Ever wonder why it costs 6% to sell a home with a real estate agent? Yeah, me too...that’s a lot of money. But as it turns out, there’s actually a very reasonable explanation for this...or at least there was during the Roosevelt Administration...
A Brief History of Real Estate
It all started in the early 1900’s when real estate brokers put a ton of effort into selling a single property. Typical activities included meticulously researching home prices at the county courthouse, taking out expensive ads in the local newspaper, and holding multi-day open houses. Even the simplest of tasks, such as obtaining signatures or delivering offers, occupied hours of an agent’s time. Indeed, the process was rather cumbersome. Even the most successful agents could only sell 5 to 10 homes per year without working themselves to death. Thus, the 6% (and sometimes 7%) commission was born.
Since then, we’ve had some major technological changes, most notably a convenient invention from the 1990’s commonly known as “The Internet”. Thanks Al Gore!
The Internet has given rise to the digital age, which has completely transformed how we live and how we work. New innovations such as Zillow, DocuSign, and email have astronomically changed the real estate industry, but thanks to great lobbying efforts by various real estate PAC's and trade associations, we are stuck with an archaic price model.
While real estate fees have remained flat for decades, the cost of being an agent has drastically decreased, leading to record-high profits. These profits gave rise to a mass influx of new agents and brokers, each trying to get their piece of the ever-growing the pie. We now have a whopping 1.2 million real estate agents in the United States; one for every 276 Americans. To put this in perspective, there were just 68,818 in 1960, or one for every 2,705 Americans.
The Real Estate Paradox
How can it be that we currently have 10 times more agents per capita than we did in 1960, yet commissions remain the same? Under normal market conditions, more competition leads to better service and lower prices. But for some reason real estate is different. It defies all of the basic rules of supply and demand. This is what I call the Real Estate Paradox.
The influx of new agents over the past 20 years has glutted the market with intense, cutthroat competition. Rather than simply lowering their prices, agents are spending more and more time trying to sell their services to prospective buyers and sellers.
A recent labor study done in Columbus Ohio sums it up nicely. In 2016 alone, agents in Columbus worked a total of 10.4 million hours. However, based on the average time it took to process each transaction, it should have taken only 1.6 million hours. That leaves 8.8 million hours (85% of time) unaccounted for.
This is a productivity nightmare, and begs the obvious question: what the hell are these people doing all day? The answer...trying to earn new business!
The typical agent now spends most of their time trying to get new clients rather than servicing the clients they already have. It's a vicious cycle, where agents continually try to one up their competition through constant phone calls, emails, and text messages to prospective clients (perhaps you’ve experienced some of this yourself).
The chart below illustrates the absurdity of what's going on in the real estate industry right now. It is mind-boggling that we can operate with an excess of over 4,000 real estate agents and 8.8 million hours. And that's just in Columbus. Just think of all the great things we as a society could accomplish if this time was put to better use.
The Bottom Line
Technology has made the job of the real estate agent significantly more efficient than it used to be. But rather than passing these savings on to their clients, agents are simply wasting their time and money in the rat race of zero-sum sales and marketing.
Thanks to lobbyists and an incompetent government (sorry Congress), this outdated pricing model lives on. But there is hope in sight! Discount agents, such as myself, are starting to make headway in select markets across the country. Consumers are beginning to educate themselves about the Real Estate Paradox, and pushing back against the status quo. They're using this knowledge to shop around for the best agent or broker, and confidently negotiate a fair price for the services they are getting.
As Benjamin Franklin once said, "an investment in knowledge pays the best interest."
Check back next week for more information about the Real Estate Paradox, and how you can save money when you buy or sell your next home.