How do U.S. residential brokerage trends & fees compare to the rest of the world?

How do U.S. residential brokerage trends & fees compare to the rest of the world?

Delcoure, Natalya V

INTRODUCTION: PRESSURES FROM THE INTERNET

There are many sweeping changes in the way business is conducted in all industries as a result of the Internet. The real estate industry is no exception. According to the 2000 National Association of REALTORS(R) Profile of Home Buyers and Sellers, in 1999,37 percent of homebuyers used the Internet as a key source of information in their home purchase process, a 19 percent increase from 1998. It appears that in 1999 the U.S. real estate industry has become more Web-based despite the fact that four out of five customers used real estate agents in their home purchase process. If this trend continues, and more consumers use the Internet as the primary source in their real estate information search and purchase, real estate professionals may face a decrease in commission fees and a reduced demand for their services.

Technological innovation (voice mail, e-mail, cell phones, pagers, Web presence, etc.), has empowered consumers in their real estate information search and purchase decisions, and prompted the development of virtual real estate brokerages offering “ala carte” services to their customers. Cyber brokers, (i.e., www.4Sale-ByOwners.com, www.FSBO Freedom.com, www.FISBODepot.com), provide customer services such as:

* free 24-hour-a-day access to property listings;

* different property listing fee alternatives, including promotional packages;

* a FSBO site index;

* blank pre-formatted real estate contracts and forms;

* virtual sale negotiations including instant contract formulation; and

* many other resources for homeowners.

For a traditional real estate firm to compete with cyber brokers, it has to perceive that the Internet expands capabilities and is a vital tool for achieving greater service, cost efficiency, and profitability, thus turning the technology into a source of new empowerment rather than threat to its existence. One tactic often exercised by traditional real estate firms to defend against the cyber brokers is to buy the more successful private MLS style networks. The consolidation process among traditional and newer real estate companies with a Web-presence can be already observed. For example, the www.cyberhomes.com Web site links to www. homeadvisor.com, which is owned by Microsoft Corporation. Also, Cendant Corporation owns www.homebytes.com, and www.cold wellbanker. com, and they recently acquired www.owners.com.

Successful real estate companies may gain several advantages if they efficiently use automated communication and information technology to attract and serve customers. Web-based programs like www.valueyourhome.com can estimate prices or market price trends and provide neighborhood information. Other online programs can set up appointments, transmit contract offers and counteroffers, provide mortgage assistance, and much more. Ancillary and complementary services including relocation, title insurance, landscaping, property insurance, and more can produce referral fees or new profit centers that many large traditional brokerage firms already attempt to capture, but the Web makes it easier to track the flow of information requested and to instantly offer potential services. Traditional firms that will survive have no choice but to embrace all the possibilities for new services and efficiency gains in order to compete in the future.

Investment in technological innovations requires cash outlays. There are economies of scale to such investments and small firms with no affiliations may have to look for assistance to support this investment. Thus, there is a potential for further consolidation trends in the real estate brokerage industry as smaller real estate companies look for a potential acquirer that will allow them to stay in business.

Another possibility for traditional real estate companies to survive the increasing competitive pressure from “lean and mean” cyber brokers is to mix traditional and non-traditional listings. For years U.S. real estate brokerage companies successfully operated through strong local, state, and national trade association representation (the National Association of REALTORS) and provided the core of the Multiple Listing Service (MLS) system. Most real estate agents belong to more than one MLS. Over the years, the access to MLS and strong interdependency among industry participants ensured high real estate commission fees in the U.S. compared to other countries and promoted a stable rise in the U.S. real estate agents’ compensation.1 However, open listing MLS services and the development of cyber brokerages challenge the market information monopoly once held by traditional real estate companies and encourage commission price competition within the industry.

Until recently the majority of traditional real estate firms with a Web presence prohibited For Sale By Owner (FSBO) listings. However, there are exceptions. For example, www.owners.com, which was acquired by www.homebytes.com in October 2000, is the biggest FSBO database in the U.S. Also, open MLS vendors are starting to encourage commission price competition in residential real estate. Several Internet-based real estate companies charge fees of 3 percent to 5 percent instead of the 6 percent or 7 percent traditionally charged by real estate firms. Some cyber brokers charge a home seller 4.5 percent, the homebuyer agent receives 3 percent, and the company keeps 1.5 percent. Technological innovations allow real estate brokers to speed up Comparative Market Analysis (CMA) report generation, the contract negotiation process, thus making the real estate professional more efficient and productive.

