Rebutting the Realtor Rip-off Argument

The great realtor rip-off” – what a great attention-grabbing headline from The Economist.

But … the author seems to have had a bad experience with a real estate agent that must have precipitated his rant. (try as I might, I cannot find the author’s name on the post, otherwise, I’d ask)

I almost stopped reading when I read that one of his sources for proof was Glengarry Glen Ross. But where’s the fun in not reading a rant?

I’ll be the first to tell you that there are too many unqualified real estate agents practicing real estate. I’ll also be the first to argue that those professional agents who truly represent their clients’ best interests are often underpaid.

Stepping through some of the author’s arguments:

“Agents routinely tell buyers not to worry about the fat commission because “the seller pays it.””

No. A lot of agents might, but I have no idea; my role is to represent my clients, not know what other agents say to their customers and clients. But … I think assuming the consumer is stupid is the wrong approach. Buyers (and sellers) know that nothing is free.

Read: Who Pays the Buyer Broker Fee? or A Call for an End to Cooperative Compensation. or The Wall Street Journal Gets it Right on commissions.

“In most areas a few big brokers handle most transactions.” Partly true.

From 1 January 2011 to 1 May 2012 in the Charlottesville MSA + Louisa:

– There were 3051 closed transaction in the Charlottesville MLS.
– The top 10 firms accounted for nearly 70% of the sides; a “side” being either the “buyer representation” or “seller representation” side of the transaction
– About 120 firms accounted for the remaining 30% of sides. That sounds like competition to me. (*of course, ~60 of those firms did between .5 and 5 sides)

“Buyers’ agents have an incentive only to show their clients homes whose sellers offer them a standard 3% commission.”

Partly true. This is one of the reasons I negotiate my fee with my buyer clients first; I don’t want my fee to be determined by the opposing party – it’s not right and leads to suspicions of collusion.

Read: When does a “Buyers Agent” earn his compensation? or Steering Buyers Agents

“To solve this problem, many sellers’ agents offer to cut their own fee while still offering the full price to the buyer’s agent. Alas, word soon spreads that they are giving rebates. That makes many buyers’ agents steer their clients elsewhere …”

This is one of the most absurd statements I have read; why do I care what a seller is paying their representative? I’d like to see documented facts for this rather than a speculative stab in the dark.

Some reasons the internet is not going to marginalize all segments of the real estate profession:

– Until the compensation landscape changes to where consumers are willing to pay their agents out of pocket, nothing will change.
– Not all questions have google-able answers.
– Buying a house is still complex and trying; a lot of buyers and sellers need guidance and advice. I’d say that for most of my clients, the guidance, advice and service wavers between valuable and invaluable.
– The MLS is owned and operated by Realtors; it’s neither a public service or nor right to have access to it. – Every state and locality has a different real estate market, environment, customs and practices – experts matter. Example for those in the Charlottesville area: Do you know what a 3/4 bathroom is? Other markets seem to have them; we don’t. Know what a FROG is? (hint: finished room over a garage, aka: “bonus room.”
– Most consumers buy or sell real estate every 5-10 years; the market changes seemingly every month. If you’re not doing this (real estate) every single day, you’re not going to have the necessary expertise to represent your client or yourself adequately

Related Reading

2008 when the Wharton School of Business published a deliciously misinformed post blaming Realtors for the subprime crisis
– And Wharton’s initial post and my rebuttal post
– Freakonomics take on realtors – in 2008 and in 2007 where they raised the question: How much is a Realtor worth?

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