Disintermediation, Freakonomics and a Case for Fee-For-Service Pricing

DISINTERMEDIATION is a 20 buck word that has sparked a lot of buzz in the real estate industry recently. Briefly, [tag]disintermediation[/tag] means “cutting out the middle man”. There are many recent examples of disintermediated industries. Travel agencies, bookstores, and computer and software come immediately to mind. Sure, there are still corner travel agencies, and there are still brick and mortar bookstores (I can spend hours in a Barnes & Nobles). You can still buy a PC in many places. But think of the impact buying airline tickets on-line, or Amazon, or Dell has had on these industries and the way we shop.

There are some who feel the real estate industry is ripe for disintermediation. Steven Levitt and Stephen Dubner, the authors of the bestselling “[tag]Freakonomics[/tag]” are strong believers that the real estate industry is in the middle of disintermediation (see Endangered Species: Why Real Estate Agents are on the Way Out). Countless “real estate bubble bursting” blogs either believe, or sincerely hope that disintermediation of real estate is here. David Houle argues the time is upon us. I can’t figure out of Declan McCullagh is saying disintermediation has arrived or is just around the corner, but either way it’s inevitable to him

Most real estate agents, if they truly understand what disintermediation encompasses, can quickly point out why it can’t happen completely in the real estate sales field. Shopping for a book, or buying an airline ticket is not the same as finding a home and closing a sales transaction. Can you buy a home site unseen? Sure, we’ve helped several investors do just that. Could these investors have done it without our assistance? I don’t think so, at least not without incurring expenses above and beyond the dreaded “C” word (commission).

I won’t spend any more time discussing disintermediation here (for now). Others have already done a far better job of that than I could ever hope to. (See this from Kristal Kraft, or Sellsius‘ many posts on the Unzillowable. Greg Swann’s BloodhoundBlog has perhaps the best discussion on disintermediation from an agents perspective. Greg has and entire category of disintermediation posts.

On Friday, the Freakonomics boys posted, “Note to Realtors: You May Want to Skip This One“. So of course, I couldn’t skip it. It’s not much of a blog entry per se, but they provide a link to a paper written by Mark S. Nadel, who either works at, or was sponsored by the AEI-Brookings Joint Center for Regulatory Studies. I haven’t gotten all the way through it (it’s 77 pages), but it’s chocked full of information and well cited sources. It discusses the current percentage-of-sales based [tag]commission structure[/tag] and makes a sound argument on how consumers would benefit most from a [tag]fee-for-service[/tag] approach – combining flat fees, hourly fees, and bonuses. It’s a compelling read, and one sure to make some “old school”/”traditional” brokers shake their head. (Some new school brokers and agents too). Whether you believe disintermediation is here, coming, or can’t happen completely, you should read Nadel’s “A Critical Assessment of the Standard, Traditional, Residential Real Estate Broker Commission Rate Structure“. If it doesn’t make you think, well, then you don’t have much gray matter up there… Once I read it and and absorb it, I’ll have more to say, I’m sure…

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Toby

I think we are seeing the very same "sky is falling" proclomation that we saw when the "big" Internet companies focused on an industry.

What happened? If the industry could show that it needed that "middle man" to succeed then it survived, if not, then it diddn't. In a recent CE class the prof said, "information is cheap, don't be cheap." The brokers/agents that try to sell themselves on simply the MLS connection and giving information will be replaced by the Internet, but those that have established their value to consumers and have built their "business" on adding value to the transaction will not only survive but thrive in this environment.

Jonathan Dalton

Once upon a time I worked for Charles Schwab - the one-time discount broker, so advertised until it was discovered the message didn't appeal to a wide enough base. The marketing positioning changed in time, but at heart Schwab's was a discount broker ... its existing clients expected it, wanted it and rarely wanted more.

In time, still trying to capture market share, Schwab tried to offer higher value items - portfolio advice, trading advice, relationship-building, all at a lower cost than what the others charged. No longer positioned as a discount brokerage, it still had a discounter's soul.

At the same time, the Merrills and Prus and Dean Witters and the higher-commission brokers remained in business as their value proposition remained attractive to a large portion of the population. Some, like Merrill, offered a lower-service, lower-cost model, but their basic model remained the same.

When the NASDAQ collapsed, it wasn't Merrill or Pru that faced extinction. It was Schwab. Perhaps extinction is too extreme, but when you shed 2/3 of your workforce, and a large portion of your executive structure (including the CEO, who lasted a week longer than me) ... the company clearly was in dire straights.

Two points: one, the brokerage industry also operates on a commission basis - in many places, it's a percentage of the total purchase/sale. Two, those who are able to proof their value are able to charge nearly whatever they choose. There always is a market for high-quality, value-driven service.

Tyler Sookochoff

Jay - thanks for providing links to some great reading material. Without having yet read through all the links on disintermediation, I agree with the above two comments: add value to your service and you'll likely be in good shape. In fact, those who provide real value should welcome some technology-driven shakeups in the industry (as you said you do, Jay) because it will drive out those bad agents who survive on deception.

I'm your newest regular reader, Jay. Keep up the fresh content!

Jay - The Phoenix Real Estate

Some *great* points and comments made by all, thanks for contributing!

I agree that if we (agents, loan officers, title companies, whoever) provide superior service, then we really have little to fear. Will the "standard" commission structure change? Not if the NAR has their way. Would a change be better for consumers? Probably. And probably for agents as well. (good agents that is)

I know a lot of agents that "fear" technology. Part of it is because they don't understand it, and part of it is because they think it will "replace" them. My feeling is that if an agent can utilize technology, both for himself and the client, then it's a win-win for all involved.

I'm all for technology improvements that will make the tedious and mundane tasks simpler for all. That will allow us to focus on providing extraordinary customer service for our clients.

Tyler Sookochoff

I read a quote somewhere that you may all have heard (I'm probably slightly paraphrasing here): technology won't replace agents; agents with technology will replace agents without.