Yes, but the fact that agents spend a vast amount of time on client acquisition doesn’t imply that their compensation level per hour of actual work is a fair market-driven rate.
What’s happening is that the cartel has successfully fixed prices at a ridiculously high level. So it’s worthwhile for vastly more agents than are required for the work available to enter the market to chase after this highly lucrative business. Each client pays 10 times what the work is worth, to agents who spend 90% of their time competing with one another to acquire clients, and 10% of their time doing productive work for clients.
If it were not a cartel and market forces were functioning properly, agents would compete on price, commissions would drop to more like 1%, only the best and most efficient agents would get the business and 90% of agents would just be out of a job.
I think a lot of women become real estate agents because 1) as you say it tends to allow for flexible hours, 2) it relies heavily on interpersonal vs technical skills, and 3) the key decision-makers about real estate purchases tend to be women.
The commission is all included in the sale price, i.e. it is deducted from the seller’s proceeds. It is usually split between seller’s broker and buyer’s broker (if there is one). This creates the illusion that the buyer is not paying anything.
The agent does some paperwork, the amount of work depends on the state, but not title search and usually not conveyancing.
Another aspect of the U.S. real estate system that is a bizarre ripoff is “title insurance”, which as you know simply does not exist in the U.K. In the U.K., your solicitor is responsible for title search and conveyancing - and you pay them a reasonable fee to do this, and it’s just their professional responsibility to do it right.
In the U.S., you must buy “title insurance”, which amounts to: we’re going to charge you an egregious amount of money to insure you against the possibility that we haven’t done our job right on the title search, and somebody else later shows up with a claim on the property. Most egregiously, title insurance is not transferable to the next buyer, so they get their insurance premium over and over again every time a property changes hands.
Having lived in various capitalist countries, it’s quite odd how quirks of the way certain markets have traditionally been set up, plus regulators just seeming to have blind spots (and of course the U.S. quirk of state vs federal law), and consumers just being habituated to being outrageously ripped off can lead to these odd little pockets of bizarre market inefficiency.
In the U.S., we have a cartel that extracts 4%-6% from every real estate transfer, combined with a healthcare system that for most people ties the quality of heath coverage to a specific job. This creates a huge cost and risk to moving to a new or better job. I’ve never seen it quantified, but it must be a significant drag on economic productivity.
Compare the U.K., where the transaction cost of moving across the country is 1-2%, and your healthcare is always exactly the same when you get there.
Yes? I mean, by nature, all costs to consumer for any product are reflective of the whole process, whether they’re billed explicitly for each line item or not.
WRT to the OP, agents certainly bring value. The problem is, the value they bring doesn’t scale with the value of the property (unless they can guarantee an increase in % sale price compared to not using an agent).
An agent is worth something, but I don’t see how that something ought to be pegged to property value. Does an agent do half as good a job selling a $130k condo as a $260k home?
Another factor is that the agent is primarily interested in the sale going through. Not in getting top dollar. You might want an extra $10k from your property, but how much work is the rep going to put in for that extra $300?
I remember reading of studies suggesting realtors got higher prices for THEIR homes, than for homes in which they repped other sellers.
Another factor is the loyalty of the agents. Once the deal is signed, the buyers might be surprised to learn that their agent has a greater interest in the sale going through, than in repping their interests.
For a selling broker, a commission contingent on completed sale does make sense, because that’s aligned with the seller’s interest.
But a straight percentage of the total price does not align well with the value generated by a selling broker. If this were not a cartel, one could imagine negotiating the selling broker’s fee to provide a financial incentive that’s much better aligned with any value they actually deliver to the seller.
For example, let’s say the market value of a property is about $1 million. It would sell instantly if it were underpriced at $950,000 or lower, so it makes little sense that the agent be paid based on the total proceeds. If the seller is concerned obtaining the highest price possible, the broker could more sensibly be compensated by paying them a modest fixed fee plus (say) 20% of any price achieved in excess of a baseline figure of $1 million.
Or if the seller is more motivated to sell quickly, there could be a modest fixed fee plus a bonus that starts high and steadily reduces based on time to completion.
