Craig is the founder and Managing Broker of Added Equity Real Estate.  Added Equity is different than any other firm. It charges a real estate agent commission of 1% to list and sell a home. Total.

This is Craig’s blog series exploring why and how most realtors don’t talk openly and frankly about the actual fees they charge. This keeps real estate agent commissions at their longstanding high level (and makes it harder for Added Equity to compete on price). The second installment:

Real estate agents don’t do a very good job of telling consumers what they charge.

It’s a fact that real estate commissions have remained largely immune to the downward price pressure exerted by the internet in other industries. This is obviously in the best interests of real estate brokers, and not consumers. How do they do it?

Real Estate Broker Commission Kept High with Ambiguity

The real estate agent commission will go down only when prices are effectively communicated to consumers so that they can make informed decisions. By keeping commissions ambiguous, real estate agents keep them artificially high. How will consumers know of a better deal? They won’t. Real estate agents have a strong personal incentive to “go along” with the system, charge the same high commission as anyone else, and keep it all from the public’s view.

Want to Know Up Front What You’ll Pay your Real Estate Agent? Good luck…

Real estate brokers – both seller agents, and buyer agents – don’t do a very good job of telling consumers what they will charge.

Seller Agents (or Listing Agents) Aren’t Up Front About Half the Total Fee

For sellers, agents – if they mention fees at all – focus on the fee paid to the “listing agent,” the agent who represents the seller. They almost never talk about the fee paid the “selling agent,” the agent who represents the buyer. The seller pays both, and the fee paid the buyer’s agent is the higher of the two, almost always 3%.

Traditional agents don’t advertise their fees at all. Look at the web sites and you’ll see it’s true. Windermere? There’s no mention, anywhere, of what they charge. The same is true for the other major brokerages. The ultimate in “playing it close to the vest.”

What about “alternative” brokers – surely they do better? Well, they do talk about what they charge – sort of. Redfin‘s home page says it all:

See any mention of what you’ll be paying a buyer’s agent? Nope. Seeing this page, a reasonable consumer surely believes she can sell her home on Redfin for a 1% fee. Which is simply not true. She’ll likely pay Redfin 4% – or four times what they indicate on their home page – when she signs the listing agreement.

Even the biggest “discount” brokers – flat fee MLS listers – keep the total cost in the very tiny print. Check out the home page of Savvy Lane, a popular FSBO firm:

“Sell on the MLS for as little as $95”??? That simply isn’t true. The fee that will show on your listing agreement will be 3% PLUS $95.

And then there is Faira. This real estate brokerage has been getting lots and lots of news coverage of late. And why not – their value proposition is UNBEATABLE:

Faira needs its own post – coming soon.

It’s very obvious that seller agents do a very poor job of communicating their fees to consumers. And that helps to keep those fees high.

Buyer Agent (or Selling Agents) Want Buyers to Think of Them as Free

On the buy side, agents loudly shout “It’s free!” From a purely technical and superficial perspective, they are right. The seller pays the agent’s fee. But the reality is a little more complicated.

The fuller truth is that all parties – buyer and seller – benefit from lower transaction costs. Lower transaction costs will lead to lower prices. And lower prices are in every buyer’s interests.

On top of that, in every transaction, a savvy buyer can use the 3% offered to a buyer’s agent  to reduce the price of the home. So while it may be “free” it is also a “credit” that can be used by the buyer instead of the buyer’s agent. Needless to say, you won’t hear about that from an agent.

We’re talking serious money! On an average Seattle home, a buyer could chop $18 grand or so right off the top of the sale price by foregoing an agent. So “free” isn’t quite accurate.

Next Installment: (un)Faira: Beware the Free Lunch