more and more posts about brokers fees

ok no thoughts then

I have no idea why 6% has remained in existence. I know when I go to sell, I will not be using a broker.

Maybe everybody's talked out about it.

There are alternatives, e.g. http://theburkhardtgroup.com/

yes makes sense.. I definitely do not want to start one more thread about the pertinence of using a broker... i m curious about the industry as a whole... where commissions look more and more in contradiction with its reality.. and yet nothing has changed... whereas for most industries, competition makes prices go lower... has the fee changed over the last 20 years ?

basic, the percentage isn't the same depending on asset price. All commissions are negotiable, but in general, 95% of agents will reduce their general rate for a higher asset price.

If you look at commissions nationwide, in aggregate they did come down over the past twenty years. However, they have gone back up in the past couple. That's a factor of the housing slump -- brokers essentially price their time, and if a property takes longer to sell, it's going to cost more money to sell it.

ali r.
DG Neary Realty

Your question is kind of like asking, why do most book agents charge 10%, and not 9% or 12%? (Yes I do know some charge 15%.) And it's a good question, and one I've thought about a lot.

The short answer is--the fee has to be high enough to attract people to get the training required and to do the work, and to cover overhead for both the agent and the firm, overhead being considerable at the big brokerage houses, and for the firm or at least its executives to make a profit.

Discount brokerages have a way of struggling, and at least one major discounter I know of failed in the past few years in the NYC area. This has happened elsewhere in the USA too.

Because when you're pricing any service, you have to price it high enough to make it worthwhile for all laborers involved, or people will go away and do something else, and companies will close their doors.

I used to wonder why sellers don't just pay a flat fee upfront for the specific work involved in trying to sell--and yes, there are brokerages that operate on that business model, I know. But it's hard for this to catch on, I think. One reason is that sellers have no guarantee of selling at all, and they don't want to spend money on something that will not work out for them. They also feel a percentage based fee that is payable only on sale will motivate the broker to find a good deal, and in this I think they are right.

As to why this percentage, or that percentage---in struggling Michigan the estate I'm involved with paid 10% commission for the sale of vacant land. Uh, you don't even have to be there to show vacant land, so that doesn't explain the percentage. What explains it is the difficulty involved in getting that piece sold, with brokers putting leaflets on the doors of the neighbors, and paying for pricey ads in places where investors shop for vacant land, among other considerations.

Also, I think it's obvious to everyone that the sale that is closed pays for all the deals that do not happen, but that the real estate agent nonetheless spent considerable life energy on. If that's not paid for, people will not do the job. Agents who can't figure out how to get involved in deals that eventually close will and do quit the business, and people quit this business in droves, as any managing broker will tell you.

The average commission rate will come down when the economics are such that it can be justified. But right now, there are plenty of brokerages and agents out there, representing every fee structure you can think up, except maybe payment in homemade cookies, and any seller can certainly shop around and choose a broker based on price, if that's the defining factor for them.

Karla Harby
Rutenberg Realty New York City
kharby@crrnyc.com

I understand your point. Thanks for that answer. So all we have to do is let the market adjust itself I guess until the oversupply of brokers out there will turn into natural selection and lower rates...

NWT: Thank you for posting the Burkhardtgroup.com link. The web site is intentionally vague with regard to rates, because each deal is unique. I can address the buy side, which is my turf. I'll leave it to Keith B. to explain how things work on the sell side.

Keith gives his agents a lot of freedom to construct deals that work for each client. My basic formula is to rebate any commission above 2% on the first $1MM of the purchase price, and anything above 1% on the amount above $1MM. So, on a $3MM purchase with a 3% buy-side split, the standard rebate is $50K (1% of the first $1MM plus 2% of the additional $2MM). Other Burkhardt Group agents may offer larger or smaller rebates, depending on their market segments and the circumstances of a particular deal.

Is this model scalable and durable? Time will tell. For this part-time broker and his clients, it works very well. On the other hand, I don't expect lower commissions or rebates to take the industry by storm.

