Tempests in Teapots

J Philip Faranda February 21, 2009

Inman News has been running stories this month about the supposed controversy and big changes coming to how real estate professionals are paid. Here are some of the headlines:

Did I not get the memo? I’ve heard lots of talk about the Stimulus Bill, Alex Rodriguez taking steroids, and how much of a lock the late Heath Ledger is for an Academy Award, but I never heard that there was a revolution coming in how real estate brokers are paid. I don’t begrudge the frown on the face of a home seller when I sketch out a net sheet on what they can expect in proceeds after their sale. That line item with the broker fee is far larger than the New York Transfer Tax in my figures. But most people agree- that’s baseball! By the time the pie is split between 2 companies and two salespeople, nobody is getting rich on that one transaction. Moreover, when people see the offer of compensation offered by recent sales, they know that it is suicide to offer a smaller commission to buyer agents.

Most of the Iman articles are very long on assertions, but very wanting in facts or a plausible, logical case. For instance, in the article  Offer of compensation’ must go, the author asserts that the MLS inventory ought not have a commission offered to buyer agents. Instead, those agents should be paid by their buyer clients, who will be “empowered,” because the seller isn’t paying the commission. I respectfully disagree. If buyer agents were paid by buyers, buyer agency would virtually disappear; no buyer wants to pay another fee above the largest expenditure of their life when they could have gone right to the listing agent and saved that fee right off the top. Right or wrong, that is human nature.

There is no more controversy about how agents are paid today than there was in 1996 when I was first licensed. You have a small percentage that doesn’t want to pay a commission, and the rest who feel it is the cost of doing business the right way in the largest transaction of their life. However, if you want to get clicks and comments, publishing these articles in a series to as to contrive a movement that does not exist might get you more water cooler attention.

Not long ago, I wrote a post entitled “Brokerage is Alive and Well.” In it, I briefly discuss why real estate brokerage has actually thrived in conditions that have virtually destroyed the brokerage models of other assets, such as stocks. While I in no way would poo-poo any change that might affect my livelihood, I have yet to see the evidence that there is any substance to the controversy other than an effort to stir the pot.

The market is efficient. If there were a better way of structuring real estate brokerage, a new model would have taken root and grown organically rather quickly. It hasn’t. A few well -capitalized ventures such as Foxtons and Iggy’s House  have made waves, but they dried up when the investment capital ran out, because they weren’t profitable on their own merit.

And if something is not sustainable by it’s own merit, it will not bring about the change that some claim is coming.

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