BROKERAGE FEES AROUND THE WORLD

The evaluation of the commission rates in foreign countries (Exhibit 1) indicates that the real estate commission rates are lower when the information within the market is more efficient, open, and reliable. Less developed countries, like Russia, with costly information dissemination processes hampered by high bureaucracy and/or no MLS system, exhibit the highest commission rates (10 percent or even 15 percent). The economic efficiency is proxied by GDP per capita and compared to the median commission fees among 30 countries (Exhibit 2). The graphical representation of the relationship between GDP/capita = f (Real estate commission fee) is presented in Exhibit 3. The model exhibits good explanatory power (R-squared equals to approximately 32 percent). As it has been anticipated, the estimated beta coefficient is negative and statistically significant (b = -.562, P-value is .001, t= -3.544). The statistical results provide the evidence that in the foreign countries, commission rates are lower as information dissemination within the market becomes more efficient.

Also, there are other implications of price competition in the real estate industry. For example, lower price homes should see higher commission rates relative to higher priced homes. Such pricing approach is employed in Sweden, Finland, Ireland, Mexico, and Belarus. We should also see more marketable and higher priced homes listed at lower percentage commission rates, similar to those in the United Kingdom, Singapore, and other developed countries. More developed markets rely upon a regulatory environment to facilitate the accuracy of the real estate transfer price and protect both parties involved in the transactions.

An alternative to the MLS system exists in UK, Ireland, and Australia: MLS brokered sales and auction sales. In these markets, the public auction system is not viewed as a reserve for the selling of distressed properties. Rather a public auction system is viewed as a positive alternative to the MLS.

CONCLUSIONS

The real estate industry seems to be undergoing an evolution of great significance. Consumers have become a driving force behind the real estate search process when they gather preliminary information on property via the Web. More information is available than ever before and virtual touring is becoming the standard expectation, not only among cyber real estate companies, but also among traditional real estate firms as well.

As traditional brokerage firms use more automated services and expert systems to serve both consumers and agents offering a range of service packages they will become more efficient, enabling successful agents to serve more clients. The cost of the full service agent should decline to 5 percent or so within the next decade and possibly to as low as 2 percent or 3 percent within the next two decades — provided the fees in other countries are a reliable comparison. Agents in those countries where fees are lower make as much or more income than agents in the U.S., but there are certainly fewer real estate agents in those countries. A drop in the commission rates to a 3 percent range will likely drive more than half of the existing marginal producers out of the industry. This “weeding-out” process is likely to result in a more professional and experienced agent becoming the norm. For consumers, this is the greatest benefit from price competition.

NOTES

1. This is a result of home prices rising faster then inflation over the past 30 years.

REFERENCES

Delcoure, N. and N. Miller, “The Future of the U.S. Residential Real Estate Brokerage Industry in Light of the Internet and International Indications,” working paper.

Roth, K., “The 2000 National Association of REALTORS Profile of Home Buyers and Sellers,” National Association of REALTORS, www.nar.realtor.com, 2000.

Web sites referenced include:

www.coldwellbanker.com

www.FISBODepot.com

www.4Sale-ByOwners.com

www.FSBOFreedom.com

www.homeadvisor.com

www.homebytes.com

www.homeowners.com

www.onerealtorplace.com

www.worldbank.org

ABOUT THE AUTHORS

Natalya V. Delcoure, DBA, is the assistant professor of finance at the Mitchell College of Business in the Department of Economics and Finance at the University of South Alabama. (E-mail: ndelcoure@yahoo.com)

Norm G. Miller, Ph.D., is holder of the West Shell, Jr. Professorship at the University of Cincinnati. He is active on the editorial board of several national/international journals. He is also the author of numerous academic articles and books. (E-mail: norm. miller @uc.edu)

Copyright American Society of Real Estate Counselors Fall 2001

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