Real Estate Firms

** Update: recent changes to RE commission structures dropped this year. We'll update this page soon to reflect our latest insights. **

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Now let’s look at who produces the house porn. Since you’re footing the bill, they work for you!

We’ll start from the top.

🏢 Institutional Level

At the company level, we have real estate brokerages—licensed firms that employ real estate agents to represent buyers and sellers in property transactions.

Brokerages at a glance:

→ Over 90,000 residential real estate brokerages in the US as of 2023.

→ Licensed at the state level, meaning they must adhere to specific laws and regulations that govern real estate transactions within their respective state.

→ Have to comply with the Real Estate Settlement Procedures Act (RESPA), a federal law designed to protect consumers by promoting transparency and fairness in the homebuying process. RESPA regulates how brokerages interact with other parties like lenders and Title companies to prevent kickbacks and referral fees that could unfairly inflate consumer costs.

→ Typically structured with a designated broker who oversees the firm's operations and holds ultimate legal responsibility for all transactions conducted by the brokerage, a managing broker who is responsible for day-to-day operations, including supervising agents and ensuring legal compliance, and a team of real estate agents who work under the brokerage's license. The agents are either independent contractors affiliated with the brokerage or employees.

There are different types of real estate brokerages, each with its own model and commission structure.

Types of RE brokerage

• Traditional full-service brokerages: Classic real estate firms that offer a full range of services, usually for a standard commission fee. The larger national brands you may be familiar with tend to fit this category.
  

• Boutique brokerages: Smaller, specialized firms that focus on a specific market niche or offer personalized services. They commonly emphasize quality over quantity and may offer a tailored experience. Boutiques operate with variable commission fee structures: many are independent with smaller overheads and franchise fees relative to the national full-service brokerages.
  

• Discount brokerages: Firms that offer limited services for a reduced commission or flat fee. They might list your property on the MLS but offer fewer additional services, leaving more responsibilities in your hands.
  

• Online platforms: These are digital-first real estate services that operate primarily on the internet. They are generalists and necessarily set up for traditional, “plain vanilla” home purchases and sales. Fees can vary widely, from reduced commissions to flat fees.
  

👩🏻‍💼 Personnel

Folks are familiar with real estate agents, the main operatives at a brokerage.

There are 3 million licensed real estate agents in the US: that’s nearly 1% of the population. About half are members of National Association of Realtors (NAR), a professional association and political lobbying group. Membership requires agents to pay annual membership dues and agree to a “code of ethics,” which grants the right to use the title “REALTOR®.”

In 2023, several national real estate firms opted to cut or downgrade their ties to NAR following allegations of misconduct, antitrust violations, and multiple pending class action lawsuits.

A little background on agents is appropriate since you may decide to hire one to represent you in one of life’s largest purchases:

• Salespeople: paid on commission when a transaction closes
• Low barriers to entry: generally a high school diploma, passing grade on a state licensing exam, affiliation to a licensed broker
• Often part-time (63%)
• Often inexperienced: nearly 1 in 4 have been on the job less than three years
• High turnover: 28% leave the industry every year, 87% leave within five years
• Modest production: 1.6 transactions per month on average
  

Like Loan Officers, there’s a broad spectrum of talent and experience but the mean tends towards less of both.‍

The nature of a real estate agent’s role has evolved.

Twenty years ago, agents were integral to the home search. Buyers depended on agents’ access to local MLS databases to view the inventory of homes for sale. Today, you can identify homes of interest from your phone through real estate platforms with a few clicks.

So, how do agents fit into modern times?

✔️ Act as quarterback

✔️ Advise on process mechanics

✔️ Prepare and deliver competitive offers

✔️ Interface with your professional deal team

✔️ Provide you and your co-buyer(s) tailored, on-demand guidance

✔️ Negotiate with listing agents on your behalf

✔️ Manage the transaction execution

✔️ Troubleshoot obstacles to successful, timely closing

Savvy real estate agents increasingly specialize in serving particular segments, both to meet client needs and to differentiate themselves in a crowded marketplace. The more sophisticated, talented agents focus on adding value instead of going through the motions.

That said, it’s essential to understand the scope and limits of their role in your co-buying journey.

🧑🏽‍⚖️ Fast Fact

Some states allow real estate agents to deal with contract preparation and closing, while others require an attorney to review contracts and/or handle the closing.

States that require attorney involvement during the closing process:

Alabama, Connecticut, Delaware, Georgia, Kentucky, Louisiana, Massachusetts, New Hampshire, South Carolina, Vermont, West Virginia, and Wyoming. Other states require lesser degrees of attorney involvement.

FYI: This list is for illustrative purposes and is not legal advice. Check with your State’s Department of Licensing, your mortgage lender, and your real estate agent to determine your state’s requirements.

Note: You may hear agents referred to as “real estate brokers,” “real estate salespeople,” “licensed real estate professionals,” or “real estate advisor”. These titles sometimes indicate different levels of responsibility, training, or licensing depending on the state's regulations. We’ll use “agent” here for simplicity.

Compensation Structure

One challenge to agency theory is the principal-agent dilemma, where a conflict of interest arises between the principal and the agent. ‍

The principal-agent relationship breaks down if you lose faith that your agent is acting in your best interest.

Agents have domain expertise and information that you, as co-buyers, do not (“asymmetric information”). Additionally, economic incentives are not fully aligned. Both sides want to see a purchase through to close, but the agent’s compensation structure favors a higher purchase price. Let’s take a look.

Over 90% of RE agents are independent contractors of their brokerages, not employees:

➡ ️ Get paid on commission (= don't get paid unless they do business, and most don’t do much)

➡ ️ Operate like a small business and cover their operating, marketing, and other costs

➡ ️ Pay their brokerage in the form of (i) a desk fee to rent space, (ii) a portion of the commissions they earn, or (iii) some combination of these two

Total commissions are based on the purchase/sale price of the home: currently over 5% on average. The total commission, 5.x% of the sale price, is split between the real estate brokerages and agents on the listing and buy sides.

Sound high to you? The Economist famously calls these commissions “jaw-dropping” in comparison to agents around the world.

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We highlight this to raise a point: context is everything.

Real estate is not a transparent industry. Be skeptical about facts, statistics, and advice you read, including ours. There is no substitute for doing your research.

How can we solve the principal-agent dilemma?

1. Transparency: The buyer's agent should be transparent about their fees and compensation structure. The buyer should also be transparent about their needs and goals.
2. Communication: The buyer and the buyer's agent should communicate regularly throughout the home-buying process. This will help to ensure that the buyer's agent is aligned with the buyer's needs and goals.
3. Accountability: The buyer's agent should be accountable to the buyer. This means that the buyer should be able to fire the buyer's agent if they are unsatisfied with their services.

Are real estate agents worth it?

It depends. A professional who provides more value than they charge is worth the cost. Simple. The best real estate agents are certainly worth it. Most are not.

What should you do?

✅ Do your research

✅ Minimize information asymmetry through education (you’re here!)

✅ Communicate transparently, early, and often

✅ Get everything in writing, including a buyer’s agency agreement

✅ Select the best real estate agent to get value for your money.

👀 Transparency

CoBuy’s biz model is not based on real estate agent commissions today—it was in the past. We pivoted. We make money by charging for our co-ownership platform, Co-ownerOS™.