Front_Porch and KHarby2 touched upon several reasons for the "stickiness" of commissions, and I mostly agree with their analysis. KHarby2 mentioned the industry's free-rider problem: clients who transact quickly subsidize those who transact slowly, or not at all. She's right, but I think that's a problem for the broker and the free-rider clients, and shouldn't be passed on to the broker's best clients.

One advantage (among many) of flexible pricing is the ability to reward buyers who display the willingness and ability to execute. If a buyer doesn't know what he wants, or wants something he may not be able to afford, I can offer him a smaller rebate, or may simply refer him to a traditional broker. That screening process isn't just a key component of our business model; it's also an important part of our service to our clients, because it spares them from carrying dead weight. Call it cherry-picking if you like; I think of it as rewarding cherries for being cherries.

While attracting the right clients is important, the biggest enabling factor of the model is very low overhead. KHarby2 mentioned that the big brokerages have high fixed expenses; most also have to provide a return to shareholders. We don't. Does lower overhead mean less service? So far, nobody seems to have noticed much difference. Frankly, scheduling viewings isn't exactly rocket science, and a Board package copied at the Staples self-service kiosk looks about the same as one from the print center at Corcoran. Front_Porch swears by the resources of her firm, and she certainly knows what's best for her and her clients. Keith and I have never asserted that our approach will work for every buyer or seller. We just think choice is good, and low overhead allows us to offer options that bigger firms can't.

Even with low overhead and effective screening, the economics of discounted commissions are challenging at lower price points. As KHarby2 notes, discounting may be impractical in certain distressed markets. For me, that doesn't pose much of a problem because my market is fairly pricey. A commission of 1-2% on a UWS classic seven is still a lot of money, relative to the amount of effort required. I don't lose sleep over the difficulty of selling a vacant lot in Detroit.

"The short answer is--the fee has to be high enough to attract people to get the training required and to do the work, and to cover overhead for both the agent and the firm, overhead being considerable at the big brokerage houses, and for the firm or at least its executives to make a profit."

"The training required ..."? Most brokers walk in and say "This is the kitchen; this is the living room; you want it? If not, I have somebody else offering 3% above ask." A trained monkey could do that.

Of course, some do have the ability to BS - I remember walking into a 700 square foot apartment in one of the Trump rentals that had 10 foot ceilings (or maybe 9 - whatever if 1 foot more than the standard; I don't recall) and told me the "High ceiling give it that 'gothic feel'"? Seriously? A plain vanilla 700 sq ft one bedroom with plain white walls, etc and he used the term 'gothic feel'" Yea, that took training.

I come from almost 25 years as a freelance writer, and there is no license required for that job, nor memberships, nor much of anything beyond a computer, phone and an internet connection. So that's my frame of reference in terms of training and start-up costs. Except for the guys who have been digging cars out of the snow for the past few days, no self employment job gets more minimal than that.

Real estate salespersons have to take 75 hours of classroom/online instruction, actually be there for it (attendance is tightly controlled), which could necessitate time off of work from another job. They do have to pass two exams (and people do flunk out, they did from my class) and eventually pay for various memberships and supplies. Depending on the firm, they also have to pay for some or all of their advertising. All of that makes it more expensive and time-consuming to go into real estate than to go into writing, which as I've said requires very little start up capital.

The showing of the space is the obvious thing brokers do, and it's obviously easy (although I'm not sure about that trained monkey working out, at least in some co-ops). It's all the stuff that happens before and after the showing that is where the skill, or craft, or whatever else you want to call it, comes into play. If you haven't lived through some of this, and the many things that can go haywire, it might be hard to have any appreciation for the broker's role.

Karla Harby
Rutenberg NYC

KHarby2: The analogy to freelance writing is quite apt. Neither field has any meaningful barriers to entry; both pose significant obstacles to success. The attrition rate among writers is probably lower, simply because a struggling writer doesn't have to "quit" writing. There's no license to give up.

