New Math On the Old Commission
Sellers Scrutinize the Value Of Regular Brokers' Services

By Dina ElBoghdady
Washington Post Staff Writer
Saturday, November 11, 2006

James Keim received plenty of inquiries after he posted a For Sale By Owner sign on the lawn of his Alexandria home this summer.

But they did not come from potential buyers. Instead, they came from real estate agents who wanted him to abandon the do-it-yourself route and sign up with them. Then they came from rival discount agents who told him to ignore those competitors because they could help sell his home at a fraction of the cost.

"It felt like everyone within a 20-mile radius was trying to sell me their services," said Keim, 54, a government contractor. "They weren't even telling me how good they were. They were telling me how bad everybody else was."

Similar scenarios are unfolding all over. Traditional agents who once had a lock on the business of selling and buying homes now face pressure from firms that offer deeply discounted but limited services. The rivalry threatens to shake up the decades-old realty commission system, creating a rift that has prompted state and federal regulators to step into the fray.

The discount business has grown more slowly than many forecasters expected. Once full-service agents started using the Internet as a marketing tool and posting sales listings previously unavailable to the masses, free-market thinkers predicted the agents' role would diminish along with their commissions.

But the Internet has not yet upended the business as it did those of traditional stock brokers and travel agents. Instead, the average real estate commission has dropped only about 1 percentage point since 1991, from 6.1 percent to 5 percent, according to consulting firm Real Trends Inc., which polls hundreds of brokerages on the topic and makes public the aggregate numbers. Rising home prices more than made up for the drop.

Depending on whom you ask, traditional agents keep hanging in there because they play a valuable role in negotiating a complex and pricey transaction unfamiliar to most consumers or because they use heavy-handed tactics to squash competitors -- or a little of both.

However, discounters are making inroads. They have captured about 8 percent of home sellers this year -- down from 11 percent last year, but still a sizeable chunk, said Steve Murray, president of Real Trends. Only four years ago, discounters lured a mere 2 percent of sellers.

At stake are tens of billions of dollars in commissions annually -- $67.5 billion last year alone.

"Many traditional brokers are threatened by the discounters and they should be," Murray said.

The housing boom nurtured the discounters. Buyers snapped up homes just days after they were listed. And sellers balked at paying hefty commissions on houses that were practically selling themselves, said Bruce Hahn, president of the American Homeowners Grassroots Alliance in Arlington.

"Sellers went to the settlement table and said: 'What? I paid $30,000 for an effort that took a few days worth of work?' " Hahn said.

More than 67 percent of real estate agents said the biggest impact on their commission rates last year came from discounters, according to a national poll of 1,000 agents released last month by Inman News, a real estate news services.

But times are changing. The market is softening.

When that happens, sellers turn anxious, said P. Wesley Foster Jr., chairman of Long & Foster Real Estate Inc., the largest brokerage in the Washington region. They want open houses, fancy brochures, tough negotiators. Paying discounters who post their houses on the multiple-listing service for a few hundred bucks, then walk away, sounds less appealing to them.

"When the market is hot, the discounters come out to play, but when the market is slow most of them go away," Foster said. "We're feeling less pressure from discounters this year than last year."

Traditionally, sellers are the ones who pay commissions to the brokers on both sides of the deal. The brokers then keep a portion of the money and pay an agreed-upon share to the agents.

Brokerages can set a commission level or range to list homes for sellers. Still, consumers can haggle over those rates. Agents can negotiate a more lucrative split for themselves. As discounters gain momentum, both are doing so more often.

"The agents are saying: 'Give me more. Give me more,' " Foster said. "The clients are saying: 'Don't charge as much. Don't charge as much.' "

And buyers are saying: Does any of this affect me?

It does because the commission is reflected in the asking price of a home. The higher it is, the more money buyers fork out.

That's where another segment of discounters see a moneymaking opportunity: Web-based rebaters.

Those firms operate similarly to their flat-fee cousins. Generally, they keep their costs down by doing as little of the legwork as possible. Then they give the customer a portion of the commission that the company receives.

BuySide Realty Inc., a Chicago-based firm, gives 75 percent of its commission to buyers who find their own homes. Instead of scouting for houses or driving clients around, BuySide focuses on scheduling appointments for clients who want to view properties and walking them through the offering and closing process via e-mail and phone.

"We ultimately feel that finding the home is three-quarters of the work, and that's why we give the buyer three-quarters of the commission," said Joseph Fox, BuySide's chief executive.

The company, launched in April, entered the Virginia market in July and operates in four other states. Their model is similar to that of other rebaters around the country, such as Redfin, which operates on the West Coast.

BuySide agents working with Virginia clients sit in a Chicago call center. They are paid a salary, not commission. Clients who want BuySide to schedule appointments for them must be pre-approved for mortgages.

