After going through the process of selling a house, I have come to a clear conclusion: it is time for major disruption in the real estate industry. If my recent experience is any guide, selling real estate and buying real estate are processes squarely rooted in the guild system where things are done “because they were always done that way” and with a serious misalignment of interests. Specifically, my experience led me to these conclusions:

A Realtor’s Interests Are NOT Aligned With Their Client

My first major complaint about the real estate industry is a basic one - that a realtor’s economic interest is not aligned with their client. The typical realtor agreement for a seller is 6% of the purchase price (with 3% going to the selling agent and 3% to the buying agent). The fee is only due at closing, thus the agents only gets paid if the house sells. Sounds ok, right?

Think about this. For a $1,000,000 house, the agent fees are $60,000. So, that is $60,000 if the house sells and $0 if it doesn’t. But, what about if the agent pushes the seller to take a lower price? Let’s say the agent gets the seller to sell for $900,000 instead. At the lower price, the agent’s fee is $54,000. In other words, the homeowner takes a $100,000 hit while the agents only lose a $3,000 a piece.

Here, it is plain to see that a seller’s agent might push the seller to take a low initial offer or not to negotiate strongly to simply get the house sold (remember, the agent is paid nothing until close) and thus forgoing a chance to sell for more through negotiation or patience.

My experience is both the seller’s agent and the buyer’s agent are motivated to get the house sold as fast as possible, not for the best price.

Negotiations Are One Gigantic Game of Telephone

Would you want to work through a middle man to purchase a Coke? A computer? Your car? Then, why your house? Just because it is for more money?

Here is how the recent sale of our house went:

An interested buyer came to view our house. The next day, the interested buyer submitted an “offer” of about 95% of our asking price with certain stipulations. I wanted to counter, so my agent had me scratch-out the buyer’s offer and write in my counter-offer. I emailed the counter-offer to my agent who then faxed our counter-offer to the buyer’s agent. The buyer’s agent then faxed the counter-offer to the buyer. At some point, the buyer’s agent spoke with the potential buyer, discussing our counter-offer, and they apparently decided to counter our counter. The buyer’s agent then had the potential buyer scratch-out my counter offer and fill in the buyer’s new counter-offer. From there, the counter-counter-offer was faxed to my agent who scanned it and emailed it to me. In the mean time, the buyer’s agent called my agent and told my agent what the buyer told the buyer’s agent regarding the price and stipulations. My agent took notes and later called me to tell me what the buyer’s agent told her that the buyer told the buyer’s agent.

ARE YOU KIDDING ME?

What other kind of negotiation works like this? I understand there are benefits for the intermediary such as removing some emotion from the negotiation, making sure the negotiation is fair, etc., but wouldn’t it be easier to sit down in person and discuss the offer and counter-offer? Both sides could lay out their reasons and come to a middle ground (if there is one to be had). If nothing else, it would eliminate the ridiculous back and forth.

My theory is real estate agents prefer this type of negotiation because it makes the process seem more difficult thus partially justifying their fees (more about this below), and because it allows the agents to control the process. More control means a greater ability to steer the negotiation to a swift outcome, not necessarily the best outcome.

Real Estate Fees Are Outsized As Compared With The Value Provided

Let’s go back to our $1 million home. Again, the standard fees are 6% of the purchase price, or $60,000. In my experience, ALL of the traffic to see our home was generated from either the web listing or from people driving by and seeing the “For Sale” sign in the yard.

The web listings are these days sent to the MLS system and picked up by the Zillows and Trulias of the world. Both of these services are doing an amazing job making it easier for buyers to find their dream home.

As a potential buyer, gone are the days of going to your agent’s office and having the agent show you all the homes for sale using their inside knowledge of the martketplace. It is as easy as surfing the net for a few hours, compiling a list of homes you want to see, and telling your agent to schedule times to see the homes.

So, basically, at this point, the agent’s jobs are to schedule tours and open the lockboxes on the front door (followed by making the negotiation more difficult - see above).

Is that really worth $60,000?

But, A Good Realtor Helps! Right?

Actually, yes. I think a really good realtor can help by knowing the local marketplace, researching comparable sales, introducing potential buyers and sellers, helping visualize changes to a home, holding the buyer’s and seller’s hands through the process, and seeing the process through to the sale.

But, in my experience good agents are few and far between.

What Is the Future?

I have no idea, but I do think the industry is ripe for disruption. Wouldn’t an agent that leverages technology and allows the buyer and sellers to drive the negotiations be able to significantly reduce the fees charged? If realtor fees were lower, would seller’s be more inclined to take a lower price (but still pocketing the same or more money)? What if the realtor’s role was reduced to showing the house for a flat fee, with all the paperwork being standardized?

I don’t know what the answer is, but I do know the current process is painful, slow, and costs way too much for the value received.