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More Bad News for Real Estate Agents

Jeff Bailey reports in the The New York Times today about how an internet site that cuts out real estate agents has grabbed 20% of the market in Madison, Wisconsin. (I think you may need a NY Times password to read the article.)

For $150, this site lists your home. The article suggests that real estate agents have missed out on $17 million in commissions because of transactions done through this site.

My impression is that most “for sale by owner” websites haven’t been very successful. They struggle with the fact that for the buyer, there is no obvious cost to hooking up with a real estate agent since the buyer’s agent gets paid by the seller, not the buyer. But once you have a buyer’s agent, they usually aren’t very interested in showing the buyer “for sale by owner” properties. Perhaps the key is simply for this kind of “for sale by owner” website reaching a critical mass that makes it worth a buyer’s while not to enlist an agent. According to the NY Times article, there are more hits on this “for sale by owner” website than on the official MLS website that the agent-listed properties are on. So that critical mass has been reached.

It will be interesting to see what follows. One might expect that real estate agents in Madison would start to compete on price, cutting their six percent commission. Or, maybe there will be no response at all, just a steady flow of more and more properties towards “for sale by owner.”

Personally, I don’t actually think this is the wave of the future. I think real-estate agents provide a valuable service. What I think will happen is that most transactions will be brokered by real estate agents, but more and more the pricing structure will move to a flat fee for listing properties and then an hourly rate for services provided like open houses and showings. The total fees collected by real-estate agents will fall dramatically and consequently there will be a shakeout with many people leaving the profession and the ones who remain doing much more volume at a much lower payment rate per transaction.