It was a sunny day in Chicago and I was sitting down with a local real estate agent to discuss listing and selling my 1900s era bungalow just outside of the city. After discussing the property valuation report and learning what this real estate agent was going to do to actively market my property, we moved into my expected cash out based on an assumed sales price. This is where the conversation became really interesting!
I asked how he estimated an 8% cost for selling the home and I was told that 2% was based on closing fees, local taxes, and title insurance while the remaining 6% was for real estate commissions. The 6% that I would pay to sell the house was split 3% for the buyer’s agent and 3% for the seller’s agent. In the previous 10 years, I had relocated and sold a home 5 different times but each of these relocations and associated expenses were paid by my employer. This move back to Texas was on my dime so I dug in deeper to “why” it costs 6% commission to sell a property. That seemed excessive for my overpriced, 1,600 square foot bungalow, which was estimated to sell at $450,000 = $27,000 in commission! I paused and considered For Sale by Owner but I quickly stopped because I needed access to the MLS Real Estate market too.
Since I thought the estimated cost was excessive, I simply asked if the commission was negotiable. The answer was “yes but”. The infamous “but”. The real estate agent continued to explain that if I did not offer the customary 3% buyer’s commission I risk having local real estate agents not show my property to their buyers. He continued to explain that the remaining 3% would be split with his broker and expenses for marketing the property. Here is my breakout that I wrote on a piece of paper in front of him:
- Buyer’s Real Estate Agent – 3% or $13,500
- Broker – 1.5% or $6,750
- Expenses – 0.75% or $3,375
- His Take Home Commission – 0.75% or $3,375
That is when I looked at him and simply thanked him for explaining the “how” but I was more interested in the “why”. Needless to say we never arrived on the “why”. For Sale by Owner was now a real possibility because I couldn’t face the fact that it would cost $27,000 in commission to sell my bungalow. I considered For Sale by Owner but realized it wasn’t an option because I needed access to the thousands of real estate agents and their buyers on the Chicago MLS. And this is how I began to envision a business model that provides Flat Fee Real Estate service versus the historically utilized percentage model.
My simple opinion is that the real estate industry has not capitalized on available innovation that can reduce costs for the seller and buyer. I include buyer because one day that buyer will be the seller. Sure, marketing has grown leaps and bounds from the days of black & white printed MLS sheets and having to go back to the real estate office to search for more properties and print more sheets.
We all know that the For Sale by Owner model is not efficient – even in a hot real estate market. We also know the internet, fast wireless networks, smartphones, and tablet apps have reduced the cost of marketing. This available innovation has been incredible for saving time, energy, and effort but why hasn’t it saved money for the sellers? With all of these cost savings available to the real estate industry, I am still stumped on “why” the cost to the client has not dropped.