Redfin on 60 Minutes: Are Realtors Paid Too Much?

May 14, 2007 in General Info + Opinion, National + California News, Buyer Basics, Seller Issues

This week, 60 Minutes aired a piece about an online Real Estate company called Redfin, whose extreme ?do it yourself? Real Estate transaction services got some valuable airtime to slam the traditional Real Estate business model. Should Realtors at traditional brokers worry? I don?t think so.

Do-It-Yourself Can Be Penny-Wise and Pound Foolish. Now that we have computers, we don?t really need anyone else at all. Robots performing surgery and vending machines spitting out everything from sandwiches to ipods at the airport are real-life examples of technology replacing human interaction. Why, soon, we won?t even need to go for a consultation when we?re ill. We?ll just call the hospital and lie down on the table, place our surgical order, and hope that we?ve selected the right cure for what ails us.

The problem with these types of scenarios is not the delivery of the final product, it?s the evaluation that happens in order to get the final prognosis.

Do you know what you want in a home? Do you know what you need in a home? Can you find it yourself online? Maybe.
Do you know what pitfalls to look out for during the transaction? Do you understand all 200 pages of the disclosures you just signed? Do you know whether the listing agent has a good track record? Can you tell if the Seller will take less than full asking? Do you know if you should bid more in order not to lose your dream home to another buyer? Maybe not. And a mistake here could have serious consequences financially, emotionally, physically, and legally for you.

If you overlook a grave problem during the purchase of your home, how much will it cost you? If you?re selling your house and taking advice from someone who hasn?t been in your home?or the last 10 homes that have sold in your neighborhood, how do you know you?re marketing it to its full potential? How do you know if the offer?s too low? How do you know that this is the best home to be offering on?

If the deal?s being negotiated by someone who?s doing 8 deals a week (like the Redfin employee, per the 60 Minutes piece), how much attention will *your* sale or purchase get? Problem is, you will never know unless you?ve had the privilege of working with a full-service agent.

Leslie Stahl and her pals at Redfin have done the average Realtor a great disservice by failing to understand what buyers and sellers give up when they go to an online broker instead of forming a relationship with a Realtor.

What A Dedicated, Full-Service Realtor Can Offer. I?m working with a few buyers right now. One of the couples I?m working with on the buy side came to me in November, with a dream of owning a home. During the course of the last 6 months, we?ve met over 20 times, written 3 offers on homes, and have together navigated the minefields of credit improvement, variable vs. fixed home loans, Tenancy-in-Common ownership issues, Condominium Conversion issues, San Francisco eviction issues which may affect ownership of TICs, and many physical issues we?ve discussed during visits to dozens of homes. I?d like to take a certain pride in knowing that my experience and specialization in San Francisco properties has helped these clients to better understand what they?ll be undertaking as homeowners, and that I?ve offered knowledge, enthusiasm, caution, ambition, and a good healthy dose of protection and objectivity during this huge decision-making process. I?ve discouraged them from offering on more than one home that I felt would not be a good investment for them, based on current legislation and our local market. So far, I haven?t made a dime from these particular clients, though we?ve made a solid commitment to work together until they find a home and own it. This commitment is not in writing?it?s based on mutual trust.

It Costs Money to Make Money: A Real Realtor?s Overhead NAR, CAR, SFAR Membership Fees: $900 per year ($75 per month) Local Chamber of Commerce $15 per month Errors & Omissions Insurance + tech fees: $2450 per year ($200 per month?I pay this, not my company) Advertising or mailings $1500 (so you can find me) Cell Phone/PDA: $175 (so you can reach me 24/7 by phone, email, text, page) Home DSL $60 (so you can receive and send documents via email 24/7) Web Hosting + HTML email newsservice $25 (so you can search properties on my site and read this blog) Supplies + Equipment $150 (paper, computers, CDs, routers, ink cartridges for printing hundreds of pages of disclosures) Shipping + Postage $40 (FedEx, regular postage + courier) Gas + Car Expenses $450 (Gas, parking, maintenance?and I drive a Mini, not some gas-guzzling SUV or Mercedes!) Entertainment (client lunches, coffees, meetings + dinners) $300 per month Expenses per month: approx $3000

When 6% is Closer to 1.75%? Before Expenses Most homes sell in San Francisco with a commission of 5-6%. Of this 5-6%, usually 2.5% goes to each side. On a $600K sale, 5% is$30,000. Sounds like a lot! This gets split between 2 agents, then again between the agents and their companies. Buyers? side (or Listing agent) commission: $15,000 minus broker admin fee: $750 (5% of the gross commission) minus company?s 25% cut: $3562 (as agents, we give as much as 50% of our commission to the company we work for. This is our ?split?) minus transaction coordination/assistant fees $1200 (to manage paperwork and to allow me to be in 2 places at one time) subtotal: $9488 minus 15% self employment tax: $1423 = $8065 commission before expenses.

The harsh reality is that many Realtors in San Francisco do just 4-8 transactions per year.

Much of the work we do for clients is not paid, since we are not compensated for showings, unaccepted offers, or the hours of emails and phone calls we spend on clients who may not end up purchasing from us. Subtract expenses, and suddenly you realize that it?s an expensive small business to be running?and unless you?re highly effective and do many transactions per year, it may be hard to make ends meet in a city where home prices are far above average. Considering that there are 5,000 licensed Realtors in San Francisco and we?re selling 17% fewer homes than last year, we?re working as hard as we possibly can to capture the loyalty and attention of a few great clients.

Do-It-Yourself Only Works for Some. Now Home Depot has proven that there?s a market for DIY home improvement. But if it was that easy, contractors would be out of business. If you?ve ever tried to do a project yourself, you may be one of us who?s realized that in the long run, experts can save us time, hassle, headache and yes, money. Redfin may just be the Home Depot equivalent of the traditional Realtor ?contractor? model.

I?ll keep my eye on Redfin?but I don?t think it?s a business model that will effectively put Realtors out of business. If anything, it may just serve to keep our standards of client care as high as possible. When undertaking one of the largest decisions and expenses of your life, it still pays to have a committed expert by your side to advise, encourage, negotiate and advocate for you at every turn.