For as long as there have been brokers, there have been efforts to sell realty services for less -- especially in the past two decades. Consumer groups, individual brokers, and online entrepreneurs have all argued that real estate fees are "too high" and that if only the system could be made "more efficient" then transaction costs could be reduced.
It's an appealing argument. In our daily lives we each seek to reduce costs and there's no reason to believe that realty services are somehow immune from the basic human drive to attain the best possible bargains.
And yet, somehow, discount brokerage has simply not had much impact.
Real estate commissions are not set by law and are always negotiable. The term "negotiable" is an expression which consumers routinely fail to understand -- it means owners and buyers have the right to seek lower fees, and also that brokers can say "no" when asked to provide services under terms which will not produce a satisfactory profit.
There are, to be sure, low-cost brokerage services available. In general terms, they come in three forms:
- Discounted services. In this case, a broker offers a discount because a home will readily sell, to gain an advantage over a competitor, or because the broker needs additional inventory.
- Menu-of-service plans. In this situation the consumer selects some or all services from a list of options. In the usual case, the buyer or seller does some of the work and the broker provides the specialized services which transactions require. A broker might assist with pricing the property or negotiating, as examples.
- MLS access plans. Here the broker enters a home into a local multiple listing system for a small fee -- but often does little, if anything, else. The owner shows the home, advertises, negotiates, and does the leg-work. In addition, the owner says to other brokers, "hey, this property is available at this price and terms. If you bring in a buyer I'll pay a fee for your services."
Okay, so there are choices and options out there. And yet, where is the example of a discount firm which dominates a local or regional marketplace?
Here's another one: How has the Internet advanced the cause of discount brokerage or self-selling?
When real estate first appeared on the Internet in the early 1990s one of the most common questions from brokers was, essentially, "if we put listings, forms, and data on the Internet, will not my services be devalued?"
We've now had real estate on the Internet for almost a decade and what's happened? The National Association of Realtors reports that it now has "more than 760,000 members," as many or more than in previous years and hardly evidence that the Web has doomed brokerage or reduced fees.
But why not? Is there something more important than the urge to bargain when it comes to realty services?
The answer for most consumers is likely to be "yes."
Think about the matter this way: Suppose you can buy steak at $2 a pound or you can buy "steak?" at $1 a pound. Both are steak -- but we're not so sure about the discount variety and so we pay the higher price to get what we want.
After the Gold Rush: Patterns of Success & Failure on the Internet, a study by Clayton Christensen, a professor at the Harvard Business School, may offer an answer.
In the study, Christensen -- founder of Innosight, an innovation management consulting firm -- discusses a Harvard case study regarding Studio Realty, a North Reading, MA electronic home tour firm opened by developer Jim Connor in the early 1990s.
"The intended value proposition," writes Christensen, "was to create an 'electronic open house' with digital images of the listed property , as well as maps and other kinds of information designed to make it much more convenient for people to buy and sell homes.
"Connor's new format produced measurably higher prices paid for real estate as well as quicker sales. Mysteriously, however, Studio Realty was never able to make its investment in the electronic home tour payoff. The company lost $10,000 a month. Moreover, buyers rarely made their decisions based on viewing the electronic house tour alone. In addition, sellers persisted in choosing their brokers based on personal relationships, rather than superior financial performance."
But if the Studio system resulted in higher prices and faster sales, why didn't it succeed?
"Because Studio Realty bore the higher cost of operating the electronic house tours, but was unable to charge a higher price for its services, the firm found itself in a classic price squeeze," writes Christensen.
And there's another reason as well, as Christensen explains:
"We would argue that Studio Realty simply missed the relevant basis of competition. The functionality and reliability of real estate brokers had not yet overserved the needs of buyers and sellers in North Reading; therefore, an offering based on convenience and price was unable to capture value in that market. If, on the other hand, an agent used the Internet to understand and win the trust and confidence of her clients, it might help her compete more effectively. Studio Realty might have enjoyed greater success if it had marketed itself in terms of functionality -- emphasizing to Realtors that homes sell faster and at better prices when presented through their system. Or the company could have stressed to homebuyers that Realtors who are equipped with the technology have a superior ability to understand their needs and find them exactly the home they want."
In a similar fashion, one must consider the "relevant basis of competition" in real estate. Is price an issue? Sure. But trust and competence trump price, as the marketplace has shown.