Putting the Squeeze on Commissions

Capital Thinking  •  Issue #720  •  View online

The current way in which Americans buy homes is a combination of intentional design, historical accident and litigation.

It all started in the late 1800s, when boards of local brokers convened at their meeting halls to swap information about properties their clients had for sale, hoping to find a buyer at the highest price.

-Lydia DePillis

The internet didn't shrink 6% real estate commissions. But this lawsuit might

Story by Lydia DePillis, CNN Business:

After moving eight times as her husband's job transferred them around the world, Lindy Chapman felt she knew a thing or two about selling real estate.

Unlike her first home purchases, by 2015 she could do most of the initial research online, narrowing her home search to a few contenders before even bothering with a Realtor.

Plenty of agents, it seemed to her, no longer did enough work to justify the traditional 6% commission: 3% on the seller's side, and another 3% for the buyer's agent.

So by the time Chapman moved to Dallas — a particularly frustrating relocation in which she ditched her agent and bought a home that was for sale by owner — she got her own Realtor's license, thinking she could do a better job and charge less for it.

"It was obvious on this move that the traditional system no longer operates in line with what the consumer needs in the 21st century," Chapman said.

"I literally had everything I needed in the palm of my hand to find homes and all the related facts. I just needed someone to open doors, write the contract, and connect me to schools and the community."

But in trying to offer cheaper services to others, Chapman realized just how entrenched the commission structure is.

When she listed homes for sale, the system boxed her in: If she didn't offer the standard 3% to buyers' agents, she worried they wouldn't show the home to their clients.

"The client wants Netflix and the technology for Netflix is here," Chapman said. "And it's like Blockbuster saying, 'no, this is the only way to watch videos.'"

A wave of disintermediation has squeezed margins in many sales and advisory professions.

Travel agencies have shrunk from 100,000 employees in 2000 to 53,000 in America today, as websites like Expedia, Priceline and Kayak have allowed travelers to book their own itineraries.

Financial advisors, who used to charge between one and two percent of the assets they managed for clients, have been shifting to fee-for-service models in order to compete with automated advisers and low-cost index funds.

Real estate agents have been a puzzling exception to that trend.

Keep Reading =>

The internet didn’t shrink 6% real estate commissions. But this lawsuit might

For decades, Realtors have managed to keep commissions at a nearly flat 3% for each the seller’s and buyer’s agents, even as the internet has allowed homebuyers to do much more of the legwork on their own. A new lawsuit takes aim at that longstanding business model.

CNNStory by Lydia DePillis, CNN BusinessPhoto illustrations by Max Pepper, CNN BusinessVideo by Bronte Lord, CNN Business