Better Technology Should Equal Lower Real Estate Fees
We’ve been talking about fees here a lot lately. It’s something I feel passionate about. If you’re doing it right, better technology should allow for lower fees. Today, across much of the real estate industry, better tech is here. So why aren’t fees falling? Let’s take a look at the numbers and what we can find. And if you’re a real estate agent or service provider who is paid a commission or contingency fee for your work and you haven’t lowered your fees since 2010, prepare for some unsettling news.
I was catching up with a good friend last week who is a career real estate professional. We were waxing philosophical about a number of trends. In that conversation, he made a passing comment about the continued decline of real estate broker/agent commissions. Whereas 5 years ago, a 6% commission split between two residential agents may have been the norm, those real estate fees in some cases are now half of what they once were. We spent time dissecting the factors that have led to that shift, at which point I also noted the shift in commissions paid to traditional property tax consultants in my industry. We unpacked that as well.
Here’s what’s happening.
Let’s use the median sale prices of houses sold in the United States as our first example and evaluate real estate sales commissions in this context. According to the St. Louis Fed, one year after the Great Recession ended the median housing price was approximately $225,000. As of Q1 2022, the median housing price has skyrocketed to $428,000. That is a 90% increase in 12 years.
Over that same time period transactional friction in the home buying process has decreased significantly. This is mostly thanks to online platforms and the digitization of various processes involved in the buying and selling of homes. Overall, the amount of human capital required to buy and sell a home over the last 12 years has declined. So why wouldn’t the price you pay for someone to help facilitate that transaction decline? It should. Which is also why it has.
To paint this in more concrete terms let’s use the above value, remembering that in the U.S. it is typical for the seller to pay the commission which is then split between two agents. In 2010, if you sold a home at the median home price of $225,000 and paid a commission of 6%, you would pay a commission of $13,500. Fast forward twelve years and your commission at 6% on a median home price of $428,000 would be $25,680. If you were to adjust the commission to match the appreciation of home prices over that same time period, the total commission paid in 2022 would need to be about 3.2% to equate to a commission paid in 2010.
Of course, inflation does come into play so let’s be conservative and round up to an even 4% for an apples-to-apples comparison. The point is, given the value appreciation in the real estate market, notwithstanding any efficiencies gained through technology, the current real estate commission paid should be 33% less than what it was in 2010.
Anecdotally, if you were to factor in transactional efficiencies gained through technology and the fact that most people already know a lot about a neighborhood and home they are interested in buying before they ever reach the doorstep, one could argue that the commissions paid in 2022 should be HALF of what it was 12 years ago. So, is that happening? Yes. Will that continue to trend towards the norm across ALL markets? Unequivocally yes. Why? Because that’s what other industries have done (e.g., stockbrokers).
In the real estate tax consulting industry, the same trends hold true. Most property tax consultants appealing assessments for commercial property owners have maintained contingency fees of 20% to 25%. And some are as high as 33%. When I started in the industry 20 years ago, those were the SAME fees we charged regardless of the asset type or market.
And for those of you that will be quick to retort with a comment on consumer price inflation being the reason fees need to remain constant despite real estate price appreciation, let me assure you that the consumer price index AND wage growth have in absolutely NO WAY come anywhere close to the increase in housing prices.
The ugly truth is that much of the front-end work of understanding and appealing real estate tax assessments is more formulaic and repeatable than one might lead you to believe. One could argue that 70% of the real estate assessment appeal process has been and continues to be improved with technology. Of course, humans still provide value in the analysis, prosecution, and negotiation of the assessment with the assessing jurisdictions. You also can’t discount the customer service component that no chat bot in the world can replicate.
However, it begs the question: Why have fees not changed if technology has offered advancements in efficiency and effectiveness across 70% of the real estate tax appeal process? Because most companies and consultants doing this type of work have not embraced or implemented any of the technological efficiencies available.
You’ve heard of “fat and happy” or “if it ain’t broke, don’t fix it.” Those mindsets always precede disruption and the displacement of the established old guard that are stuck in the old ways of doing things. There are countless examples of this throughout history. Needless to say, the property tax consulting industry is ripe for disruption and unfortunately for those stuck in the past, the disruption has already started.
At Cavalry, we have used technology, data, and better processes to offer our clients lower fees. Our standard contingency is 15% across the board. At the end of the day, through innovation we have lowered the cost to consumers while providing better results. We’re ushering in the new era of real estate tax consulting – and hope you join us.BACK TO ARTICLES