Property Grunt

Sunday, May 15, 2005

Stormwatch: Commission Fees

In a recent article Ms. Bahney has exposed a current trend that is afflicting brokers which is sellers negotiating fees.

She also touched upon the DOJ antitrust suit that reported on and the lawsuit against REBNY that is involved in a lawsuit with a discount broker. This is just further confirmation of the Grunt's perfect storm scenario.

"Everything under 6 percent appears in red - it's an alert," said Arina Yakobi, an agent for the Corcoran Group. Commission fees are not disclosed and agents don't like to tell each other what they made, let alone anyone outside the industry, but they acknowledge that fees below 6 percent are showing up more often. Ms. Yakobi said lower fees have become so problematic that her firm has sales meetings addressing them.

I haven't had meetings like these as of yet but I wouldn't be surprised when this becomes the topic of discussion. Arina's statement that brokers never disclose their commission fees is complete BS. Fee gossip is part of the broker culture in fact its encouraged especially if you are working in a group. You have to know who is getting what and your cut is. There are some brokers do not discuss their splits but word always gets around about how much they make on a deal.

There is mentality among brokers to act like as Michael Lewis would say "A big swinging d**k." You want to show the goods because it attracts the attention of others including potential sellers. When you create the perception that you are banging out deals left and right it gives them the impression that you are the go to guy.

In other parts of the city, and elsewhere in the country, the commission system is under vigorous attack, and fees are falling. Alternative and discount brokerage firms, online auctions for low-commission brokers and flat-fee firms are percolating up from the online ether, challenging the traditional notions of what agents do and what they should be paid.

My industry needs to adapt if they want to survive. Customers are always going to go for the better deal.

There are more agents than ever, and that means they have an incentive to offer something extra, like a lower fee, to get business. There are 12.5 percent more agents in New York State then there were last year, a percentage that mirrors the national increase, according to the National Association of Realtors.

At the same time, the real estate industry is going through a natural retail evolution from "mom-and-pop shops" to dominating regional firms to companies offering discounts. "There is warfare at the fringes," Mr. Murray said. "Eventually it settles out so that there is a full-service luxury option and a low-end discount option."

One of the reasons why I feel that discount brokers will be making their presence known is because it’s already too competitive to get listings and if you are part of a company that is set in their ways in getting a 6% fee and you are forced to stand your ground I think you are going to be pretty pissed if the listing goes to another broker. Why get tangled in the red tape when you can still close the deal albeit at a lower fee?

The Grunt feels the discount push will be lead by the new agents who will be quicker to embrace the online discount brokerage business model. Those smaller operations will follow the chinatown model of business which is to sell cheap but move massive amounts of volume.

Think about it. You get a small group of agents playing victor charlie who carpet bomb residents with discount services. They use craigslist and other venues to list an apartment for free limiting their overhead and show till they close a deal. Its pure guerrilla warfare and it can be conducted out of someone's own home.

If sellers can get a reduced fee and are willing to accept competent yet no frills service then there is no doubt they are going to avoid the big kahunas of the real estate world. Of course it is at the cost of leaving REBNY and there is going to be a backlash from the rest of the brokerage community. However everyone will be watching this lawsuit closely including the DOJ to see the outcome of the situation. If it rules in favor of the discount broker than that is when the storm will hit full swing. Dare I say a rumble will occur pitting broker against broker?