There are about 5 million homes bought and sold each year in the US, give or take, and most of them are bought and sold with the help of a real estate agent. Buyers almost always hire an agent to help them buy a home because it costs them nothing, and somewhere around 90% of home sellers hire an agent to help them too. So, how much real estate agent effort does it take to buy and sell all these homes?
We know from a 2002 study done by the California Association of Realtors that the average transaction requires about 20 hours of a seller’s agent’s time. (This study was done long before the widespread adoption of Internet home advertising. I would assume that number has gone down since then.) If we assume the same number of hours for the buyer’s agent, we come up with about 40 hours of total real estate agent time to complete the transaction. So, let’s do some math.
There are 5 million homes that change hands each year and each transaction requires about 40 hours of work for a total of 200 million “agent hours” of work. A full time job in the US is considered to be 2,000 hours per year. Let’s assume agents work full time and do nothing but help buyers and sellers. Then we take 200 million agent hours and divide by 2,000 hours per year of work and we come up with 100,000 real estate agents. That is the number of agents it takes working full time to help people buy and sell homes in the US each year. The problem, of course, is that there are over one million real estate agents in the US. What the heck are all these extra agents doing?
The way I see it, either 90% of real estate agents are not helping buyers and sellers or 90% of each agent’s time is spent on something other than help buyers and sellers. That does not make for an overly productive industry.
Now, you might make the argument that it takes more than 20 hours of work to help a buyer or seller. Fine. Let’s assume it takes twice that long: 40 hours for each agent for a total of 80 hours. That still means 80% of real estate agents are not needed. If 80% of the real estate agents left the industry tomorrow, every single home buyer and seller who wanted representation would still get their full allotment. There would be no shortage of agents.
You might argue that agents need time to market themselves to find new customers so they cannot work full time helping clients. That is true. But 90% of their time? And if 80% or 90% of real estate agents left the industry tomorrow, the remaining agents would not have to market themselves at all—buyers and seller would find them. The remaining agents would make more money while spending less time marketing themselves and more time helping clients. Sounds pretty good.
So, will 80% or 90% of real estate agents leave the industry? Not voluntarily, but then again, neither did the buggy whips makers.
It occurred to me that many of the homes for sale today are being sold in a hot seller’s market. There are many willing and eager buyers for every home that comes up for sale in these markets and many of them foster a bidding war, especially if they are priced right. You might even say these home sell themselves.
Even though these homes have tremendous buyer demand, the seller is still expected, by custom, to pay thousands of dollars for the buyer’s agent. And buyers almost always employ the services of a buyer’s agent to help them buy a home because, well, the seller pays for it.
This got me thinking. What would happen if a home seller in one of these sizzling hot markets decided to keep that ten or twenty grand for themselves by refusing to pay for the buyer’s agent, which is well within their right? Perhaps they had the crazy notion that the person receiving the service should actually pay for the service. What the heck would happen?
I will tell you what would happen. Every single anxious buyer would be faced with the question that is the title of this post: what do they want more, the home or a free real estate agent? Because, you see, they cannot have both.
If they want the home more, then they are going to have to pay their real estate agent (or fire them). And if they want the free real estate agent, then they cannot have that home. They have to walk away from it.
There are a few problems with walking away though. First, in a hot seller’s market homes do not come up for sale very often, so it could be a long wait before they get another opportunity to buy a home. But there may be an even bigger problem.
Assuming the home sells, which is highly probable because some buyer will want that home more than a free real estate agent, what happens if the next home seller does the very same thing? Surly word would spread throughout the neighborhood that Joe sold his home quickly, for over the asking price AND without paying for the buyer’s agent. A new precedent will have been set. It may even become the new custom. What is a buyer to do?
Buyers who want to buy a home with the help of an agent, in neighborhoods where sellers refuse to pay for them, will have to pay for those services themselves. And because they have to pay for their own agent, they will quickly discover what home sellers already know: 3% of a home’s price is an outrageous amount of money to pay someone for about 20 hours of work. And then they will do something they never would have considered doing previously: they will shop around for the best deal on an agent. That’s right. They will actually negotiate a more reasonable compensation with buyer’s agents for the help they need. Some may even discover fee-for-service agents who are happy to work on an hourly rate for a few hours of service.
Will this ever happen? Maybe. It really only depends on one thing: home seller’s. Do they have the gumption to ignore the industry’s outdated customs, and instead do what the market dictates? Time will tell. I suspect that as technology makes the buying and selling of homes easier and easier, more home sellers will put home buyers in a bind by making them choose between living in their dream home for 30 years or getting a free real estate agent today. It is a pretty easy choice.
In the article, the author explains how his aunt, a busy professional, wanting to sell her home quickly, bypassed the entire real estate industrial complex and managed to seller her home in three days for over asking price. No real estate agent. No For Sale sign. No 6% commission. And how did she pull of such a feat: Zillow.
Maybe you think she needed a professional home stager and photographer to take beautiful pictures to find a buyer. No such hassle. She simply used the photos that were still there from the last time the home sold. Maybe you think she needed a professional appraiser to help her set the asking price. Nope. She just used the value Zillow suggested (called a Zestimate). She used the existing photos, updated the description, used the Zillow recommended asking price and flipped the status switch to “Active.” Three days, above asking price, no commission. And what did Zillow charge her for her trouble: NOTHING.
The article goes on to explain the home that sold was in Portland, which is a particularly hot real estate market right now. That makes perfect sense. In a hot real estate market homes practically sell themselves, which begs the obvious question: why would anyone pay a real estate agent 6% commission in a hot market when you can pay Zillow nothing?
The article also speculates that “she probably would have gotten more for her property had she listed with an agent.” I am not sure that is true.
In an article published in 2008 by the National Bureau of Economic Research entitled Do Real Estate Brokers Add Value When Listing Services Are Unbundled, what the researchers found was that other than the benefit of access to the MLS, “a seller’s use of a broker reduces the selling price of the typical home by 5.9 – 7.7 percent, which indicates that agency costs exceed the advantages of brokers’ knowledge and expertise by a wide margin.”
In simpler terms, what that research finds is that other than the benefit of using the MLS to advertise a home for sale, real estate brokerage services costs more than they are worth. All that expertise results in a LOWER selling price. In other words, not only did she save the 6% commission, she most likely sold her home for MORE than what she would have with brokerage representation.
What is Zillow but the modern day version of the MLS. It enables home sellers to advertise a home for sale to buyers. And if the only true benefit of hiring a brokerage to sell a home is access to an advertising platform, and sellers no longer need that platform to advertise their home for sale, do they really need the brokerage services at all anymore?
Buyers and sellers can find each other today for free, without the MLS and without a real estate brokerage. It is only a matter of time before home sellers realize that the 6% brokerages are just not worth the money—especially when using them results in a lower sales price.
Home sellers can find their own buyers and come to an agreement on price without help from anyone today. What they need are transactions managers: real estate professionals, who work on an hourly rate, and make sure the transaction goes smoothly. Who will be the first one to fulfill this latent market need? You better hurry. It soon may be the only position available in an industry that is in desperate need of change.