COO & Co-Founder of Radius Agent, a social network and lead conversion engine for Residential Realtors.
If you’ve followed the real estate industry for any amount of time, you’ve probably been involved in the perennial debate about the high agent commissions in the U.S. The issue reached a fevered pitch last year when a lawsuit was brought against the National Association of Realtors, calling commissions the results of collusion.
A common argument for lowering them claims U.S. commissions are among the highest in the world, but technology means agents don’t find homes for buyers anymore. They just unlock the door and fill out paperwork, and lots of agents don’t even do this full-time.
The common denominator in this debate is always the agent. Critics say they earn too much and do too little. But rarely is the brokerage relationship addressed. Commission splits to the brokerage can often be as high as 40%. You have to factor in this expense when looking at ways to reduce commissions.
Some brokerages have pursued different business models to try to bring down commissions. Redfin for example employs agents as full-time employees instead of commissioned salespeople — while setting a standard for what a consumer thinks agents deserve. However, Redfin is an anomaly. They have taken on the high expense of using full-time employees as agents — an unsustainable model for most brokerages.
Meanwhile, technology has exploded in the real estate industry, bringing with it the promise of greater efficiencies and lower costs. We’re seeing innovation with companies built to sell homes without showings, listings or agents — showing how quickly homebuyers can buy and sell their homes. An exciting variety of new technologies have come online to improve the interaction of the buyer search process and the agent. New marketing tools in the form of VR setups from companies like Matterport are transforming practices. Yes, these technologies are providing agents easier ways to present their clients. But they haven’t necessarily made their jobs simpler.
Great agents work incredibly hard. They build their brands, market themselves and lead teams. They are business people dedicated to their client’s success while being master negotiators and knowledgeable advisors. Making their jobs even more challenging is the fluctuations of the business that requires amortizing their commissions, and spreading them out over slowdowns and low seasons.
Many real estate practices clung to by brokerages were antiquated even before Covid-19. Fancy office space is totally unnecessary in most markets. Social media, podcasts, webinars and online platforms have made traditional brokerage marketing attempts to drive their own brand through print ads, billboards and bus stops of limited value.
The bottom line is Americans shouldn’t pay the highest commissions in the world, but the hard work of real estate agents shouldn’t be devalued to solve this. The answer lies in brokerages evolving and making their own businesses more efficient in order to charge better splits, or better yet a flat fee per transaction, thus allowing agents to bring these savings back to consumers. The support provided by the brokerage for a $1 million listing versus a $400,000 one is likely similar, yet the commission splits model ensures the brokerage pockets substantially more for an expensive listing.
There are a few ways brokerages can become more financially efficient — and thus impact the high commissions:
1. Reevaluate the need for physical space. Companies big and small have adapted to working from home. The camaraderie among agents can be established in a Facebook group or Slack. Agents can meet their clients at a coffee shop or in conference rooms at spaces like Regus and WeWork.
2. Offer a lower commission split or a flat fee to agents for the core benefits they receive, and offer add-on optional services such as virtual 3D walkthroughs or custom social media support for a separate fee.
3. Build an online brand for lead generation and agent recruitment through organic social media and virtual events instead of relying on paid channels.
In the mid-2000s, online real estate companies like Zillow, Trulia and Redfin were the first big wave of disruption to shake up the industry. The next wave of innovation is here. In order to survive and succeed, brokerages must take steps to stay relevant and embrace these new technologies and approaches. This includes driving change on the commission issue — before others do it for them.