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Doomed for Extinction? – The 6 Percent Real Estate Commission

couple looking at 6% real estate commission being slashed out

Recent technological advances have disrupted nearly every industry to date. Travel agents have yielded to giants like Expedia and Travelocity. Booksellers gave up their brick-and-mortar shops for listings on Amazon. Is technology finally disrupting the real estate market as well? And if so, is the 6 percent real estate commission going to be a thing of the past? Many forecasters believe so. Given the number of technology startups with the goal of disrupting the real estate industry, they might be right.

The 6 Percent Real Estate Commission – The Dinosaur in the Room

Real Estate Trends Infographic

The 6 Percent Real Estate Commission Infographic

For most who bought a home in the last century, the 6 percent real estate commission has been a standard. Buyers and sellers partnered with a real estate agent who in turn helped them with the real estate transaction. Moreover,  both the buyer and seller paid the agent a real estate commission, which was typically several thousands of dollars. Through the entire process, the real estate agent offered advice, education, negotiating skills, and other benefits. These services substantiated the 6 percent real estate commission received.

Today, people are questioning whether a 6 percent real estate commission makes sense. What value does the buyer or seller receive in exchange for the real estate commission paid today? With numerous online resources to assist individuals in homebuying, is the 6 percent real estate commission still worth it? Some homebuyers are not so sure. However, despite attempts by some companies to innovate the industry, the basic real estate commission model persists. At least so far, disrupting the real estate industry has been harder than many thought.

Disrupting the Real Estate Industry – A Work in Progress

Early in the 2000s, a few real estate renegades thought the time was ripe for disrupting the real estate industry. Zillow and Trulia launched online platforms with interactive real estate maps for homebuyers and sellers. Their model allowed them to earn revenues from real estate agent referrals. In contrast, Redfin pursued a similar platform but decided to seek revenues from real estate brokerage services. As a more “do-it-yourself offering,” Redfin costs much less than the traditional 6 percent real estate commission. However,  despite the cost advantages, customers still preferred the personalized service of a real estate agent.

man writing in front of a model of a house

Some real estate startup companies are awarding more to brokers than the 6 percent real estate commission. Compass, which may be more of a technology company than a real estate firm, offers real estate brokers lavish signing bonuses. Compass provides its 2,000 real estate agents with a platform of hi-tech tools ideal for disrupting the real estate industry. The platform integrates all types of data for buyers and sellers alike. Moreover,  it allows real estate agents to schedule appointments and communicate more effectively with their clients. However, despite awarding more than the standard 6 percent real estate commission with sales, Compass has yet to make a profit. The company raised a total of $808 Million in funding over 8 rounds, the last coming from SoftBank.

Flat Rate Real Estate Commissions – The Next Wave

More recently, technology startup companies with plans of disrupting the real estate industry have taken a new approach. Rather than charging a 6 percent real estate commission, these companies offer a flat rate fee for the transaction.

For example, Reali has adopted such a model using independent real estate agents. Based in Southern California, Reali uses machine learning and artificial intelligence to enhance customer experience and improve efficiency.

Purplebricks, operating in the U.K., Australia and now the U.S., takes a similar approach as Reali. Purplebricks also charges a low flat rate fee instead of the 6 percent real estate commission. And Trelora also charges flat-rate fees that are less than half the traditional 6 percent real estate commission fee for most sales. Unlike Reali and Purplebricks, Trelora uses an employee-based model where employees assume typical real estate agent duties. All of these companies leverage technology in some way to make the home buying process more efficient and less expensive.

Looking Beyond Real Estate Commissions

Technology startups are not only disrupting the real estate industry in areas of real estate commission. Several companies are looking to make changes in other areas of the real estate sector. Bowery is using data processing software in a proprietary appraisal platform to improve the speed and accuracy of home appraisals.

Flip is like a long-term Air BNB type of company facilitating subleasing activities. OnTarget provides an online dashboard to ensure on-time home construction projects by connecting multiple stakeholders. Finally, Offerpad, a technology startup in the Southwest, is reinventing the home sale process by providing its customers the convenience and control of the process. It is using on-demand technology to create a platform come to get fair and fast purchase offers on their home. They are live in Phoenix, Atlanta, Orlando, Tampa, Las Vegas, Los Angeles, Salt Lake City and Charlotte. Earlier this year, they secured $150 Million in new equity and debt financing. LL Funds, LLC is leading the round and they see further expansion of the business across the U.S. This raises OfferPads total funding to $410 Million.  As Bold Business  reported in May, Zillow, OpenDoor, Perch and Redfin are also ramping up their competing platforms.

There are many technology startups, and these are only a few with potential in disrupting the real estate industry further.

Dying a Slow and Gradual Death?

Unlike other industries, the real estate sector has maintained some resistance to change. Though many technology companies are hopeful in disrupting the real estate industry, they have not made a major impact yet.

More than 90 percent of homebuyers and sellers use a real estate agent and pay the 6 percent real estate commission. More than $75 billion in real estate commission fees are made each year in the U.S.

However, the writing is on the wall. Venture capitalists poured $1.2 billion into real estate technology companies in 2017. In the near future, you might check out a potential home by unlocking it with an app on your smartphone. You might then tour the home with a virtual assistant on the same app. Moreover, artificial intelligence might then help you close the deal. Though change has been slow, most still predict the 6 percent real estate commission is seeing its last hoorah.

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