Chipping Away At Realtors'
Six Percent
Lesley
Stahl Reports How Realtors' Commission Fees Are Under Assault
Editor's
Note: After
our broadcast we heard from Stephen Cook, a Vice President of the National Association
of Realtors. In his letter he said, "All real estate commissions are
negotiable and the average is 5.1 percent, according to the most recent
available data." That number came from an industry trade publication, REAL Trends,
and was an estimate of average commissions charged by the nation's top 500
brokerages.
A critique of that survey, written by John C. Weicher, Director of the Hudson Institute's Center for
Housing and Financial Markets, found REAL Trends' commission data limited by
its focus on the largest brokerages and most expensive homes; the most likely
situation in which agents charge a lower than 6 percent commission fee.
And, the
Government Accountability Office – Congress' investigative arm – reported in a
2005 study that commission rates continued to be about 5 percent to 7 percent
of a property's selling price "regardless of local market conditions,
housing prices, or the cost or effort required to sell different
properties."
Finally,
in Cook's letter to us, he wrote, "The National Association of Realtors is
a trade association and does not "govern" the real estate industry,
and, there is no such thing as a national multiple listing service."
In fact, there is no national Multiple Listing Service, instead according to
the Justice Department, there are about 1000 multiple
listing services, 80 percent controlled by members of the National Association
of Realtors and governed by its policies.
We
reported in our story entitled, "6 Percent", that an Internet-based
real estate company, ERealty, went "belly
up." To be precise, ERealty was purchased by
Prudential Real Estate Affiliates, at a loss of about $33 million to ERealty's investors, according to one of those investors,
Steve DelBianco.
Even with today's housing slump, real estate agents will pull in about $60 billion
this year. And the reason is, as any homeowner knows, they charge a six percent
commission on the price of every house they sell. So, for instance, a home that
goes for a half a million dollars will net agents $30,000 right off the top.
For
realtors, the six percent commission is sacrosanct. It's remained in place,
even as the price of homes has quadrupled over the past 25 years.
But as correspondent
Lesley Stahl reports, things are beginning to change. What happened to
travel agents, stock brokers and book sellers – the encroachment of the
Internet – is beginning to affect real estate agents. And the sacred six
percent is under assault from online discounters.
Lehrer Willis and his fiancée Bridgette Takeuchi of Seattle, young and Internet
savvy, took a big chance when they decided not to hire a traditional real
estate agent. Instead, they both sold their old house and bought a new one
online.
"What
did you have to do yourselves that the traditional real estate agent would have
done for you?" Stahl asks.
"Print
out the flyers, you know, that would go on our signposts, and describe our
house to potential buyers. And then we held an open house ourselves,"
Willis recalls.
What did
they didn't get, says Takeuchi, was having a real estate agent to show the
house and actively sell the property.
"Who's
out there, really pushing for us?" Stahl remarks.
"And
that's what I kept saying," Takeuchi acknowledges. "Those
insecurities started to really seep in for me and I started to really question.
It wasn't until the ink was dry on the paper that I was a hundred percent sold,
to be honest."
Willis
says they saved $26,000 by not going through a traditional realtor and paying a
commission. "Now we can walk down the aisle. Actually, pay for people to
eat at the wedding," Takeuchi adds.
They used
a real estate company called Redfin, an online
discounter based in Seattle. It has a cadre of e-agents who, for the most part,
do their work on computers and on phones. Rob McGarty
says early on a number of people called who were skeptical about the whole
idea.
"Are
there real people there? Is this just some shop in Bangalore! A call center taking real estate transactions? And, you
know, after they talked to us [they] realize we were real agents in the same
city they were in … they were like: 'Whoa, this is for real!'" McGarty explains.
