(Link to news story: MLS real estate deal ‘may force out agents’)
About thirty years ago, the stock trading business was cracked open when brokers could charge whatever commissions they wanted – the eventual result of this was automated stock trading and dirt-cheap commissions. A trade in the old days could cost $100 (and that was in 1970’s dollars), while today you can get them done for a dollar.
Essentially, the full-service broker was supposed to provide “value” in their advice to buy or sell securities, but there was an embedded conflict of interest – the broker made money by performing transactions, as opposed to giving good advice. Discount brokerages alleviate this problem by allowing individuals to make their own trading decisions.
The same trend toward discounting will happen to real estate transactions. Currently a typical commission scheme is 8% for the first $100,000 and 2% thereafter; so a transaction on a $500,000 place could be around $16,000 or 3.2% of total transaction price. Suffice to say, this is a huge liquidity penalty (not even including the property transfer tax in BC).
What value does a real estate agent provide? It is one of being a liquidity provider – trying to find somebody to purchase your property. They also provide some supplementary paperwork (mainly copied from templates), but you still have to engage in a lawyer and/or notary to get some other paperwork done to close the transaction.
It is debatable how much “marketing value” is provided by an agent, but what is clear is that real estate transactions are likely to become cheaper as service components become separated. Also, people that can actively shop their property around will likely be able to save significant amounts of money.
Reducing property transaction costs will strongly help to increase liquidity in the real estate marketplace, which would also increase the accuracy of valuation.
One of the primary reasons why I do not dabble in real estate is simply due to the lack of liquidity and the transaction costs. I’d much rather prefer to invest in companies that specialize in real estate since they are likely to have better skills in property management than I ever would.