someone wants to sell or buy, they'll keep trying until they do), the hourly rate is still monstrous for the time and money required to get a license.
Thanks for sharing this article. I say bring it on. Even if Trelora doesn't make it, it's an experiment in the consumer's favor. It may take several such experiments to get something that can be replicated in all markets.
I heard for years that buyer's agents wouldn't show flat fee listings or reduced commissions. All it takes is a market with very little inventory and they call. I have a flat fee listing that went live on Friday. No shortage of agents wanting to show it. Now I wish I had experimented with a flat fee to the buyer's agent instead of a percentage of sale price. It's not FHA ready so it's mostly being shown to cash buyers. How many agents would have still shown it for a flat fee of, say $3500, instead of $5100 if it sells full price? If the agent has a cash buyer and doesn't have to babysit a consumer loan, wouldn't they take the $3500?
Flat fees might work out for agents on the low valued props here in CA. I know several agents that already set a flat fee for listing anything under $50K. 3% of $50K minus broker fee is not worth it to them. There is a minimum overhead cost to agents and consumers are probably not aware that 6% of $15K won't cover it many places.
I say give the consumer some choices and let them decide. They may well prefer low cost over customer service.
The average house price in the Denver metro area is ~$255,000. At 2.8%, that works out to $7,140 for each of the seller's and buyer's agent.
That real estate agent then splits his fee with his broker (the actual split varies). Assuming a 50/50 split the agent earns $3570 minus his expenses (car, insurance, phone, license, continuing education, etc.). The agent's broker also gets $3570 from which he pays for the office space and staff, insurance, advertisement, MLS listing and access fees, etc.). Any way you wish to look at it the commission is not all profit, there are all kinds of expenses to consider with it.
@Edward Burns I suppose that's true, depending on where you work. Where I hang my license there are no splits, just a low flat per-closing fee. I don't pay anything for staff, office, etc, my license is a couple hundred dollars a year, MLS is less than $50/month, CEs are free, etc. If you hang with Remax or Coldwell Banker, I'm sure it's different, but for such a large split I hope they're providing some serious value.
I completely agree though, it's not all profit. but even at a 50% margin, that's still about $90/hour. Would you agree that's probably excessive for the education required?
The reason I ask. I found a home listed for sale, and I sent an email asking two questions is the home in an HOA and are their foundation problems. The realtor's response was when you like to close on the home but never address the questions.
@Adrian Tilley while I do agree that RE agents seem highly compensated for what the job really requires, I'm not sure I agree with your hourly rate analysis. The 13 hours (or maybe 40) might be about right for the specific deal that closes. But aren't there more hours of work required on the part of an agent for all the deals that don't close? The buyer that finds a house they like but, for some reason or another, just can't close. Or the ones that look at houses but then don't buy one. Or the ones that require you spend a few hours looking for listings but then never even look at a house. Its a classical "sales funnel" issue. If you compute an hourly rate by looking at the income from closed deals vs. the time for only that deal the rate will be very high. The reality is you have to also include all the deals that didn't get to the tip of the funnel. And even go all the way back to money you spend marketing just trying to get people to even enter the wide end of the funnel.
I sold my house with a flat $500 mls listing fee. Had to pay buyer's agent fee of $8500. Buyers told me at closing their agent was so incompetent they had to call his broker 3 times to get him to return their call.
@Account Closed Sorry to hear about that experience. I had a similar one when I was not an agent and unrepresented. I think agents take unrepresented parties less seriously for some reason. Not really sure why.
@Jon Holdman I agree that there is more to be taken into account. However, I think one of the main reasons agents have to spend so much time/money on marketing is (as stated above) there are so many agents, because the pay is so high.
If there were fewer agents, they could be more selective about who they take on and how much time they spend with lookey-loos.
@Ryan Shuchman I think that the high pay draws a lot of incompetent people into the business.
I think you mean the potential for high pay. Funny, isn't it, that the same could be said of real estate investing in general. Stories of big paychecks are a strong draw for people to jump in and try their hand. The barriers to entry are very low so there's very little cost to "becoming an agent".
Here in Canada, we have a few flat fee brokerages, the best known is PropertyGuys.com. They've been around for 15 years and while they still constitute a small fraction of real-estate transactions, a court ruling in the past 2 (maybe 3 now) years opened the door for them to have access to the MLS system for their listings and has accelerated their growth.
I am definitely not a fan of the incumbent commission/percentage based system as I feel it helps inflate housing prices.
Of all the parties involved in a real estate deal in the US, usually only the buyer wants the deal to close at a lower value. All other forces are pulling in the upwards direction. Consequence is that ever so many years the market has to correct it self.
One would think that it is only reasonable that a buyer's agent compensation be commensurate with the increased value (lower price and/or higher value) he brings to the buyer. But no, the agents compensation is directly proportional to how much money he makes for the seller. One has to wonder who the 'buyer's' agent is truly representing.
I am definitely not a fan of the incumbent commission/percentage based system as I feel it helps inflate housing prices.
Of all the parties involved in a real estate deal in the US, usually only the buyer wants the deal to close at a lower value. All other forces are pulling in the upwards direction. Consequence is that ever so many years the market has to correct it self.
One would think that it is only reasonable that a buyer's agent compensation be commensurate with the increased value (lower price and/or higher value) he brings to the buyer. But no, the agents compensation is directly proportional to how much money he makes for the seller. One has to wonder who the 'buyer's' agent is truly representing.
The way it's evolved for the bulk of SFH sales to owner occupants, and with all the money NAR has spent on marketing to the general public in the last decade, buyers now know and understand that they have to have an agent if they want to make an offer. If they think otherwise, all they have to do is call the listing agent directly. Who will not answer their call or who will tell them they need their own agent. IMO, Buyers don't expect their agent to get them the best deal anymore. They need to the agents just to get the offer in.
To be fair, the best buyer's agents help their buyers get loans, which is a skill. And then they stay with the loan process until it closes.....so that the seller can pay their commission.
I'm surprised that there is the sentiment that the agents need to be compensated for work that didn't result in a commission by the consumers that DID come through.
Sure it totally sucks for a buyers agent that walks around 100 houses with a PITA client and then they don't even buy a house. Not the seller of the home to another one of their clients faults.
If the norm was for a buyers agent to charge some hourly rate or some fee structure for their time, which would be credited back at closing, they would probably get a lot less tire kickers. Not many do that so they have to offer a TON of value over the next guy to get any action.
BTW I'm a licensed agent and would rather shoot myself in the face with a nail gun then work with a retail buyer client.
@Wayne Brooks
The average house price in the Denver metro area is ~$255,000. At 2.8%, that works out to $7,140 for each of the seller's and buyer's agent.
That real estate agent then splits his fee with his broker (the actual split varies). Assuming a 50/50 split the agent earns $3570 minus his expenses (car, insurance, phone, license, continuing education, etc.). The agent's broker also gets $3570 from which he pays for the office space and staff, insurance, advertisement, MLS listing and access fees, etc.). Any way you wish to look at it the commission is not all profit, there are all kinds of expenses to consider with it.
Add to this, the marketing cost, MLS fees, lockbox fees, continuing education fees, etc...the average agent is NOT rolling in the dough!