Lack of Transparency Befuddles Today's Consumer...

But here's the interesting phenomenon: the doctor-teammate didn't have a clue as to what to charge him because he had no clue as to what his services were worth! As any doctor today will tell you: their charges are handled by insurance. And the truth is that if the good doctor had not been playing softball with him, Jack's lack of insurance would have dictated that he wouldn't be going to a doctor's office at all - rather he would have to go to the ER if he wanted his ankle looked at and the cost of his care at the ER would have been absorbed by the insured.

Meanwhile, most of us who have health insurance never ask a doctor what they charge because we don't pay for the lion's share of our care - insurance does, so we have been quietly oblivious until the last few years.

So, what does this have to do with real estate?

Actually, quite a bit! Think for the moment of the 85% of insured Americans as real estate buyers. Like insured health consumers, real estate buyers may have a vague idea that the services they are being provided have a cost, but most give it little thought since they don't perceive themselves as paying for it.

Meanwhile, compare the growing ranks of uninsured Americans like my friend Jack to today's home sellers. With tough times squeezing home equity while technology provides more options, today's seller is increasingly asking the real estate practitioner what they charge. And since most practitioners are not trained consultants and don't offer hourly or flat fee alternatives to commissions, agents are left flatfooted. They have no idea what their services are actually worth and the fuzzy concept of a commission increasingly doesn't cut it. Today's seller wants real questions answered:

"What do your services actually cost? If I do all the things you ask me to do in terms of preparing and pricing my home, why do I pay the same as a seller who doesn't? And if a commission is payment for services, why does it cost me twice as much to sell my $600k home as it does my cousin across town who sells his $300k home? And why ARE commissions so high? Could it be that those that go to closing are subsidizing those who use real estate practitioner's toil and time but never close a transaction? (The answer is YES).

As our health care system continues to dominate the news, it should make those of us in the real estate industry note how the systems compare. Both were designed in another era: health insurance tied to an employer made total sense in the years after World War II when most of us stayed at the same job for life and independent contractors represented a much smaller percentage of the working population. The insured covering the uninsured was much more palatable when there were a lot less uninsured to cover.  Today's health consumer is asking a lot more questions: what do services cost? Why are they so high?

In the same way, real estate as a sales profession paid by commission made total sense when our role was strictly that of selling the merchandise, not providing fiduciary counsel and care. A 5, 6, or 7% of a home's sale price as compensation took a lot less of a bite when home values were more in line with other costs of living. Because of economics squeezing the consumer and technology providing choices, today's consumer wants choices in the services they receive whether they are consuming health care or real estate services. Most of all, they want transparency in what they are being charged for. So, is it any wonder that sellers look at us blankly when we try to explain commissions?

Commissions as payment for risk mitigation makes total sense: Economics 101 says that high risk must be coupled with high reward. But if a consumer wants to understand and perhaps pay for the real estate services themselves, commissions make no sense at all. This lack of transparency and continuing to try to explain a commission as payment for services is increasingly biting our industry in the back side and sending the consumer fleeing for alternatives.