New Behavior In The US & Disruptive Technologies Lowering Real Estate Commissions

Georges Benoliel, Founder, NestApple Having graduated from HEC Business School and holding a Masters degree in Finance from ESADE Barcelona, Georges has 18 years of experience in the Finance sector, working with companies such as Paribas Affaires Industrielles, Arthur Andersen and Société Générale, and is also an active real estate investor.

When I place an order to buy Microsoft stocks, I am being charged $4.95; when I shop for a hotel, insurance or a plane ticket, I can choose and compare between thousands of options, and with Amazon Prime, I no longer pay for shipping for most of my shopping. The internet has reduced inefficient middlemen in most industries; why haven't real estate brokers in America been affected? As a Frenchman, I am particularly shocked by the high six percent real estate commission paid in New York. The average commission paid to brokers in the UK, Australia, France and Belgium ranges from 1-3 percent.

I live in New York, and prices here may rise & fall, trends may come & go, but one number remained unaffected ­ the 'standard'six percent broker commission. With six percent, NYC has the highest real estate commission rate in the world and even within the US If you try to negotiate, brokers will tell you that six percent is standard and 'this is the way it is in New York'.

The national US average real estate commission charged by real estate brokers to sell a home stands at 5.36 percent. In the UK, real estate brokers charge 3.25 percent, and in France, it ranges from 2-4 percent. In the center of London, brokers charge 1.7 percent. In London or Paris, it's common for real estate agents to charge a lower fee for more expensive apartments. But brokers generally do not accept that in New York. To make matters worse, in London or Paris, the average commission is lower than what it is in the rest of the country. How do you explain this? Real estate in London and Paris is considered a safe and liquid 'asset class'; in other words, it is easy to sell. For instance, it is easier to sell a studio by the Eiffel tower than a farm in Normandy; this is the reason why the agent trying to sell the farm needs to charge more. The same rationale should apply to NYC real estate. But it does not. It turns out that real estate in NYC is actually higher than in the rest of the country, when the market is more liquid and transparent.
Technology has changed the way business is done in ways that were unimaginable a decade ago. Experts say that residential real estate practices should adapt and evolve now, as buyers and sellers have unlimited access to property listings and other information that was once hard to get. Twenty years ago, brokers were receiving apartment listings over fax, had access to information not available to the general public, and were considered to have an insight into the business. Brokers are still useful and play a major role in real estate transactions. However, it is realistic to say their role has changed and should therefore be reflected in the commissions they receive.

Residential real estate practices should adapt and evolve now, as buyers and sellers have unlimited access to property listings and other information that was Once hard to get

So people pay six percent?
1) Although collusion about real estate commissions is illegal among agents, we have heard many real estate brokerage firms not allowing their brokers to work for less than five percent. 80 percent of the transactions involve two intermediaries: a seller's agent and a buyer's agent, and each of those two share the commission with their firm (50/50 or 60/40). After taxes, there is not a lot left. A buyer can legally list his house directly (it is called FSBO ­ For Sale By Owner)and attract a buyer coming with no broker and can transact directly, saving the six percent.

2) In France, if you give an exclusive mandate to a broker to sell a property, the commission charged is lower(1-3 percent) because the likelihood of the agent earning the commission is higher (since there is no other agent). Also, you are not allowed to transact with a buyer represented by another agent. In essence, there is no commission to be ‘split’. In the US both the buyer and seller are represented by agents in most transactions, brokers must collaborate to close transactions at the same time as they compete for listings. Buyers' agents have an incentive to only show their client's homes whose sellers offer them a standard three percent commission.

3) It's common in Europe for percentage commission rates to be based on the sale price. If the property sells for a higher amount, then the commission rate steps up. Conversely, if the property sells for a price on the lower end, then the real estate commission rate would go down. We think it is fair, but propose that to a broker in NYC! As a consequence, there is no real incentive for the broker to sell your price at the highest price possible; they just want to close a deal. A broker will prefer an apartment which sells quickly at $2 million than working for months (marketing, staging) and getting it done at $2.15 million.

4) If you try to negotiate, brokers will probably try to make you feel guilty and tell you that they will work less for a three percent than for a six percent and they can only get you top prices for your property if you pay six percent. The good news is that there are 26,000 other brokers you can try.

My bold prediction for 2019-2020 is that real estate commission will get reduced by half, and this is the reason why startups like NestApple are thriving. New York's Attorney General Eric Schneiderman issued an open letter to encourage brokers to offer NYC broker commission rebates to make the market more fluid. "Such rebating is also procompetitive and good for consumers...I encourage all real estate brokers and salespersons in New York to consider enhancing the choices available to real estate buyers by offering lower commissions (by means of rebates) to some or all of your clients," said Eric.