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Hot Market Pressures Agent Commissions

As real estate agents and discount brokers compete for business, commissions have become more flexible.

In real estate these days, everything seems to be climbing, rising or soaring, but the one thing dropping, or at least pressured to drop, has been real estate commissions.

In an area that has seen the average home more than double in price the last five years, competition among real estate professionals has reached pitched levels, which has often triggered agents to lower the commissions they charge buyers and sellers.

Making competition even fiercer is the growing number of discount brokers and firms offering low or flat fees for services.

“In a seller's market, you’re always going to get downward pressure on commissions,” said John Tuccillo, who has a Ph.D. in economics and has been a consultant to the real estate and mortgage industry for 30 years. “Sellers think they can get lower commissions because homes are selling so fast,” said Tuccillo, whose company JTA Inc., is based in Arlington.

For Geraldine Milon-Jones, who chose a discount real estate firm to sell her home, it was about saving money. “I didn’t want to pay an agent 6 or 7 percent,” she said. She decided to work with MLS Now, a firm based in Reston, which gives a flat fee of $1,995 and 1 percent of the value of the home to selling agents and 2 percent to buying agents.

“The more I save, the more money I can put down on a new home for myself,” said Milon-Jones.

The head of MLS Now, Ned Malik said that commission-conscious clients like Milon-Jones are driving the discounting business.

Discounters also say that changes in technology, and how consumers use that technology, are supporting their success.

Sellers, who are gaining a much greater understanding of the market through greater access to information on the Internet, have helped increase the demand for discounters, said Malik.

“The dynamic for our area is that our client base is more educated and more savvy about the market,” said Malik. “The technology is making it more and more convenient; they don’t need a real estate agent to hold their hands.”

WITH THE GROWING number of Realtors in the country — more than one in 300 Americans — and shrinking inventories, Tuccillo said that listings have premium value. In addition, he said the technology is available “to cut the costs of the company, and some Realtors are passing those savings on to customers.”

Many of the companies offering lower commissions implement a business model based on higher volume.

In Chantilly, Samson Realty, which focuses on western Fairfax County and eastern Loudoun County, charges its customers 4 percent or 4.5 percent commission.

Working with the full-service firm, David Ridley of Samson doesn’t consider the firm a discounter because of the way it handles commissions.

When selling a home, the company gives agents from other companies their traditional commission, said Ridley, managing broker at the firm.

“We always pay 3 percent to the co-opting broker because we think it would be a disservice to the seller not to,” said Ridley, adding that Samson selling agents receive the remaining one and a half percent. Offering less to buyer agents from traditional firms might limit the pool of potential buyers, he said.

“The difference is we work on a model where our agents are doing two to three times as much business as the traditional agents,” Ridley said. In June, Samson Realty closed on 235 homes, according to Ridley.

How Samson does business is a response to the changes in the industry, Ridley said. “We recognized a change in the flow of information,” said Ridley. “If you can manage that new increased level of information, then you can market successfully to it.”

Meanwhile, home prices in the area continue to soar. In Northern Virginia, home values have increased 114 percent since 2000, according to the Northern Virginia Association of Realtors (NVAR). In June 2000, the average home price was $259,776 and in June 2005 that average was $556,606, according to NVAR. In addition, homes don’t stay on the market very long. In the last five years, the average home in Northern Virginia was on the market for 20 days, according to NVAR.

GIVEN THE AREA’S rise in home prices, Malik argues that the payout for a traditional commission is too much. In Northern Virginia, June’s average home sold for more than $550,000. The 6 percent commission for a $550,000 home would be $33,000. “People are feeling that commissions are too high,” said Malik. “Because demand has been so strong, the 6 percent commission doesn’t justify a month’s worth of work,” said Malik. On the same priced home, Malik’s firm would charge $18,495.

By law, real estate commissions are negotiable, but the standard rate charged by traditional full-service firms has been 6 percent, which includes all the work. These firms market and show the property, list it on the Multiple Listing Service (a database agents use to find homes for customers), handle negotiations with buyers, and complete all the necessary paperwork among other things. The 6 percent commission is then split by the listing and buying agents.

Depending on the company, discounter firms will either offer full-service at a lower than 6 percent rate or charge a flat rate fee. Other discounting firms, not considered full-service, will offer flat-fee rates per service. For example, they may charge a fee for putting the house on the Multiple Listing Service, but require the seller to show the house.

Aisha Banks, a Realtor with Long and Foster in Sterling, said she has noticed that other firms reduce their commissions to be more competitive. Banks said, although her firm doesn’t typically drop its rates, her firm is still the “best” because it’s full-service. “We’re the Nordstrom’s of real estate, while [discounters are] the JCPenney’s of real estate,” said Banks. “We really service our clients with virtual tours, we have open houses, comparative market analysis, and we’re always in classes so we can stay on top of the discount folks.

“It’s not about the commission,” she said. “If you’re going to get a good price for their home, it’s not a problem.”

Ernest “Ernie” Miller, office manager of Better Homes Realty in Springfield, has not only noticed the trend in lower commissions, but said it’s a “daily event.”

“I [negotiate my commission] all the time,” said Miller. He said that discount firms and traditional firms are doing it. “Agents are listing properties at less and sometimes far less than 6 percent commission.”

With 30 years experience in real estate, Miller has also noticed an upward trend in rebates. “A lot of homes are selling at 6 percent, but you’re seeing rebates up the wazoo. Rebates are happening — happening big time.”

Miller said that agents are “locking horns” when listing agents offer buying agents two percent, one percent, or a flat fee of $1,000.

“Most [listing] agents paid the selling commission of 3 percent, but a lot of them are not doing that now.”

Miller explained that many of the listing agents feel that they are doing buyer agents a favor because listings are at such a premium in this sellers market. In addition, some listing agents, Miller said, are getting 2 percent themselves and don’t want to pay more than what they’re getting to the buying agent.

Miller said that he often offers rebates to customers. “I used to say 1 percent of the sale of the house,” said Miller because that was usually one-third of his commission. “Now I say one-third of whatever I get.”

In the end, Miller argues the discounters and the traditional firms are offering similar services.

“The bottom line is there’s not a dime’s difference,” said Miller. “What sells a house is that it’s in good condition, pricing it right and putting it in MLS. That house will be sold and be sold quickly by the biggest firm and the smallest firm simply because of supply and demand.”

Banks disagrees. “I think we just offer more of a full service even though [discounters] say they’re full service,” said Banks. “They’ll only do so much.”