Uncoupling real estate commission: 10 Megatrends pointing towards Tipping Point in 2006
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The document discusses the need to uncouple the traditional two-sided real estate commission system, outlining ten mega-trends that could lead to significant changes in the industry by 2006. Key trends include the rise of rebate models, the proliferation of entry-only MLS listings, and widespread consumer dissatisfaction with commission structures. It emphasizes the necessity for regulatory reform and innovative business models to enable buyers and sellers to negotiate fees independently, potentially saving billions annually.
Uncoupling real estate commission: 10 Megatrends pointing towards Tipping Point in 2006
- 1. Uncoupling the traditional two-sided real estate commission 10 Mega-trends leading towards Tipping Point in 2006
- 2. Overview Two-sided fee: Linchpin of 900 MLSs Barrier to price competition Goal: separate agents / separate fees Consumer savings: $10 billion annually 10 trends = tipping point/break point?
- 3. 1. Subagency disappearing Realtors moving away from subagency Buyer agents negotiating own fees Historical basis for two-sided commission becoming obsolete?
- 4. 2. Rebate models pressuring Lending Tree, ZipRealty, & others Rebates moved into mainstream Chipping away at two-sided commission But not going far enough
- 5. 3. Old Biz models experimenting DeWolfe New England, leading RE firm DirectDirect.com: separate commissions “More logical if each paid” “Equitable, straightorward, honest, & revolutionary” Purchased by NRT/ Cendant, Fall 2002
- 6. 4. MLS Listing entry only proliferating Hundreds of listing entry only options Flat fees: under $500 to 1% Some require 2-2.5% coop fees Undermines ability to maximize savings Fear listings will be boycotted
- 7. 5. 103 - 107% financing Allow buyers to finance 3% closing costs Another 4% to pay-off consumer debt Why not allow buyers to finance fees?
- 8. 6. Banks competing Proposal 1st made by Fed in 2001 Brookings Institute endorsed in 2005 Increase competition in industry? Likely to uncouple fees, offer financing Rising foreclosures will minimize fees
- 9. 7. Fee-for-service unbundling Menu of service / real estate a la carte NAR: business model of the future? Potential partners with banks National Assoc. of R.E. Consultants founded in 2000
- 10. 8. Widespread consumer dissatisfaction Gomez/Inman @ 2000: CBSMarketWatch: Most overpaid jobs CNN/Money: Brokers overpaid WSJ: consumers pay $24 billion / yr. more than European counterparts
- 11. 9. Regulators looking at barriers to competition GAO congressional study overlooked Brookings made repeated reference FTC seeking recommendations on how to uncouple
- 12. 10. Real estate bubble shrinking home equity Prolonged downcycle following bubble? Home prices stagnate or fall Home equity shrinking/negative equity? Seek alternatives to preserve equity Minimize transaction costs, both sides
- 13. Time for a change 1991 CFA: “decouple commission” 1996 Former NAR economists: “next major revolution replacing commission” 2000 Inman / Gomez: “1 in 4 buyers, 1 in 3 sellers wants full service, full fee” 2005 agent: “outdated system...Stop telling me how much I must work for...”
- 14. Regulatory intervention Why is the industry still built on two-side commission? What obstacles need to be removed before... Buyers & sellers hire own agents Determine what services are worth Compensate independently
- 15. Policy change necessary Goal: finance fees independently Fannie / Freddie hold the key Change could be implemented rapidly Billions in consumer savings annually
- 16. Local experimentation Agents & sellers fear being boycotted A few innovators are experimenting MLS require offer of compensation BYOB: Bring your own broker Minimal fee offered/buyer pays extra Currently no easy way to finance
- 17. Involving consumer groups Back to the future: CFA reform @ 1991 2005: CFA return to real estate? Push overdue reform past tipping point Help millions of buyers and sellers save billions of dollars annually Build coalition to lobby Fannie / Freddie
- 18. Discussion: What series of actions needed next to break-up the two-sided commission? What series of actions needed next to break-up the two-sided commission? Prepared by Bill Wendel, The Real Estate Cafe. Comments? Email RealEstateCafe@gmail.com or 617-661-4046 to discuss / give feedback