Will Real Estate Brokerage Fees Fall To Zero?

Since the Internet first became commercially viable in the 1990s it’s been driven largely by a single principle, the idea of pushing prices to zero. If you can make money by not charging then you’ve likely got a winner.

The reigning champ at this time is obviously Google — it makes a ton of money and has greatly rewarded investors by offering free search, free software, free blogs, free video broadcasting via YouTube.com, free e-mail and much else that’s free. This is possible because while Google services and features are free to users, to reach the online hordes attracted by no-cost services advertisers must pay Google for each ad click they receive. Advertisers for their part want to pay Google because the cost-per-result is cheaper than elsewhere and results can be tracked with far greater accuracy than most traditional media.

It’s not just Google that’s been knocking down traditional prices and approaches. The Internet has impacted every business from travel agents and stock brokers to auto dealers and funeral directors.

Consider the case of Zecco.com. It allows you to buy and sell stock without charge. This is possible, says the company, because “after years of dramatic cost reductions and advances in technology, trading has essentially become a commodity in which every brokerage uses substantially similar exchanges, automated ordering systems, and clearing firms. All this has lowered the average cost per trade to a level that enables us to absorb these costs. At Zecco, we see it as the cost of doing business with you. It helps, of course, that we’re not spending up to $4 a trade on advertising, the current practice of many of the large online brokers.”

In other words, technology substitutional allows for new service concepts and lower pricing.

Well, okay, what about real estate brokers? Will we see a day when brokerage fees drop to zero?

This is obviously the goal, or close to it, for those who philosophically believe that brokerage services are without worth. But can the Google or the Zecco models work for real estate? Google is really in the substitute income business. That is, Google takes something that Smith might sell — such as a search service — and gives it away. Google can do this because it sells other services, ad opportunities in this case. Smith, without something else to sell, cannot compete.

But what if a firm engaged in the substitute income business? For instance, a company could offer free brokerage services if you would agree to use their mortgage and settlement companies. Can’t be done? Just look at the way new homes are sold. If you use the builder’s lender and closing company you can often get a variety of discounts and price breaks. In effect, if a buyer wants to trade there’s a discount, if a buyer doesn’t want to trade they pay more for the property but perhaps save on mortgage and closing services by going elsewhere.

In the case of a buyer brokerage there could be a trade of reduced brokerage fees or no brokerage fees in exchange for the use of a particular lender or closing agent. The fee reduction could be in the form of a rebate or price discount equal to the buyer broker’s entire fee, something obtained from a share of the commission offered by the listing broker.

If it’s fair for real estate brokers to provide mortgage services, then perhaps mortgage brokers could offer free brokerage services as a way to sell more loans.

As to listing brokers they could — with approval of seller clients — act like builders and offer homes for sale with two prices, one price if you use any old mortgage company and a lower price if you use the broker’s affiliates. The seller would pay a lower fee or no fee if the buyer accepted the lower sale price and the broker would make up lost commission revenue by selling mortgage and closing services.

The technology-substitution model makes sense for stocks because there is no physical component to buying shares; that is, no one has to inspect a stock certificate or visit a company to buy stock. Real estate is different because while paperwork can be automated actual transactions are not technologically dependent. Instead, real estate sales are predominantly and traditionally an activity that require real people to physically examine real property.

As to income-substitution ideas, they’re currently well outside common norms and practices for real estate. But will that always be the case in one form or another? Stay tuned.

Published originally by Realty Times on January 16, 2007 and posted with permission.

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