KB Homes Slashes Commissions

Congratulations to home builder, KB Homes.  Effective March 15, they are cutting commissions to real estate brokers to two percent.  At least here in my market.  Here is the email announcement:

So why congratulations?

Well let's ask the obvious question:  How much should a real estate commission be?  Or, how much is a broker's service worth?

Of course, it's debatable.  And brokers can charge whatever they like.  But that does not mean that buyers and sellers have to pay whatever the broker likes.  Sure, some brokers are worth more than others.  And some deals are easy, some are difficult.

Nevertheless, after a lifetime in the business, if I had to put a number on it, I would say that on average a real estate transaction should pay one percent to each side, plus expenses.  That is, one percent to the seller's agent and one percent to the buyer's agent.  Plus an accurate accounting of expenses related to the transaction.  For the seller, these expenses should only include marketing costs of the property involved and not any other marketing expenses of the broker.  For the buyer, only the search costs, and not the marketing expenses of the broker.

Most brokers will find this pretty radical.  But I am simply trying to match brokers' fees with their actual value proposition.

And just to be clear, I am NOT talking about any form of discount brokerage.  No, I am talking about full service.

But brokers are consistently paid much more than this.  Why?  Well they have perpetuated the myth that they are worth more.  And have frightened buyers and sellers into believing that if they pay less, something bad will happen to wreck their transaction, or otherwise cost them even more money.  It is a sham.

Let me quote from The Competent Broker:

I will tell you what many brokers will never admit:  Many of the services offered are commodities and should be priced as such.  And as we have discussed, many brokers offer only the illusion of Lexus-level service.  Their value proposition is minimal.  This certainly applies to almost all real estate marketing.

Also, and there’s no getting around it, this industry dynamic involves an element of work ethic.  Or lack of work ethic.  It is easy to get fat and lazy at six percent.  If the industry average commission was dramatically reduced, brokers would have to really hustle.  There’s a lot more hustle at Walmart selling household goods than there is at Nordstrom selling high-end handbags.  Now sure, Nordstrom has luxury offerings and a refined atmosphere and unmatched service.  But what you have in the real estate business is Walmart brokers waiting for (and insisting on) handbag shoppers.  They need to cut their prices, roll up their sleeves, and get to work.  Yes, really.

I also think that reduced commissions would lead to a more professional class of broker across the board.  With six percent commissions, what you find is many marginal brokers remain in the business who would otherwise have to find a real job.  If we dramatically reduce commissions, these people would be forced to leave the business.  Those remaining would be the true professionals.

But the real question is:  Why do sellers continue to hire these brokers?  It is, I think, a combination of factors that we’ve discussed.  The pretense of competence and authority.  The widespread, and often valid, stereotype of brokers.  And the illusion of high service.

There is also an element of fear.  Some sellers fear that if they hire the wrong broker, the broker might make an expensive mistake that the sellers cannot afford.  I get that.  But brokers prey on this fear.  So many of them are little more than snake oil peddlers preying on the nervous, uninformed, and credulous consumer. 

So with this book, I hope to convince you that six percent does not guarantee competence or integrity.  In fact, it might even reduce these sought-after qualities.  I have mentioned this a couple of times and I will again here:  If we want better brokers, the only way we are going to get better brokers, is for consumers to demand better brokers.  Please.

So with the above announcement, KB Homes is paying the buyer's agent two percent.  Double what I think it is worth.  But okay, what I think is only one opinion.  You decide for yourself.

In any case, I'd say KB is taking a step in the right direction.

Update:

Just for kicks and grins, I looked up the commission payouts from other new home builders.  Lennar, Pulte, Taylor Morrison, and Dan Ryan are also paying two percent.  Maybe it's a trend.  In this huge seller's market, how long before lower payouts reach the re-sale market?

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