An examination of inventory and the market and how it impacts commission rates.
We looked at three factors: inventory, brokerage models, and referral fees to see what the possible impact of those factors would be on commissions. Here’s what we found.
The Market’s Impact on Commission Rates
Commission rates appear to be very sensitive to the availability of listing inventory and the population of REALTORS®.[1]
We examined the average number of listings in the national market from 2000-2017; the average number of Realtors over that same period and compared the ratio of listings to Realtors against the average commission rate for each of those years. (See attached exhibit #1.)
There is clearly a strong correlation between this data. What it signals is that when listings are scarce relative to the number of Realtors in almost every year the commission rate declines. When the ratio of listings to Realtors climbs (as in 2008-2010) the average commission rate increases. With few exceptions, these data establish a clear pattern.
What we know about the residential brokerage business is that real estate brokers and agents compete for business aggressively. When listings are in relatively short supply, brokers and agents compete even more aggressively for those listings. One of the ways they compete is on the price, or commission rate, that they will charge. When markets are strongly oriented towards the sellers (which it has been for the past 4-6 years) a well-priced listing will sell relatively quickly. This improves the economics for the broker who has that listing as it will take less time and cost less money, generally, to sell than when markets are more oriented towards buyers of homes.
Thus the market is working as it should. It is clear that brokers and agents themselves compete aggressively for listings and that this competition for scarce listings drives the commission rates that consumers are paying for these services.
Consumers Know Their Options
REAL Trends does its own consumer research and has done so over the past 16 years. We use respected survey firms like Harris Interactive and Nielsen to assist in this research. As long ago as 2005, for instance, when we last asked consumers what methods they used to sell their homes, nearly a fifth said that they planned to attempt to sell their home without any assistance. (See exhibit #2).
That survey showed also that consumers shifted between different models of selling assistance during their process. What it most importantly shows is that a majority of consumers are aware that they a) can sell or purchase homes without using an agent, b) they are aware that there are alternatives to using a full service, full price, real estate agent and c) they often try other methods to either sell or buy homes prior to the selection of such an agent.
Low Barriers to Entry Provide Opportunity
In the last ten years, there has been an explosion of new brokerage models in the U.S. residential real estate industry. At the national level brokerage firms such as Redfin, Compass, eXp, Realty One Group, HomeSmart and Fathom Realty have launched. Redfin alone closed over 45,000 transactions in 2017 and offers both reduced listing commissions and rebates to buyers of homes. The others listed offer mainly lower costs to Realtors in running their businesses. Each is growing rapidly and is exerting downward pressure on commission rates and/or other costs to housing consumers (we will discuss in the next section).
In the past such firms as HelpUSell (1977), Assist2Sell (1987) and ZipRealty (1998) operated by offering housing consumers lower commission costs. At their peak, HelpUSell and Assist2Sell had over 1,500 franchised locations in the United States. Zip Realty went public and at its peak was closing nearly 30,000 transactions per year both through its owned brokerage operations as well as through affiliated realty firms.
Each of these firms (and hundreds of other limited service flat fee brokerage firms in markets across the country) had ample resources to offer their reduced-price services.
In addition to the entry of numerous alternative residential real estate brokerage firms, new entries now include such companies as Open Door, OfferPad, and Knock.com that will purchase homes direct from sellers. Even Zillow, the leading real estate advertising website in terms of total online traffic, is now purchasing and reselling homes. In short, competition for housing consumers has never been as vigorous as it is at this time.
There are numerous discount brokerage service offerings available to consumers in the United States. In Denver, Colorado, alone, a simple Google search revealed 9 different discount residential brokerage offerings. They include Trelora, Altrue Realty, Simply Optimum Realty, List with Clever, Redify, Colorado Flat Fee Realty, Assist2Sell and Realproteam and Redfin. A similar search in Atlanta, Georgia, reveals over 14 such firms just on the first page of the search. And this doesn’t include such firms as Assist2Sell or HelpUSell.
Another indication of competition from discount or lower fee realty services firms is the recent entry of Purple Bricks, a well-funded discount realty firm ($177 million in last round) which is now getting established in Los Angeles and New York City.
