The Economist asks why commissions are so high

“Why is it so expensive to buy or sell a house in America?” the Economist magazine recently asked.

According to the magazine in its unsigned piece, the short answer is greed.

It reports that my British counterparts charge just 2-3 percent of the sale price to “list the property, find a buyer, help you negotiate a deal and guide you through the transaction.”

Forget that here, the Economist says in its article, titled “The great realtor rip-off:”

The demise of the 6% commission may still be inevitable. But for now, it seems a long way off.

According to the magazine, one theory for the rate is that the nation’s housing bust has made it harder to unload a home.

“Selling a home is easy when prices are rising,” the publication observes.  “But when financing dries up and volumes dip, sellers may need an agent’s expertise and energetic marketing to find a buyer.”

Another theory in the piece is that “clients are suckers.”  It goes on to say that agents “routinely” tell buyers not to worry about commission size because it is the sellers who pay it.  At the same time, the magazine continues, agents tell sellers that they’ll raise the price of the home to account for the commission.

Since most consumers choose an agent because of a prior personal relationship or a referral, the writer avers, they “may be reluctant to haggle with realtors to whom they have social ties.”

A third theory advanced by the Economist is that the industry is less competitive than it looks in that “a few big brokers handle most transactions.”  They set high fees, and the industry’s regulators tend to be insiders, the magazine contends, adding:

Perhaps this is why many states have banned commission rebates—a form of discounting—or set up “minimum-service” standards that stop brokers offering fewer services for less money.

Although I long have said that we brokers and agents often are over-compensated, I am moved to challenge much of the Economist’s reasoning while acknowledging (as the magazine might have done) the limitations of anecdotal evidence such as what it heavily used and such as mine in the District of Columbia, Maryland, Virginia and, of course, New York City.

First, I don’t think any of my clients are or have been “suckers.”  Some are less sophisticated than others, but the vast majority is smart enough to have researched the ins and outs of both buying and selling property before even speaking to an agent.

Second, only in rare instances has a seller failed to ask me to defend the amount of commission I have to charge to cover my expenses, compensate me for the time I will devote to them, recognize my expertise and reward me for successfully marketing their property.  I invariably explain that, for example, a 1 percent reduction of a 6 percent commission adds up to a more than 16 percent cut in income that brokers must share with their firms.

As for telling buyers that it’s the sellers, not them, who pay the commission, they would be fools (not suckers) if they didn’t understand that the money comes out of the price of their new home.

With regard to a “few” big brokers in most communities, that assertion greatly exaggerates how the industry works.  Unquestionably, a small minority of brokers does a dauntingly disproportionate amount of business, but I could name literally dozens of big names in Manhattan alone and could identify them in the D.C. region as well.

“Few” does not take into account the large majority of everyone else who collectively does a great deal of business, and some of them do very well indeed.  All real estate is, you know, local and thus differs around the country.

I’m frankly puzzled by the point about regulators since brokerages offering cafeteria-style services have the same opportunity as everyone else to compete in the real estate marketplace.  Legislators, too, could enact restrictions that they think best (or are in the best interest), but anything that smacks of price controls strikes me as pure fantasy.

I have saved perhaps the most spurious argument for last: “The biggest cause. . . is probably the interdependent nature of the business.”

While it is true, as the magazine says without qualification, that buyers’ agents “have an incentive only to show their clients homes whose sellers offer them a standard 3 percent commission,” it also is true that conscientious and ethical brokers ignore the percentages.  According to the Economist,

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—either in solidarity with full-service brokers or because they fear a discounter will leave them with the lion’s share of the work.


Tomorrow: Weekly Roundup

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201
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