Sellers' agents should be rooting for BuySide, Fox said, because it delivers pre-approved buyers to their doorsteps and frees up buyers to kick in more money toward the price of a home. In cases where the buyer and seller are $10,000 to $15,000 apart, "I've seen our rebates close the gap on the transaction," he said.

But by BuySide's own estimates, about 9 percent of the traditional listing agents they approach resist working with them, presumably because showing houses and answering questions for BuySide clients adds to their duties without compensating them for it. Some refuse to show homes to BuySide customers, Fox said.

To get around that, "I've had customers who made offers contingent upon seeing the home," Fox said.

Whether on the selling or the buying side, many discounters can pull out plenty of hate e-mails from their traditional counterparts.

Each side accuses the other of doing a disservice to consumers.

Traditional firms say discounters offer poor service, then expect them to pick up the slack. They have pressed several states, with some success, to outlaw rebate firms and to force flat-fee brokers to widen their array of services.

The discounters say that practice is designed to stifle competition and allow full-service agents to charge excessive commissions. In some cases, federal regulators agreed and took action.

"All we've heard is hypotheticals about how consumers would be harmed and how real estate agents would have to do too much or expose them to risk, but there is no evidence of that occurring," said James Cooper, the Federal Trade Commission's deputy director of policy planning. "If there's a market failure, no one has shown us evidence of that."

If a market failure exists, blame it on the cartel-like behavior of traditional brokers, said Stephen Brobeck, executive director of the Consumer Federation of America.

The most effective way to create real price competition is to bust that system and end commission splits between brokers who represent buyers and sellers, he said.

"The effect of the split is to make it extremely disadvantageous for any seller to list a split below 3 percent in most areas," Brobeck said. If they do, the buyer's agent could bypass the house and take clients only to those sellers who guarantee a 3 percent commission.

Also at issue are the multiple-listing services, cooperatives formed by real estate brokers in which all their properties for sale are lumped together in one database. Most of the nation's 900 such services display members' listings on Internet sites that can be accessed by the public.

Last month, the FTC said five multiple-listing services charged with barring the listings of some discounters from appearing on public Web sites agreed not to engage in those practices. The agency sued another two Michigan firms, facing similar charges, that refused to settle.

But traditional brokerages argue that the market is competitive and efficient because of the listing services, as Tom Kunz, president and chief executive of Century 21 Real Estate LLC said at an FTC hearing last year.

"The residential real estate industry is one of the last great industries where entrepreneurs can open up shop next door to the largest brokerage firm in town, join a cooperative group called an MLS and share in their competitor's inventory, invest relatively little in the start-up costs and actually make a living," Kunz said in a statement.

Keim, the Alexandria homeowner, was oblivious to all this when he and his wife, Jane, put up their for-sale sign in June. All he knew is that he didn't want to pay a 6 percent commission.

But a month later, with no potential buyer in sight, he considered hiring a traditional agent.

Then he spotted a flier from RealEstatebyOwnerInc.com, an Arlington flat-fee brokerage.

He googled. He called. He signed up online. For $199, he got a posting on the multiple-listing service, the usual disclosure documents, a yard sign, and some hand-holding from co-founder Michael Schmidle.

A day later, he got an offer that he felt was reasonably close to his $730,000 asking price. He paid the buyer's agent a 3 percent commission and the deal closed in September.

Schmidle, a real estate agent since 1973, formed his company in 1999. Later his wife, Teena, and her colleague Eric Kutch, both former Long & Foster agents, joined him.

In addition to the $199 package Keim bought, the firm will write contracts, rent lockboxes, and offer other services off an a la carte menu. They have also set up a sister company, Everything Real Estate Inc., to offer traditional services. They refer clients back and forth.

Through the flat-fee business, they sold 364 homes last year with a sales volume of $158,031,584, Schmidle said. Had all those sellers paid a 3 percent commission, listing brokers would have collected $4.7 million.

But the promise of a cheap, easy deal does not always pan out.

When Dan Kilcoyne and his wife, Shira, decided to sell their Silver Spring townhouse, he logged on to ForSaleByOwner.com and found a local flat-fee broker who gave him everything he expected for $300: a yard sign, the paperwork, a posting on the multiple-listing service. "It was very smooth and very easy."

But 60 days into the process, he knocked $20,000 off his $585,000 asking price because he had no offers.

"Other agents would not bring people into our house," said Kilcoyne, 31. They told him they feared doing more work for less pay, because he did not have an agent. He also offered a relatively low 2.5 percent to agents who brought him a buyer.

Ninety days into the process, he hired Joan Caton Cromwell, a Long & Foster agent who had the house under contract at the reduced $565,000 price in about two weeks, he said. He paid 5.5 percent in commissions.

The do-it-yourself approach, he concluded, was "a complete disaster." People knocked on his door at all hours. His family had to keep the house spotless -- no easy feat with a 21-month-old child. And he had no time to follow up on inquiries.

Could he have fetched a higher price had he hired an agent earlier?

Kilcoyne sighs. "I try not to think about it."