It’s Not Rocket Science.
In fact, becoming a Realtor may have some of the lowest entry standards of any profession. Only 11 states require a high school education and most require only 90 hours of pre-licensing education (some as low as 30 hours) geared towards passing the exam. Montana requires a 10th grade education… These people are selling houses?
Continuing Education Requirements
To make matters worse, many states approve classes on self-promotion for continuing education credit. Classes that teach Realtors to join more than one place of worship and to call all their friends and neighbors and sell them your services. In other words, classes that have no redeeming licensing value are getting approved for credit.
Then Why Do They Charge So Much?
Forget about all the Realtor talking points about how many people they have to split their fees and all the competition between Realtors as explanations for why their fees are so high. In an efficient marketplace, those things just don’t matter. Real estate fees make no sense and are artificially high because the listing broker controls how much the buyer broker makes. In other countries, the buyer agent is an hourly employee who drives buyers around. When the buyer finds a house, the buyer uses an attorney to draw up an offer. Commissions total 1-2.5%.
Prior to the Multiple Listing Service (MLS), commissions were approximately 2.5% or less in the United States. However, when the MLS arrived and listing brokers started “sharing” their commissions with agents working with buyers, all of sudden real estate commissions doubled. The MLS is now a way for Realtors to horde data and force people to pay for a buyer broker whether they want one or not.
Are Buyer Agents Free?
Of course not. But Realtors will tell you all day long that they work for free. The National Association of Realtors came to the rescue of Realtors by providing Realtors with an absurd “Code of Ethics” that makes it “ethical” for Realtors to lie to you and tell you that they work for free. Here it is:
Standard of Practice 12-2
REALTORS® may represent their services as “free” or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the REALTOR® to obtain a benefit from a third party is clearly disclosed at the same time.
Buyer agents are trained to lie to you about their fees being free in order to prevent you from negotiating their fees. In fact, savvy home buyers negotiate very large rebates from buyer brokers (from smaller firms) all the time. By forcing consumers to pay for a buyer broker whether they want one or not has more than doubled the commission cost of buying or selling a house.
Why are Brokers Paid a Commission?
One of the requirements of putting a property in the MLS is that Realtors must offer a commission to other brokers who find the buyer. The MLS is not simply a database. Rather, it is a way to force buyers and sellers to pay for a buyer broker. It would be far more efficient if the MLS did not exist and only a public facing portal like Zillow did their job without any strings. Take away the MLS and we could start to see fees be commensurate with the complexity of work being done.
If Realtors charged more like attorneys do, the cost of hiring a Realtor would come way down. Yet attorneys are far more qualified and educated.
Isn’t It Important to Have a Qualified Agent Representing Me?
Maybe. The problem is that few agents/brokers can provide representation because they have inserted so many conflicts of interests between them and their clients. Whether it be selecting a title company or steering buyers towards in-house listings or listings that pay big bonuses, the conflicts are rampant and often undisclosed.
When you think about the type of work an agent does, you quickly realize that few, if any, are really qualified to do the work for which they are hired. Unless you believe that 90 hours of education on how to pass an exam prepares an agent to practice law and draft binding contracts, you quickly realize that few of the jobs being done by Realtors SHOULD be done by Realtors. They are not qualified to handle the financial aspect of qualifying a buyer. They are not trained in the science of determining the value of a property (appraisal). They are not qualified to inspect a home and most can’t even measure a house. They can put a sign in your yard or drive you around though.
Isn’t Buyer Representation Important?
Maybe. If it’s done by a highly qualified professional who actually represents the buyer. The low entry standards to the profession make this highly unlikely. Worse, most brokerages spend an enormous effort to guide buyers to their own listings where the broker simply can’t negotiate for their clients.
The best way to find out if buyers want to hire buyer agents is to allow them to pay for the buyer agent out of their own pocket. Have the sellers pay their broker and the buyers pay their own. We believe it is highly likely that most buyers (who already find the house they want to buy without a Realtor) would go at it alone or hire a much more qualified attorney to draft the offer and save a ton of money in commissions.
Why Are the Entry Standards So Low?
Realtors are free employees for brokers. They get to supervise them and the agents work exclusively for the broker, but agents are treated like independent contractors. The “masses of asses” business model (first coined by a large group of brokers called the “dirty dozen”) makes it possible to hire as many Realtors as you want. They don’t care that the turnover rate is 70% every two years. All they care about is that they have so many Realtors working for them that everyone will have a friend or neighbor who is a Realtor. The more Realtors you have in your office, the more likely that they will sell to a friend or neighbor. This is why there are 2.5 homes sold every year for each active real estate licensee.
The National Association of Realtors is the most powerful industry lobby in the United States. It is political suicide for legislators to go against them. In the last election, they boasted that over 90% of all the candidates they backed got elected. That’s in both the state and federal elections. Think about that a minute.
They also appoint the regulators (often ex-Realtors) and write their own laws. The current president of the Association of Real Estate Licensing Law Officials (ARELLO.org) is a Realtor. They are the biggest advertiser in newspapers and it is risky business for newspapers to write negative Realtor stories. They own our government and have set their fees and standards accordingly.
In other words, the entry standards are low because the big brokers want it that way.
What Can I Do About It?
Read our website for tips and traps in selling and buying a home. Engage the services of small independent brokers who will negotiate their fees and not expose you to dual or designated agency. Make sure your agent is qualified and well educated. If you want to avoid paying a buyer broker, talk to some brokerage firms that pay rebates or find an attorney who is also a broker who may be able to help. Use an independent title company and hire an attorney before you sign anything – especially the buyer representation contract or the listing contract.