Redfin is a discount real estate brokerage in Seattle that has put together some interesting data analysis from their first year in business.
Their numbers suggest that clients who use their discount brokerage firm pay a lower percent of the list price than the typical home buyer in Seattle (99.329% of the listing price with Redfin vs. 100.233% with other agents). That difference in price is worth more than $4,000 per purchase, on top of the already discounted fees/commission sharing.
Of course, it is hard to know exactly what to make of these results. Redfin would like you to believe it is that they have crack negotiators doing the bargaining. Another possibility is that the home buyer that seeks out a discount broker is cheaper and more savvy than the typical home buyer to begin with. It is possible (although there is no direct evidence to support such a claim) that these homebuyers could have made even better deals if they had worked with a full-service agent.
It is not easy doing data-driven research that is completely convincing. This research is not completely convincing. I do think it is sensible and interesting, at least, so hats off to Redfin.
Although the data here do not show it, one of the legitimate fears a client should have when using a discount broker is that lower fees translate into even weaker incentives to do well for the client. This is why I think that the real-estate market is more likely to move towards a flat-fee system (where a fee is paid to list houses and then agent compensation is based on an hourly wage as opposed to a share of the sale price), rather than to a discount system which is still tied to sales price.
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“compensation is based on an hourly wage” – beware the law of unintended consequences! I can just see the levels of busy-work that would erupt. Think about lawyers. Every time your real estate agent called you, another (rounded up) 30 minutes of billable time… For buyers, they would have an incentive to encourage you to keep looking. For sellers, they would price high and so it would take longer to sell.
You can argue that the market would settle it out, but has not really happened with lawyers and comparative analysis is hard with specialist services such as home buying/selling (every case is different).
Flat fees make more technical sense, but then you run the risk of an agent that wants to push the sale even faster (they get paid the same regardless of whether you were screwed or not).
The only thing I can see that would work is bonuses based on exceeding performance criteria set by the customer. You still have the agent making the “is it worth X extra dollars” calculation, but you can choose the terms.
“compensation is based on an hourly wage” – beware the law of unintended consequences! I can just see the levels of busy-work that would erupt. Think about lawyers. Every time your real estate agent called you, another (rounded up) 30 minutes of billable time… For buyers, they would have an incentive to encourage you to keep looking. For sellers, they would price high and so it would take longer to sell.
You can argue that the market would settle it out, but has not really happened with lawyers and comparative analysis is hard with specialist services such as home buying/selling (every case is different).
Flat fees make more technical sense, but then you run the risk of an agent that wants to push the sale even faster (they get paid the same regardless of whether you were screwed or not).
The only thing I can see that would work is bonuses based on exceeding performance criteria set by the customer. You still have the agent making the “is it worth X extra dollars” calculation, but you can choose the terms.
Since regular commissions are stated as a percentage of selling price, it’s possible that the after-sales-cost price of a home received by a seller is the same whether using a regular agent or a discount agent (indeed, the theory of competitive markets suggests this would be true.
Second, the difference does not take account of the differential effort made by sellers (not their agents, the sellers themselves) when using alternative agents. If sellers using dicsount brokers have to do more work, then we’d expect their after-sales net to be greater.
Third, there’s time-to-sale–under which representation arrangement do homes sell faster? A quicker sale at a lower price might be a larger discounted present value.
Since regular commissions are stated as a percentage of selling price, it’s possible that the after-sales-cost price of a home received by a seller is the same whether using a regular agent or a discount agent (indeed, the theory of competitive markets suggests this would be true.
Second, the difference does not take account of the differential effort made by sellers (not their agents, the sellers themselves) when using alternative agents. If sellers using dicsount brokers have to do more work, then we’d expect their after-sales net to be greater.
Third, there’s time-to-sale–under which representation arrangement do homes sell faster? A quicker sale at a lower price might be a larger discounted present value.
Redfin states that their agents are paid a salary. So although the business collects a discounted percentage fee, the agents are paid a fixed salary plus a bonus determined by customer satisfaction.
http://blog.redfin.com/redfin/2007/02/redfin_advantage.html
“This is why we decided to pay Redfin agents a salary with a customer satisfaction bonus, not a commission. Agents do what you pay them to do, we reasoned, and we believed our agents would be more likely to get the price our customers wanted.”
Redfin states that their agents are paid a salary. So although the business collects a discounted percentage fee, the agents are paid a fixed salary plus a bonus determined by customer satisfaction.
http://blog.redfin.com/redfin/2007/02/redfin_advantage.html
“This is why we decided to pay Redfin agents a salary with a customer satisfaction bonus, not a commission. Agents do what you pay them to do, we reasoned, and we believed our agents would be more likely to get the price our customers wanted.”
What drives the far higher commissions that US home sale transactions attract compared to the UK? Here in the UK, the seller pays between 1% and 3% to their agent for finding a buyer. The buyer pays nothing (except in rare cases where the buyer also retains an agent, this only happens at the very high end of the property market, presumably because people spending many millions on a home would rather pay someone to find it for them).
In the US it appears the seller pays 3% to their agent and another 3% to the buyers agent, is that right?? A total of 6%? Why is it so much more expensive to sell a home in the USA? Are agents earning twice as much, presumably not. Maybe there are just too many agents, so they each close fewer deals and so need to charge more per deal? Anyone know?
What drives the far higher commissions that US home sale transactions attract compared to the UK? Here in the UK, the seller pays between 1% and 3% to their agent for finding a buyer. The buyer pays nothing (except in rare cases where the buyer also retains an agent, this only happens at the very high end of the property market, presumably because people spending many millions on a home would rather pay someone to find it for them).
In the US it appears the seller pays 3% to their agent and another 3% to the buyers agent, is that right?? A total of 6%? Why is it so much more expensive to sell a home in the USA? Are agents earning twice as much, presumably not. Maybe there are just too many agents, so they each close fewer deals and so need to charge more per deal? Anyone know?