The Contrarian’s Guide to Real Estate / Selling Options
Brokers compete on questionable claims
But hardly compete on commissions
Painting the housing market with broad brush strokes, over 2 million licensed real estate agents including 1.3 million Realtors sold 5.45 million existing homes in the U.S. last year. That gives sellers many options to choose between when it's time to transact.
While the National Association of Realtors will tell you that the “median gross income” of their members was $39,800, the reality is that more than half of all agents did not sell a single home or else managed to do only one deal last year. The other side of the coin is the one-fifth of agents that work real estate full time end up processing 80% of all the housing transactions nationwide. An even more focused 5% of the most productive agents will end up doing more than 50 deals every year which means that only 40,000 agents get their fingers in a remarkable 40% of all home sales across the country.
The average commission on U.S. home sales last year was around 5.4%, and while many part-time agents are not making a lot or doing much work, the ones working hard are doing well especially if in high priced markets. Check out this Wall Street Journal article on how U.S. commissions are 3-4 times higher than in other similar countries.
The vast majority of agents work for traditional brokers and these brokers, in turn, operate around 860 multiple listing services (MLS) across the country. These marketplaces are a de facto monopoly and for that reason are advantageous places for sellers to get good prices for homes. However, the downside of the MLS is the commissions and if you decide to work with a traditional agent don’t expect a lot of wiggle room on the rate which uniformly retails at 6%.
Technology powered brokerages like Redfin will list homes for 4 to 5% and newer upstarts like Faira will do so for 3 to 5%, but these are nominal discounts to the prevailing rates. And if you have a lot more time, don’t mind doing the work and taking the risk, then the For Sale By Owner (FSBO) route could be a good option for MLS access without the brokers, but you still end up paying another 3% usually unless you can skip it (which you should). Finally, whatever you do as an owner, try to avoid a situation where you are contemplating working with an instant offer company. But if you find yourself in that unfortunate situation, companies like Open Door, Redfin, and Zillow will give you money for your house in a matter of days, but do so for less than market value AND charge high commissions. Instant offer deals reduce your net proceeds worse than just about any other option.
To sum it up, the main reason why these companies can’t get their commissions any lower is that they often require uniform buyers agent commissions of 3% when they list in the MLS. The reasons for this are involved, but brokers are accused of colluding on this particular topic frequently to benefit themselves. Interestingly the reality is that these optional commission’s do not affect the final sales price, and the issue has been researched repeatedly by academics. Be sure to consider the different routes into the MLS and the impact on your net proceeds but also be sure to check out the Contrarian’s Guide on pricing too.