Willis and
Takeuchi's agent, Kelly Engel, used to be a traditional agent. "I had done
quite a few deals where I spent maybe five hours total working on the deal. I
never saw the house. My client found it online and, you know, I would make
$12,000 for four hours of work. And I thought this cannot keep going on like
this. Someone, I felt like I was going to get caught! You know, someone's going
to see that this is happening and I think a lot of them hold that truth inside
of them right now. They've got the clients that are finding houses on their
own. They make $20,000 and did 10 hours of work," she says.
Glenn Kelman may look like a bike messenger, but he's an Internet
entrepreneur, the president and CEO of Redfin.
"Real estate, by far, is the most screwed up industry in America," he
says. "And we feel like things that Amazon or eBay or Yahoo have done of
other industries, we can do for the real estate industry."
Because
of the Internet, he says, his agents can handle many more transactions and
charge the clients much less. "Because they didn't have to sit in the back
of a Lexus with a real estate agent, and use up all of this time, we're able to
pass on a lot of savings to them," he says.
And he
does mean "a lot" of savings. Usually, a seller's agent and a buyer's
agent split the commission, so they each get three percent. But when Redfin represents the seller, it charges a flat fee of just
$3,000, and that's it. That alone drives the traditional agents crazy. But
then, when Redfin represents the buyers, they give
them money back.
"We've
refunded over $3 million in commissions to our customers," Kelman says. "When we're the buyer's agent, we take
our commission, which is usually three percent. We keep one-third of it. And we
give two-thirds of it back to the buyer. So, on a $1 million house, we would
get $30,000 normally. But we only keep $10,000 and give $20,000 back to the
buyer."
How is he
making money?
"The
average agent processes eight deals a year. We have an agent that can do that
every week," Kelman explains.
"Are
you spinning me?" Stahl asks.
"I
mean, seriously," Kelman replies.
There's
no way to independently check the number of deals his agents close in a week,
but it is clear that they do make it easy for their customers who can sit home
at night in their pajamas and click on the Redfin
webpage to read critiques of houses in their price range, see what comparable
homes in a given neighborhood have sold for and to even tour a house they might
be interested in.
Redfin displays, for free, information that's part of the
package you pay a traditional agent to get. "So, for example, if we were
looking for the turkeys in this market, we could find properties that haven't
sold in the past 45 days," Kelman explains.
If you
like the house, you can click the "start an offer"
button. A Redfin agent at his or her computer in the
office contacts the seller's agent and negotiates a price. Redfin
then coordinates all the paperwork for a loan and closing the deal.
Willis
and Takeuchi say the Redfin agent helped them come up
with an asking price. Eventually, they sold for $10,000 under, which Willis
says they're happy with. It was in their range, he says.
"But
perhaps they've left quite a bit of money on the table if it had been put in
the hands of somebody that really knew the business," argues Deborah Arends, who has been a top RE/MAX agent in Seattle for 18
years. She says that Redfin customers get the
"Wal-Mart treatment" when what they really need is an experienced,
hands-on professional. And besides, she says buying a house is a high-touch
business, not high tech.
You have
to go and see it for yourself. "This is not like buying books on
Amazon.com. Real estate is typically people's largest investment," Arends argues.
"If
someone comes and challenges you and says, 'You don't
do enough for the six percent.' What's your response?" Stahl asks.
"My
response is, 'I'm not the agent for you,'" Arends
says.
Some
agents have been known to lower the commission, but Arends
says to give clients her ultimate, she needs to charge the full six percent.
"Now
here's what Glenn Kelman of Redfin
says: 'The price of homes has gone through the roof, pardon the pun, over the
last several years. And yet your commission has still stayed at six
percent,'" Stahl remarks. "You're not lowering your commission to
give the buyers this advantage. You're just raking in the money?"
"Wish
that were true," Arends says. "I think
what's happened is a lot of expenses have gone up, everything from postage to
gas, which affect real estate agents' profits."
She says she
has to spend money to make money for her clients, especially when they're
trying to sell a house in today's down market.
To move a
property, Arends comes up with a strategy, then
creates buzz by blanketing neighborhoods with fliers and sending postcards to
notify other agents. She also spiffs up a house for viewing. As an accredited
"staging" professional, she polishes, re-decorates and de-clutters.