In the UK, the lawyers and the legal system uniquely refuse to accept responsibility for professional mistakes. “Uniquely”, because they pretty much have rejected the idea that anybody else has professional opinions – medicine is all ‘science’ and if your opinion turns out to be wrong you were negligent. But the title system is simpler than some parts of the USA, and it’s partly a government responsibility.
The reason you ‘must’ buy title insurance is that the title insurance companies typically handle the title transfer, which is just a customary allocation of work.
Title insurance reflects the complexity of the land title system. The complexity of the land title system varies from place to place in the USA, as does the importance and cost of title insurance. The fundamental reason why the land title system is so risky in the USA has nothing to do with lawyers taking responsibility: it’s because Government has directed responsibility to the insurance industry and the Courts, which is a characteristically American approach.
Instead of regulating stuff to make it work better, the American people use the courts and commerce. Instead of EU directives, they have UL. Instead of Torrens titles, they have title insurance.
You keep repeating this claim throughout the thread. Can you provide some more detail on exactly how the “cartel” managed to “fix prices”? What’s stopping someone else from offering to do it at a lower price?
Realtors® generally show only houses listed by other Realtors® to their clients, and the usual multi-list services likewise only include Realtor®-listed properties. While their commissions are not legally fixed, in practical terms few agents are willing to deviate very much from whatever is standard in your locale. You CAN do it yourself or use a non-Realtor®, but you usually won’t be able to get your property in front of the same number of eyeballs, and a more limited market usually means you get less money.
But that’s the crux of the question. What’s to stop a Realtor from showing a house for less than the other Realtors and thereby increasing their listings?
Right. The only reason they were able to keep this up is that for a long time they had monopoly ownership of the MLS system, I think. Hopefully with more options opening up via the internet, this will change. As you say, estate agents in the UK are much cheaper… people here are ‘gobsmacked’ at the idea of a 6% agent cut!
Never had the problem, so I didn’t put much thought into it. $50k is pretty high. But I didn’t begrudge the $22k all that much I just had to pay. Far less than some of the other parasitic people that get involved with house sales and do nothing well.
What do you think the compensation should be for the agent? I think the selling agent deserves more than the buying agent.
Interesting article (interesting to me, anyway) in The Economist. The article is about how technology has and is disrupting retail investor participation in markets. Paywalled?
They point out that the residential real estate market is going through the beginnings of disruption that will likely (hopefully) reduce the transaction costs to buyers.
"Even in residential property, the most sluggish and expensive market of all, firms are using technology to improve efficiency. “When we thought about what makes a properly functioning marketplace, it all came down to price discovery and data,” says Rich Barton, the founder of Zillow, an “i-buying” firm, which acts like a marketmaker for houses. After a decade gathering data on every home in America, it can now plug a property’s characteristics into machine-learning algorithms to price them, just as Mr Magdelinic plugs in characteristics of bonds. Zillow buys homes based on the algorithm’s assessment, taking them onto its balance-sheet. It then sells these on its platform.
There is evidence this is pushing down agents’ fees. Commissions are dropping quickly in areas in which i-buyers operate. A study by Mike DelPrete of the University of Colorado suggests that the fees i-buyers pay to buyers’ agents are falling. In places such as Phoenix, Dallas, and Raleigh the fees paid to agents have dropped by around 0.5-1 percentage points in a little over a year. In Atlanta they have fallen by half in just two years."
Based on reasonable assumptions for an hourly rate for their skills and qualifications and the number of hours typically spent selling a house, I think if market forces were operating they’d be earning around 10%-20% of what they are currently paid for selling a house. This does not imply that a successful broker’s income should drop by 80-90%. Instead, most should be out of a job. The market should not support nearly so many brokers who can currently survive on getting grossly overpaid (per house) for selling a few houses a year. Those that survived would sell more houses, i.e. spend most of their time doing productive work for clients rather than spending most of their time competing with other brokers to acquire clients.
The other issue, as discussed above, is that the structure of how they are paid is not aligned with the client’s interests.
