Why Aren’t Commission Rebates More Common In NYC?

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Buyer thinking with lots of question words around him wondering why commission rebates aren't more common

With so much money to be made on every transaction, it’s surprising that commission rebates are virtually nonexistent in the NYC real estate market. Sure, just like you, brokers would prefer to make more money than less but why else aren’t more buyers collecting a commission rebate?

What Does Economics 101 Tell Us About Real Estate Brokers?

A commission rebate takes money out of the broker’s pocket and gives it to the client. If a broker is not given a reason to rebate, they won’t. However, real estate brokers operate in a very fragmented industry. According to the Real Estate Board of New York, there are currently 301 residential brokers in the organization1. The number of agents is harder to track but in 2014 there were about 30,000 in Manhattan2. That’s more than twice the number of annual transactions in Manhattan so there are plenty of agents running around competing for business.

Economics 101 says fragmented markets are bad for pricing and it’s hard to find an industry more fragmented than real estate. The largest brokerage, Douglas Elliman, has less than 7% of Manhattan’s agents3. With so many players, some will be willing to charge less (for whatever reason) and keep pricing for the entire industry in check but that hasn’t played out – brokers are making 50% more per transaction than they did ten years ago – so what’s going on?

Transaction Size And Frequency

The best thing brokers have going for them is an apartment is a large and infrequent purchase. With so much at stake, it’s easy to convince a buyer they can’t cut corners and need a traditional broker’s (expensive) service. Many buyers view traditional brokers as better because they are more expensive. In this way, brokers are an example of a Velben good where their high cost becomes proof of their value.

Anyone that has purchased real estate before knows that not to be the case. When we explain Yoreevo’s model to a repeat buyer, it’s a much shorter conversation. They know what the broker actually does and recognize the absurdity of a $30,000 commission. However it’s understandable if a first time buyer thinks they’re making some sort of concession with a commission rebate. They assume they need the best and the most expensive must be the best. Hiring a traditional broker is like hiring a brain surgeon to do a few stitches. They’ll get the job done but it’s completely unnecessary.

Real Estate Broker Cost Structures Can’t Afford Commission Rebates

With dramatically higher commissions, brokers can obviously afford to spend more but perhaps more importantly, higher commissions have required them to spend more.

Ten years ago, when selling your average Manhattan apartment you would have paid your listing broker about $40,000 (and a total commission of $80,000). Now that same average Manhattan apartment seller is writing a check for about $60,000 ($120,000 total). In a previous post, we explained why the value of brokers has declined over that same period so what else can brokers do to justify their cost? They can spend money on flashy but unnecessary expenses.

You can see signs of excess all over the NYC real estate industry. Perhaps the largest and most obvious is office space. How many times are you going to visit your broker’s office? Once? Twice? If they’re really good – zero – they’ll come to you. And yet, even small brokers tend to have prime office space4. If you have a high enough budget, expect a car service to shuttle you around viewings. Sure, it’s convenient and luxurious but it’s coming out of your pocket.

What if buyers start to realize they’d rather keep that excess in their pocket and opt for commission rebates? Traditional brokers can’t terminate their lease. They can’t tell a buyer there’s no car service when their friend got one. The industry has gotten too fat and happy to adjust. Their cost structures have ballooned to the point where they’re addicted to today’s commissions.

We’ve designed Yoreevo to be the Amazon of NYC real estate brokers. Amazon’s lack of stores dramatically lowers their cost structure and allows them to pass those savings on to you. Yoreevo doesn’t have a fancy office or car service but we do have a commission rebate for you at closing.

Why Buyer Agent Commission Rebates Matter
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