From the Archives
This is one of my posts from my days at Quill Realty (the precursor to Added Equity). That model began as a fusion between agents and lawyers – in retrospect a lousy idea. After rethinking the business in the spring of 2015, I saw the future and Quill withdrew from the NWMLS that June. I wrote this, my “manifesto,” to explain my actions and help spread the word. It’s all about Real Estate Evolved…
Originally posted 5/13/15:
Real estate brokers have been around for a long time. Sooner or later, their business model will evolve to match our modern age.
The Real Estate Industry Hasn’t Changed for two centuries
Unlike any other, the real estate industry is characterized by a standing offer of cooperation and compensation among its members. This practice dates back to the end of the 19th Century. Real estate brokers would gather to discuss their inventory, and they agreed to compensate anyone who helped sell one of their properties.
At the time, it was pure genius. Two centuries ago, there were virtually no means of advertising a property for sale. The term “marketing” didn’t even exist. With cooperation at its core, the real estate brokers’ system allowed for dissemination of market information via its broker members. In the 19th Century, this people-driven system was a highly efficient and effective way of selling property. It became known as the multiple listing service.
Today, two centuries later, the MLS remains the primary way of selling a home. As they have always done, sellers using the MLS pay a commission in two parts: To the listing broker, who represents the seller; and to the cooperating broker (or selling broker, the official term), who usually represents the buyer. On the listing side, there has been significant downward price pressure thanks to the availability of MLS listings on the internet. A seller today can list on the NWMLS for as little as a few hundred dollars.
But on the cooperating side, commissions have remained stubbornly high. A recent analysis of median priced homes in King County showed that about 85% of sellers offer the traditional or “full” 3% cooperating broker commission. Another 12-13% of home sellers offer a slightly reduced 2.5%. The remaining 2-3% of sellers offer commissions ranging from a couple thousand dollars to 5%. So one hundred plus years later, and 98% of the sellers on the MLS pay the same old cooperating commission of about 3%. The MLS is hardly efficient any more.
In the 21st Century, the cooperating broker system falls short in many other ways as well. First, it is no longer consistent with consumer expectations of professional services or their efficient delivery. Originally, all real estate brokers worked for the seller, even the one that “brought a buyer.” A hundred years ago, we were far less concerned about consumers’ rights and expectations. It worked just fine having all real estate brokers work for the seller, even those that ended up working closely with the buyer.
But times changed. Society became more concerned with protecting consumers. Buyers came to expect that their real estate broker worked for them and put their interests first. And laws changed as a result. Here in Washington, the state enacted RCW 18.86 in 1996. That chapter imposed “buyer agency,” meaning that a real estate broker could now work for the buyer.
Nonetheless, the typical method of compensation remains unchanged from two centuries ago. Because most sellers use the MLS, most sellers continue to pay a cooperating broker commission. So even though the cooperating broker now works for the buyer and not the seller, the seller still pays the fee earned. The buyer typically pays nothing for the professional service. This causes several problems, such as a clear conflict of interest and insulation of the buyer agent commission from any sort of meaningful downward price pressure.
Second, the cooperating broker system is built around an antiquated business structure that is inconsistent with modern business practices. It made sense a hundred or more years ago, indeed the industry was likely considered “forward thinking” by the innovators of the day. But times have changed, and the typical underlying structure of the industry has not.
Third, the MLS system no longer provides the most efficient platform for selling property. That role has, of course, been assumed by the internet in our modern age. The MLS system is simply no longer necessary in order for a seller to efficiently attract buyers to the property.
Real Estate Evolved: It Will Happen Soon
Nothing is immune to change. Our understanding of business practices, and our ability to implement them, will continue to evolve. The use of the internet, and the widespread availability of market information, will continue to grow. And of course the financial incentive for disrupting an outmoded and inefficient industry increases as the distinctions between it and a modern system continue to widen. Sooner or later, real estate will change too. It will change when real estate brokers offer sellers an alternative to the MLS. A change, BTW, that Zillow has seen coming for a very long time….
It will change soon. Real estate evolved, coming soon to Seattle.