Three years ago I was a business development advisor for a real estate company in the Minneapolis/St. Paul area. During this time, The U.S. Justice Department’s Antitrust Division launched a Web site focused on competition in the real estate industry armed with charts on real estate commission costs and potential savings from low-cost real estate brokerage companies.

Concurrently, the Federal Trade Commission fired off a sister site to amplify Uncle Sam’s message.

There were maps that showed states that had adopted restrictive minimum-service and anti-rebate real estate measures. Evidently some industry potentiary and lobbyists were able to convince lawmakers to pass bills to prohibit consumers from receiving and real estate companies from offering discounts. Some experts argued it was cupidity for pecuniary reason no less.

The United States Government intended “to educate consumers and policymakers about the potential benefits that competition can bring to consumers of real estate brokerage services and the barriers that inhibit that competition,” according to one announcement.

According to the Government, the estimated median commission paid by home sellers in 2006 was $11,672, and that amount rose from 2001-06 while falling slightly in 2007.

The Justice Department had a lot of ammo after having been locked in an antitrust lawsuit against the National Association of Realtors trade group for the past two years, alleging that policies the Realtor group had adopted for the display and sharing of online property information were anticompetitive.

The Government contends, for the last half century, brokers typically charged a commission based on a percentage of the home’s sale price. Over the past decade the average commission rate has remained relatively steady between 5.0 and 5.5 percent. As a result, the actual median commission paid by consumers rose sharply along with the run-up in home prices.

The Government further its arguement that, unless broker costs were also rising sharply during this period of time, competition among brokers should have held commissions in check even as home prices were rising.

Five primary commission models exist: 1) 5.5%-7% commission. 2) 2-4% discount commission. 3) flat fee model ( 1-2% ). 4) Pay per service model. 5) The rebate model ( Commission less 1-2% rebate ).

Choices 1 and 2 often include the buyer side commission ( if there is no buyer agent involved the seller agent keeps the full commission ), choices 3-5 typically require the seller to pay the buyer agent when one is involved. With the advent of the internet, where 95% of buyers start their search for homes online, the issue centered on, “who really brings the buyers?”

The real estate industry at the time rubbed swords over which commission model suited the consumers best. As an advisor I coqueted with the idea that unless real estate agents and brokers innovated a commission model to better align with consumers’ behavior, the whole industry was in jeopardy. I recalled standing in front of a group of agents asking, “who will pay your commission when there’s not enough equity in the house?”

After counting all the frowns in the room, I came to realize that it was only a matter of time when some inexorable element will surface to “force” the industry to change.

Today, it turns out all the commission models were vitiated by the force of the 2008-2009 world economic crisis. Homeowners all across the United States are owing more money to the banks than what their homes are worth. In fact, many homes valued at $700K – $1 million in 2007, today, are worth less than $300K ( if there’s a buyer ).

The side effect: Real estate companies, big and small — full service and discount brokers are failing at alarming rate.

Real estate franchise giant Realogy Corp. ( Parent company of ERA, Coldwell Banker, Century 21 ) reported net losses for 2009 totaled $262 million, as revenue fell by 17 percent from the year before, to $3.9 billion. Cost-cutting measures allowed Realogy to cut its annual loss considerably from the $1.9 billion loss reported for 2008.

Similarly, discount brokerage proponent Foxton has filed for bankruptcy in the United States. BuySide Realty, after having touted the largest buyer rebate ( 75% ) has ceased operations.

Only time can predict the future of industry pioneers like Assist2sell and HelpUsell. While others like Zip Realty and Redfin are on life support awaiting a calmer storm.

So what will vivify this industry?

A commission model tied to consumer habits. As buying behaviors change, the revenue model must also change. Today’s consumers are different from those just ten years ago, but real estate revenue models have not.

This entry was posted on Wednesday, February 17th, 2010 at 3:48 am and is filed under Revenue Model. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.