Sunday, May 23, 2010

One percent realty – a revolution in the making

Real estate agents have a poor reputation.  The cynical side of me would say that they get paid a lot for doing very little.  Unspoken collusion results in an unwillingness to negotiate commission from the maximum allowable, which, under the Property Agents and Motor Dealers Regulation 2001, is $900 plus 2.5% if the price is over $18,000.  Almost ten years on residential property prices have increased is many areas by 300%, yet agents still typically charge this maximum amount in a 'take it or leave it' fashion.

But things are changing fast. 

Economists often proclaim that market failures are best remedied by the market, since governments are very bad at improving outcomes even if they have the best intentions. I previously raised the possibility of government establishing a centralised real estate exchange to improve the efficiency of the property market.

Imagine a real estate exchange (REE) where home owners could list their properties. Maybe each property has a list of compulsory documentation to be included – Survey plan, title, aerial photo, front photo, number of rooms, bath, bed, total covered area, building materials, age, car spaces, maybe pest inspector and engineers reports.

The house would be put up on the exchange, which could be searched by any of the characteristics. The seller would nominate a price and contract conditions they are willing to accept, and buyers would nominate a price in a kind of open auction process.

There would be no time limit, and people could keep their house in the exchange at a ridiculously high price, and if someone agreed, they would be forced to enter the contract, even if it was a bit of a joke - “just testing the market” or something like that.
Now I am happy to say that this type of intervention is unlikely to be required.  Market forces are removing inefficiencies in real estate transactions.

The market dominance of the main on-line real estate search website,, and the centralised map based searching for residential rentals and sales listings on Google Maps, is bringing buyers and sellers together – greatly diminishing search costs for buyers.  Google maps for instance allow any individual to list their home, and as it becomes a more prominent search tool, may surpass, who only accepts listings from licensed real estate agents, as the main real estate website.

Not only is the centralising of information taking place, but competition amongst real estate agents is heating up.  In a revolutionary spirit I recently sold a house with One Percent Realty, where, as the name implies, the total commission is 1% of the sale price. 

My experience has been fantastic, and by all accounts (recommendations by friends), so has the experience of others who have sold with One Percent.  It is by far the best service from a real estate agent at a fraction of the price. 

GoGecko is also competing strongly with commissions capped at $5,950, although I have heard no first hand experiences with this agency (let me know if you have).  No doubt this trend will pressure others to follow although I have not yet heard of traditional agents entering into negotiated fees.

The reduced commission gives a seller a massive edge over properties on the market with colluding traditional agents charging the maximum commissions.  For a $500,000 home, a seller is $8,400 better off to sell with One Percent Realty.  

This type of competition works due to the centralised nature of internet searching for real estate.  The agent no longer needs to have a prominent office in ‘their’ area, distribute glossy brochures, or advertise in traditional print media.  Real buyers are online searching for property.  Browsers and neighbours are the only ones reading newspaper listings.

I have taken this experience as a lesson.  While markets may fail, over time they can be better are becoming efficient without government intervention than with.  

1 comment:

  1. yes - you are right Cam - traditional agencies are going to be competing for a smaller slice of the "commission pie" once REAL competition comes via even more online agents. I sold my house late last year and there is no way the agent "earned" the $20000+ commission.Make room for more 1% agents - keith