With regard to the 75-hour training requirement and the "tightly controlled" attendance, there might - just hypothetically - be a way to complete the on-line course without actually logging 75 hours in front of the computer.

It's true that good brokers are most valuable when things go "haywire", but how often does that really happen? And isn't this basically another aspect of the free-rider issue, where high commissions on easy deals subsidize the more problematic transactions?

I guess I also (and remember, I've been a buyer and seller in both New York County and Nassau County) don't understand this single-minded emphasis on price. If this were a commodity business, sure, you'd want the cheapest gas.

But what I (and note I'm saying "I," not "most brokers" who I agree are morons) do isn't a commodity. I help people buy, sell, and rent apartments, and I'm very very very good at that -- much better than most of my competition -- and that's why my clients pay me.

They bargain for a fair price, sure, but not the absolute cheapest -- any more than they wrangle with their doctors. The people who hire me pay me to get result X, and I deliver it.

ali r.
DG Neary Realty

Returning to basicinformation's original question, I hope KHarby2 can shed some light on Rutenberg's commission rates, because her firm is uniquely positioned to provode leadership on this issue. Rutenberg has achieved impressive growth by keeping overhead low and allowing brokers to retain a larger proportion of commission income than traditional firms. So far, though, there does not seem to be any discernible difference between the commission rate on a typical Rutenberg exclusive and the industry as a whole. The rates remain at industry norms, despite a cost structure that should enable profitable business around 4-4.5% on high-priced listings (assuming a 2.5% buy-side split) and much lower on dual-agency deals.

There's no mystery about the reluctance to lower commission rates - it's money out of the broker's pocket. The pertinent question for this discussion is whether brokers at a low-overhead firm like Rutenberg are permitted to slash rates to capture business, and whether they are likely to discount more aggressively in the future.

Front_Porch: I understand that you're very, very, very good, despite the handicap of four years in Adams House. A fair number of other people are very, very, very good too. The question here isn't why good brokers can charge more than idiots. The question is why good brokers don't compete more vigorously with each other on price. Fixed overhead and house splits are clearly a challenge; but why do rates vary so little among brokerages with dramatically different cost and comp structures?

By the way, Happy New Year.

Sorry for the typo - "provode" s/b provide.

thx west 81st for focusing on the original question. I am very familiar with other intermediation businesses and in all of them i have witnessed commissions going lower and brokers going out of business (the exception is maybe the auction house business where they still apply absurd rates in my view)... but real estate intermediation... looks pretty steady and homogeneous

Keep in mind that most discounting is handled quietly, on a case-by-case basis, to win exclusives. On high-value transactions, 5% is close to becoming the rule rather than the exception; lower rates are not uncommon. Among the biggest firms, at least one seems to care very little about discounting, as long as the house gets its cut. As far as I know, no big firms offer rebates to buyers, but I wouldn't expect them to advertise it if they did.

The party line from REBNY is that sellers should happily pay 6% in a difficult market, because properties are harder to sell, and it's more important to retain a good broker and provide adequate funds for marketing. There's some merit to that reasoning, but I think it will be hard to hold the line on pricing - especially at high price points - with so many capable brokers competing for fewer transactions.

In the meantime, high nominal commission rates help us discounters, by expanding our competitive advantage and giving us more room for negotiation.

What is the breakpoint at which discounting to 5% starts to be discussed?

I guess it s on a case by case basis... As a seller I would have a tough time paying 50,000 usd to sell a 1m usd property (for example). I dont think there is anything a broker could do that justifies such an amount given how transparent and regulated is the RE industry here in Manhattan. You write a quick description, you take a few nice pictures at the right moment of the day for the light, you organize a 2h OH on a weekly basis and you let the market do the rest. You dont have to sollicit anybody or to knock at people's door like a bible salesman, since every listing is shared with the public (correct me if I m wrong). 50,000 usd is a lot when you compare to the average % of equity people puts in their purchase for example... But at the same time, I have noticed that things are overall pretty well balanced in Manhattan so there must be sthg I m missing...