"It
is the single biggest moneymaking thing a seller can do, because getting their
own belongings out will allow buyers to imagine themselves in the home,"
she explains.
When the
house is ready, she then targets potential buyers as well as agents, and holds
an open house to dazzle them.
"Redfin very proudly says that they returned in rebates $3
million last year to its buyers," Stahl remarks. "You can't boost of
anything like that."
"Absolutely
not," Arends acknowledges. "I don't know
how to answer that one."
Other
agents have an answer: try to drive the discounters out of business, which is
what happened to Steve DelBianco.
He helped
launch the first Internet discounter, eRealty, in
1999 in Texas. No sooner than they were up and running, the local agency in
Austin that regulates the industry adopted a new rule that effectively barred e-realty
from listing houses for sale on its Web site.
Then, DelBianco says, "They sued us for breaking the rule
they created to shut down eRealty's ability to
compete."
"Was
the main objection, do you think, the cutting of the commission?" Stahl
asks.
"That
was the only objection," DelBianco argues.
"Realtors embrace the idea of some automation and some use of the
Internet. But the minute it cuts into their pocketbooks, well, all hell broke
loose."
eRealty won the lawsuit. But then it ran
into the National Association of Realtors, the industry's powerful governing
body. In 2003, the association issued new rules of its own, ones that
threatened to block Internet discounters' access to the multiple listing
service, or MLS. That's the data base that lists virtually every home for sale
in the country. It's the lifeblood of any agent or brokerage, including
discounters like eRealty.
"The
threat of the new rules meant that our investors closed their pocketbooks and
new investors wouldn't answer the phone," DelBianco
explains.
"'Cause
they knew if you couldn't get access to the MLS, you were dead anyway, and they
knew that," Stahl remarks.
"They
cut off our air supply. They knew it," DelBianco
says.
In the
end, eRealty went belly up. DelBianco
says the company lost $33 million.
The
Justice Department is now suing the National Association Of
Realtors, or NAR, for adopting policies that are "fundamentally
anti-competitive and harmful to consumers." The NAR told 60 Minutes
those accusations are untrue.
"Now
the NAR argues that it's their agents who contribute to the MLS. That's their
listings, and that they should, therefore, have the right to withhold them
since they belong to the agent. Doesn't that make some sense?" Stahl asks DelBianco.
"I
don't think so," he replies. "When you hire an agent to help sell
your home, you're paying them a six percent commission to put your home in
front of as many possible buyers so that you get the best possible price in the
shortest time. How does it serve your interest then if they suppress the
showing of your home to a whole category of realtors who show it online?"
NAR has
suspended the rules pending the outcome of the case, which is scheduled for
trial next year. But Redfin's Glenn Kelman says the effort to shut down the discounters
continues.
"The
traditional brokerages have figured out nine ways from Sunday to try to screw
up our business," he says.
Asked if
they're targeting him, he says, "Oh, absolutely."
One way
is to influence local and state legislation and rules. The brokerage industry
has a powerful lobby.
"The
people who made the rules are the real estate agents themselves. And almost all
of the rules are for the benefit of those agents. They have control of this
industry and they intend to keep it," Kelman
argues.
Eight states
have "minimum service laws" that require realtors to provide a level
of service many Internet discounters can't afford. Eleven states flatly
prohibit rebates.
"Oregon
is a perfect example of that. We would love to go into Portland, Oregon. But
there's a law against giving people who buy a house part of the commission
back," Kelman says.
"Are
you going to try to go national?" Stahl asks.
"Our
goal is to get in every major market in America by the end of 2008," he
says.
Asked if
he expects the fighting to get more intense if he goes national, Kelman says, "We expect it to be hand-to-hand in every
market that we go into. And so we're just going to go door-to-door,
house-to-house, and try to change this industry."
Produced By Rich Bonin
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