The information super highway has dramatically upended the way many businesses operate: particularly profit margins. Retailers now have to compete with online retailers and eBay. The competition drives prices down and the consumer wins. Stock brokers have to compete with online brokers with trading costs that are a fraction of what they used to be. Again, the consumer wins. Auto salesmen now have to compete with previously unavailable information to the public such as manufacturer rebates and dealer costs. They can no longer charge outrageous prices because consumers know when they are getting ripped off.
These are only three examples. But how about the real estate industry? In the US, real estate agents charge a 6% fee on the closing price. In Canada, agents charge 7% on the first $100,000 and 1.5% on the remaining balance. These fees have not dropped and those in the industry continue to enjoy such fat margins. The question I have in my mind is how this strong hold has resisted what so many other industries could not. I speculate some possible reasons:
- Selling and buying homes are very personal. The crew on Fox's 'Cavuto on Business' jumped on guest Tom (a real estate agent) this week about the non competitiveness of the industry. Tom argued that buyers and sellers get security because agents can screen the buyers. He also argued that commissions have dropped from 6% to 5% but that is despite the average home value rising from $200K to $800K
- Selling a home is unlike selling stocks. The buyer has to enter and view the home. This aspect cannot be done online.
- Listings online are limited
- The industry is doing whatever it can to maintain the status quo by minimizing the possibility of competition
The realestate market has been booming the last 4 years. When everyone is making money, they don't necessarily question the fees that they have to pay. However, as the market slows and less profit is made, people will begin to question the value that they got for the fees that they paid. This is especially true for homes that practically sold by themselves the day they were listed.
The boom has also encouraged many to become agents. This will increase the competition and lower prices. 1% flat agent fees have already begun to be popular and this should become the norm in the future. A slowing market should also result in slashing fees as more agents fight for reduced deals.