This is the first in a series of several pieces I’ll be writing on the question “Why is disrupting real estate brokerage hard?” The pieces will reflect on several of the major reasons why residential real estate brokerage has been so hard to disrupt despite the high fees and dissatisfaction many homebuyers and sellers feel each year.
Since founding door.com about 3.5 years ago, we’ve helped over 1,000 homebuyers and sellers save an average of around $10,000 on their home transaction thanks to our low fees and tech-enabled agents. All told, we’ve saved clients over $10M in commissions. However, we’ve also lost out on hundreds of potential transactions: both buys and sells.
Every time we lose out to a traditional real estate agent, I feel it keenly and try to figure out why. Why—given that we save our clients so much money—would someone actively choose to spend more in order to sell or buy a home with an old-fashioned real estate agent?
The residential real estate market in the United States is massive. Last year, almost 6.3M homes transacted. With a median U.S. home price around $224,000, this represents somewhere around $1.4 trillion dollars of homes exchanged last year. Only 7% of homes sold for sale by owner last year, meaning roughly 93% of homes sales in the U.S. involved a realtor.
While the average commission paid on home sales has been declining over the past decade, it still stands at 5.08% as of 2017. This means that U.S. homeowners pay out over $71 billion in commission to real estate agents each year. Put another way, on average, a home transaction in the U.S. involves payments to agents in excess of $11,000.
That’s $11,000 of home equity dollars in every single home transaction!
Why do people do that? Why do people pay such a substantial chunk of their home equity to a real estate agent every time they buy or sell a home? This is particularly puzzling to me given that 57% of Americans could not absorb a $500 surprise expense without going into debt. $11,000 is a lot of money.
One reason people do this, that has come up time and time again, is something called “price anchoring.”
I know people who would drive twenty minutes to save ten cents per gallon of gasoline. Coupon clipping is a cottage industry in some parts of the country. And who doesn’t love saving 20% on that flat screen you’ve been eyeing on Cyber Monday?
Yet, I’ve heard people selling a $300,000 home—facing a $4,000 savings if they used Door—brush off the savings saying “It’s just $4,000. That’s not much money.”
Not much money!? A person who owns a $300,000 home has to have, at bare minimum, a household income of a bit over $50,000. $4,000 is up to an entire month’s wage for them, pre-tax.
How can $4,000 come to seem like not much money?
It’s thanks to a phenomenon called price anchoring. $4,000 only seems like not much money when it’s compared to the $300,000 price of the home. The savings that Door can deliver to a client seems relatively small compared to the overall home transaction price, even though $4,000 would seem like a ton of cash if it magically appeared on the dinner table one night.
Price anchoring is a major headwind facing companies trying to disrupt the residential real estate brokerage industry. For a normal American, the home sale or purchase is the largest financial transaction of their life by an order of magnitude.
In my opinion, it’s incumbent upon firms like Door to deliver value above and beyond financial savings. We need to make things easier and better for clients, not simply less expensive. This is a primary reason why we focus on our Net Promoter Score (NPS) so fanatically. Last year, our NPS was over 70, and I think this industry-leading score is a testament to the incredible value that our wonderful employees and fantastic technology bring to our clients every time they buy or sell a house with Door.
As you, or a friend, think about buying or selling a home, keep price anchoring in mind. You’d do well to approach the decision as to which real estate brokerage to use with an objective mind, if possible. Try framing the commissions you’re facing in terms of how many weeks or months you’d have to work to earn those dollars.
In the meantime, I’m going to drive across town because I heard there’s some really cheap gas :).
Chief Executive Officer at Door, Inc.