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Commissions have long been the lifeblood of the real estate agent. For decades, real estate transactions have relied on a familiar model: a commission rate, typically 3 percent. Note that commissions are never a set amount, they are negotiated between the seller and the agent’s brokerage.
That 3 percent is paid to both buyer and seller agent, carved out of the sale of the house. It’s so common that most of us in the real estate industry have taken it as a given, and home sellers and buyers are often unaware of how the process works at all.
But that’s starting to change. As home prices have risen, driven by supply shortages and increased demand, many industry experts have started considering whether the existing model is still working. Some researchers point to other industries, like purchasing flights or trading stocks, where digital technology has driven down costs and opened the opportunity for industry outsiders.
My St. Petersburg-based brokerage is still commission-based, and my team is proud to offer our clients excellent service in return for those commissions. But as a business owner, I’m always looking ahead to see how industry trends will change the landscape of real estate. Some experts are forecasting big changes to come in the way consumers buy and sell homes.
In 2020, things came to a head when the U.S. Justice Department filed an antitrust lawsuit against the National Association of Realtors (NAR), claiming a lack of transparency about buyer’s agent commission fees. The parties had reached a settlement agreement in July 2021, but the DOJ ultimately withdrew to continue its probe of the powerful real estate group. (NAR counter-sued over DOJ’s withdrawal in November 2021; that case awaits a judgment in D.C. District Court.)
What is the flat fee model?
Flat fee is an alternative to commission-based real estate services. Rather than buyer and seller agents splitting a percentage of the final sale price, a flat-fee Realtor will take a fixed payment instead. The fee rate varies: Clever, a national brokerage with a flat fee model, charges $3,000 or a 1% fee, while the Philadelphia-based brokerage Houwzer charges $5,000, regardless of the home sale price. Typically, buyer’s agent commission fees still come out of the final sale.
This is distinct from so-called flat fee MLS listing, which is an à la carte Realtor service. Flat fee MLS companies like Homelister and Beycome charge clients a fixed cost, usually between $300 and $600, in exchange for basic services, such as listing of their property through MLS, photography or subsidiary listings.
They don’t offer the extra services Realtors provide, like home tours, negotiations and paperwork. Discount brokerage services like these are generally targeted to FSBO homeowners, so the model isn’t intended to replace full-service realty.
Given the logistical hurdles of selling a house without a Realtor — and the fact that only 7 percent of homesellers last year sold their house FSBO, per NAR’s 2021 “Profile of Home Buyers and Sellers” — flat fee MLS listing will likely retain an important but minor role in the overall real estate industry.
Full-service flat fee realty, on the other hand, offers the same or similar services as commissioned-based brokerages, but for a flat rate rather than a percentage of the sale. Flat fee agents perform the same duties for the client as a commissioned agent, and simply receive an agreed-upon flat rate once the transaction is complete.
Across the country, independent brokerages have adopted flat fee services on their own, but the main driver of this industry shift is new real estate startups that are changing the model of pay for their agents.
Houwzer, for instance, pays its agents a salary, and then charges sellers a $5,000 listing fee. The buyer’s agent generally earns a 2.5 percent commission out of the sale of the house.
Other startups like Homie and Clever are also built on full-service, flat-fee models. Meanwhile, smaller brokerages from Tennessee to Utah have migrated to a flat fee model, offering full-service client support in return for a fee of several thousand dollars.
Why move to a flat-fee model?
The flat fee real estate model is growing. Houwzer, one of the largest full-service flat-fee brokerages, now operates in seven states. Interest in new models like flat-fee is likely to grow: a 2019 Brookings Institute study found that uncoupling buyer and seller commissions, and letting each client pay for their respective services individually, would increase healthy competition in the real estate market.
Real estate agents and brokerages, however, may be warier of this trend. Since commissions grow with the price of the house, the current model offers large financial incentives as brokers grow their businesses. And because flat fee models may require agents to handle more customers at a time, this arrangement often means more work.
So why consider a flat fee model at all?
- Flat fee models are, for obvious reasons, enticing to clients hoping to save money. By switching to this model, you open up the potential for new leads, especially if your area doesn’t have a flat-fee brokerage yet.
- Market forces may begin to nudge the industry towards the flat-fee model regardless; moving to flat-fee can help your brokerage get in ahead of time.
- Flat fee models could help balance the real estate industry by helping new agents get in the door while still rewarding experienced professionals with robust commercial networks.
- A profit-sharing brokerage model can foster collaboration rather than competition amongst agents.
- Flat fee models acknowledge the evolution of the real estate industry, including digital innovations like Zillow that give home sellers and buyers more information about the market. Embracing these technologies can lessen the workload for agents in a brokerage while gaining more clients through the flat-fee model.
- A set rate for services offers full transparency between listing brokerages and home sellers.
How could a brokerage apply a flat-fee model?
For brokerages operating with a traditional commission amount, there may be questions about how a flat-fee model would function within the brokerage framework.
In a flat fee model, a brokerage’s listing agents would receive an agreed-upon fee, say $4,000, for helping a client sell a house. The broker agent could then implement a flat-fee profit-sharing model with listing agents, say, $500 of the $4,000 flat fee.
Alternatively, a tiered model of flat fees could be tied to the broker’s split: the negotiated fee for the listing agent could vary depending on the market rates of the area or other factors, while the broker’s split could remain consistent across rates (in the above scenario, that would be a 25 percent to 75 percent split).
Given the lead-generation potential of a flat-fee model and its appeal to new customers, a likely increase in listings could generate more revenue for the brokerage overall.
Brokerages with a flat-fee model have reported favorable earnings: Scout Realty in Nashville, Tennessee, charges homesellers a flat fee. Their Nashville listings sold in an average of six days, compared to an average of 12 days for other brokerages. Higher volume sales, then, can lead to a more profitable brokerage, even if you eliminate negotiated commissions.
The future of flat fee
Meanwhile, some real estate startups are advancing new funding models, including flat fees instead of commissions. The so-far success of these fledgling concepts has many in the industry wondering: is flat-fee real estate the future of the business?
As business owners and real estate experts, I believe we’re best served by staying ahead of the curve. Understanding how the flat-fee model works and how it could apply to our brokerages will help us all stay abreast of changes in the industry and keep our businesses thriving for years to come.
Nicholas Acosta is a real estate broker and instructor. He launched Downtown Expert Realty LLC in Orlando, Florida, in July 2020.