By: GREG FISCHER
[Note from editor: We publish Bi-Weekly Transmissions for paying members of the GEM Crystal that consist of long form articles covering the spectrum from shipping container co-living spaces to the battle for listing acquisition in the first iBuyer world war.
Below is a sample Transmission, written by Greg Fischer. While he wrote it over a year ago, it’s as relevant today as it was the day it was published. I thought a wider audience should hear the message, one I very much personally agree with. If you’d like to read more from Greg, you can find his writing here. —Drew Meyers]
We’ve seen real estate’s newest entrants over the years start with a focus on reducing the commission of hardworking agents. From Redfin to Reesio, and Haus – all of these companies started with the goal of diminishing the role of the agent in service to the consumer.
Redfin is now a traditional brokerage almost indistinguishable from those it hoped to dethrone. Reesio opened up their FSBO platform to agents when DIY transactions failed to scale. California based startup Haus is still hoping other players were just too early to make it all work.
The $80 billion in annual commissions was an easy target for tech. The idea that self-made real estate agents, who often didn’t even attend college, were capturing so much revenue was impossible to ignore. What entitled them to siphon thousands of dollars from every deal?
AGENT EARNINGS FUND TECH INNOVATION
We’ve seen real estate’s most heralded darlings focus on earning their fair share of those same commission dollars in an all-out war. From Zillow to Move, and all of the vendors in between – these companies exist because of dollars paid out to real estate agents, and they all want some more.
Zillow tunes and refines its advertising pricing algorithm to keep Premier Agents coming back. Move is selling software for almost every piece of the broker stack from front to back. Vendors run the gambit of quality from undervalued swiss army knife-like tools to wallet draining duds.
Commissions fund the products and brands that power the industry. Without revenue from transactions, we wouldn’t have online search, electronic signatures, and analytics tools – much less 3D home tours.
OTHER ITEMS WORTH TACKLING
Before continuing this unspoken quest to make real estate agents vanish, let’s take a look at some back of the napkin math to find out if we’re missing other opportunities instead.
- House – $206,250 at an estimated 75% of the total purchase price
- Interest – $100,000 in fees amortized over 10 years
- Land – $68,750 at an estimated 25% of the total purchase price
- Taxes – $31,625 at an average rate of 1.15% but varies by state
- Maintenance – $27,500 at an estimated 1% home value per year
- Commissions – $13,750 at an average of 5% of the purchase price
- Insurance – $13,000 for premiums and an average of one claim
- Fees – $2,750 for estimated origination and title fees
HOMES SIMPLY COST TOO MUCH
That’s why it’s encouraging to see models focused on reducing the cost of the house and the land such as co-living, tiny homes, and pre-fab.
Real estate lobbyists fight for mortgage interest deductions to help reduce the burden to homeowners of this six-figure expense.
Home improvement companies make a killing on the furnishing, maintenance, and repair of large American homes – paving the way for an ecosystem of contractors and service providers. Why aren’t startups looking to reduce these costs instead?
The property tax system hasn’t seen a refresh since colonial times, leading people to stay in their homes to transfer the wealth intergenerationally instead of back into the neighborhood.
It’s not that real estate commissions are insignificant, but five other line items cost much more.
DO YOU SEE WHAT I SEE
I know it’s easy to look at that $13,750 and think “what the heck did the agent even do?” However, consider after it’s split between two brokers that fee is only $6,875. After a 30% cut for the brokerage one agent earns $4,812. But after 25% for expenses, that’s a gross of $3,609. Even with the generous 20% tax rate most will see next year – that’s only $2,887 in take-home pay per side.
No wonder agents are tired of disruptors trying to take their hard-earned below median wages. What is it about this demographic of self-starting practitioners that we can’t seem to stand, yet still tolerate the idea that homes should cost hundreds of thousands of dollars to occupy?
So excuse me if I yawn at the notion that real estate agents need to go away. While I appreciate the entrepreneurial nature of the technology startup scene, I can’t help but love the quirkiness of the do-it-yourself real estate agent community even more.
Who do you think invented dropping out of college to launch a longshot business idea out of the garage?