Tuesday, August 27, 2013

Could Changes in Real Estate Broker Pay Affect the Market?

I was being bad a while back and internet-trolled a well-known real estate trade magazine article on brokers discounting commissions. It was kind of fun. But the question, as the last snarl was gasped, what would changing the traditional broker commission-compensation model mean for consumers--if anything?

Suitey is a next-gen real estate brokerage startup in New York who has already raised a half million dollars and rising. Its founders, one-time Yale Rowing teammates, say they founded their company after hearing from friends who didn't like working with real estate brokers. It's agents are called "neighborhood experts" (how original) and are paid a salary, with a bonus paid per deal as opposed to dollar amount. Part of the sales commission intended for the buyer's broker is passed through to the buyer.

If this sounds like Redfin's business model, it's because it is. Redfin maintains perhaps the industry's most robust website and likewise pays its agents a salary. Their salary increases are determined by customer reviews. Findwell, in Seattle, rebates 1% of the buyer-side commission to clients and, like Redfin, charges sellers a 1.5% listing fee.

Meanwhile, a Southern California brokerage, Gen.I.re. "unbundles" its services for both buyer and seller. With services unbundled, a client will only pay for those services she needs. Clients also have a choice to pay a traditional commission. Gen.I.re brokers consult with clients for thirty minutes, free, and then lay out a game plan, not unlike good traditional brokers. The difference is that the client selects services needed and pays accordingly.

What does all this mean? Heck if I know. I do believe the current commission model will last for a while, with the new compensation offerings making stronger inroads as the years go by. Transparency and choice is just a better deal for consumers.

It's unclear how the overall market would be affected. If a non-commission payment modus operandi takes hold, lenders may get into the act and offer to pay all or part of their customers' broker fees. They're already doing it, in effect, but by formally crediting their borrowers for real estate broker expertise, they could assume some control in the process.

I kind of like the idea of real estate brokers getting paid for all their work, not just on closed transactions. Doing so helps get rid of the inherent conflict of interest pointed out by the Freakonomics guys.