Why Real Estate Commissions Are So High: Paying For Wasted Time

I’ve decided that I’ll never be able to write the comprehensive post on all the reasons why real estate commissions are so high, though I have covered some of them previously in posts such as this one: Why Do Real Estate Agents Make So Much Money? There are just too many reasons to cover in a single post. So I’m addressing them on the installment plan.
This post is inspired by an article that appeared in last week’s Wall Street Journal: A Raw Deal for Real-Estate Agents, which provided some of the worst examples of real estate agents getting deals snatched out of the hands of victory at the last minute. Examples include seeing ghosts and just good old fashioned buyer’s remorse. And I’ve got a few of my own war stories.
As the article points out about 20% of deals fall apart – and that number is extremely consistent with my own estimate for the Chicago real estate market. And that doesn’t even count the number of buyers and sellers that never make it to the contract stage.
Don’t get me wrong. Even though I use the term “waste” in the title of this post a lot of this just comes with the territory of any commission based business and can’t honestly be classified as a waste of time. If inspection issues come up, financing won’t materialize, or the client’s circumstances change it’s the realtor’s job to deal with it as part of their responsibility to the client.
Nevertheless, a lot of time is spent on clients that never produce a commission or take a long time to produce a commission so realtors need to get handsomely compensated for the deals that do close. Otherwise they couldn’t afford to stay in the business. Basically the clients that close end up subsidizing the clients that never close or take a lot of effort to close.
There is no easy solution for this problem but one rather obscure alternative is for clients to pay their realtor by the hour instead of on a commission basis. If buyers and sellers got comfortable with this model an interesting dynamic would materialize. The highly motivated, serious buyers and sellers would go hourly, leaving the rest to pay commissions. Eventually realtors would realize that the commission clients were higher maintenance, commissions would go up and maybe a few more people would choose the hourly option. In the end all buyers and sellers would end up paying for the services they consume.
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