[Excerpts from full article by Brad Stone]
Economists have long been perplexed by the resilience of the real estate agent. Since the agent bears much of the costs of selling a house, in the time they spend hosting open houses and touring with clients and the money they spend advertising property, they’re rewarded for pressuring clients into selling quickly and accepting suboptimal offers, or in the case of a buyer’s agent, for allowing the client to pay too much.
Yet only 9% of homes were sold directly by owners in 2012, down from 13% in 2008, according to the National Association of Realtors. As one might expect, members of the housing industry argue that people simply value the expertise and service that agents can provide and are nervous about venturing out on their own or trusting an online discounter for the most complicated transaction of their lives.
They found that there’s a subtle collusion in real estate that separates it from industries like stock trading and air travel. Two agents, not one, are required to sell a house–one representing the buyer, the other the seller. “Needing two agents to cooperate in a transaction allows a full-service agent to punish discount agents,” says Chad Syverson, economist at Chicago’s Booth School of Business, “It also allows full-service agents to punish other full-service agents who cooperate with discount agents.” As a result, an agent can steer clients away from for-sale-by-owner properties or from homes represented by discounted brokers.
Zillow and Trulia, in effect, decided to enable the traditional way of doing business in real estate rather than fight it.
The payoff for buyers and sellers was in radically lower fees. Instead of collecting the 3 percent commission from the seller, Redfin charged sellers a flat $3,000 fee, paid at closing, for listing and marketing a home. When Redfin represented the buyer, the company, in the role of the agent, would receive the standard 3 percent commission on the purchase price from the seller but then refund about two-thirds of that to the buyer, or about $6,000 for a $300,000 house.
It was disruptive, and Glen Kelman, CEO of Redfin, relished the chaos. “Real estate, by far, is the most screwed up industry in America,” he told CBS News’s 60 Minutes in 2007. The company also discovered that its customers really did want more hand-holding.
For sellers, the flat fee is gone; they’re now charged 1.5% of the sale price of their home. Buyers are still treated to a refund upon Redfin’s collection of the buyer-side broker commission, though Redfin has gradually lowered the amount as it has added services.
So far, Redfin hasn’t convinced many people that brokers, or their 6% take on most deals, are in any real danger.
What buyers want from real estate agents:
50% want help finding the right home to purchase
12% want help with the price negotiations
12 % want help negotiating the terms of sale
8% want information on what comparable homes are selling for
7% want help with the paperwork
4% want guidance on how expensive a home one can afford
3% want help finding and arranging financing
2% want help learning about the neighborhood or area
Read the full article on Bloomberg BusinessWeek here: http://www.businessweek.com/articles/2013-03-07/why-redfin-zillow-and-trulia-havent-killed-off-real-estate-brokers