Structure and Direction Trending to Lower Commission Rates
We estimate that well over half of all real estate agents in the United States work for brokerage firms that do not have a financial incentive to police the commission rates that their agents charge.
National firms such as RE/MAX (65,000 agents), Keller Williams Realty International (166,000 agents), Realty One Group (12,000 agents), eXp (10,000 agents) and HomeSmart (14,000 agents) are just the most well-known national companies whose compensation policies and programs provide no incentive for the brokerage to police or care about what their agents charge. For instance, RE/MAX brokerage firms charge the great majority of their agents a flat monthly fee, as opposed to a percentage of the commission revenue, for the services they provide their agents. Keller Williams charges a ‘capped’ fee wherein once the agent has paid a certain amount, they pay no more to their brokerage. Realty One Group and HomeSmart charge flat monthly and transactional fees and again they have no financial incentive to police or care about what their agents charge for the agent’s services to housing consumers.
Add to these national firms regional and local companies like Benchmark (Nashville), Signature Realty (Kansas City), Equity Group (Salt Lake City), West USA (Phoenix), Charles Rutenberg (Florida, NYC) and Wilkinson (North Carolina) and many others. Each charges a variation of a flat monthly fee and transactional fees and again the owner/operator of the brokerage firm has no financial incentive to police agent commission or fee charges to housing consumers.
The effect of this change, which has happened slowly over the past 5-7 years, is that whatever influence brokerage firms once had on the direction of commission rates or other charges is disappearing for the majority of the brokerage industry. When added to the nearly universal scarcity of listings of homes for sale, it creates significant, long-lasting downward pressure on commission rates.
Calculating the National Average Commission Rate
When REAL Trends and others track the national average commission rate we use Gross Commission Income (GCI) divided by the sales price. The GCI is the total of all commission income from closed residential transactions. This top-line number does not reflect referral fees paid to third parties, such as online marketing businesses or relocation management referral firms. This causes the national average commission rate to be higher than it actually is when taking into account the hundreds of thousands of residential transactions where there is a referral source.
Firms such as Cartus, Brookfield Relocation and Weichert Relocation and Weichert Lead Network charge referral fees for their corporate and affinity group business that is generated and serviced by real estate brokerage firms and their agents. These fees range from 30-45% of the total commission earned by the brokerage and their agents. Other firms such as Referral Exchange and OpCity generate leads online and refer them in the same manner to local real estate brokerage firms and their agents.
Cartus alone generated 245,000 referrals and closings in 2017 spread between their corporate relocation and affinity group business. Brookfield and Weichert generated approximately one half this amount. Firms such as Referral Exchange referred and closed more than 15,000 such transactions. Leading Real Estate Companies of the World generated an estimated 30,000 closed referrals among their large independent brokerage membership. The total referral volumes within the national franchise brands cannot be determined but could conservatively be between 50,000 – 70,000 closed referrals annually.
While no total estimate for all firms engaged in these activities is not available to us, we can conservatively estimate that it is in a range of 500,000-600,000. Out of total existing home sales of 5.5 million, this would mean that on approximately 10% of all transactions closed last year, there was a discounted commission involved because of a referral fee requirement. The estimated reduction of commission income to brokerage firms and their agents from these transactions would be a range of $1.5 to $1.6 billion ($300,000 average sales price, 2.5% average commission on each transaction side, 40% referral fee times 500,000 transactions equals $1.5 billion) which alone is nearly 2.0% of all gross commission income earned by residential brokerage firms and their agents in 2017.
Conclusions
The market for residential realty services is highly competitive and getting more so. Not only are discount realty service firms abundant in most markets, but as our research shows consumers are very aware that they can either not use any realty services firm or have a range of offerings to choose from.
Competition among existing traditional realty services firms is already lowering the commissions that consumers are paying, and all meaningful trends indicate that the pressure is for lower commissions, not higher. Whether it is due to the increase in agents working in brokerage firms whose business models don’t reinforce any particular commission rate or the impact of third-party referral sources which are themselves lowering commissions generated to brokerage firms and their agents, there is fierce competition in the market for sellers and buyers of real estate that is resulting in lowered commission rates for all consumers.
[1] REALTOR® is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS® and subscribe to its strict Code of Ethics.
