“A better mousetrap”: Brokerages cut commissions to gain market share

Yoreevo's James McGrath and Leon Goldfeld (Yoreevo; Illustration by The Real Deal with Getty)
Yoreevo's James McGrath and Leon Goldfeld (Yoreevo; Illustration by The Real Deal with Getty)

When former financial analysts James McGrath and Leon Goldfeld launched brokerage Yoreevo in 2017, the standard 5 or 6 percent commission looked like a fat target.

“It just seemed like an industry that was ripe for disruption,” McGrath said. “We thought that we can basically reinvent the process, build a better mousetrap and save clients a lot of money while providing a better service.”

They created a model that rebates buyers up to 2 percent of the purchase price and sells for a 1 percent listing fee.

Yoreevo is among a number of outsiders trying to carve out market share with discount commissions, sometimes in the form of rebates for home buyers.

In a typical home sale, the seller’s and buyer’s agents might each get a 3 percent commission, which on a $1 million transaction is $30,000 apiece. But Yoreevo, representing the buyer, gives its client $20,000 of its cut.

“Basically, we’re working for one-third of the commission,” McGrath said.

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That might seem like an enticing proposition, but Yoreevo hasn’t exactly taken off. Five years after its debut, it has just seven agents and a total of $500 million in residential sales.

The traditional model has been surprisingly resilient, even as competition and technology have whittled commissions down to almost nothing in other fields, such as stock brokerage.

Legal barriers defended by industry lobbyists are one reason. Commission rebates are not even allowed in Alaska, Oregon, Iowa, Kansas, Oklahoma, Missouri, Mississippi, Louisiana, Alabama and Tennessee, although the Department of Justice encouraged them way back in 2007.

“Rebates can be powerful tools for price competition among brokers,” an agency report said.

But the department, which is tasked with preventing businesses from colluding rather than competing, has not brought an antitrust action against the industry since the 1940s, when it sued the industry for fixing commission rates and won.

After the Supreme Court upheld the decision, the industry shifted to “recommending” or “suggesting” commission rates. However, there was little change in broker practice, and commissions remain similar from one market to the next.

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In one study, the Consumer Federation of America found that agents’ commissions across more than 10,000 Northeast home sales were highly uniform. In eight of the cities examined, more than 80 percent of the rates were identical.

The organization encouraged federal agencies and courts to prohibit the coupling of listing agent and buyer agent commissions, which would allow buyers to negotiate their agent’s compensation rather than having it set and paid by listing agents.

Commission rebates were only made legal in New York in 2014, after then-Attorney General Eric Schneiderman proposed amending the New York Real Property Law to clarify that a brokerage can pass part of its commission to the client. The legislation was sponsored by Rep. Lee Zeldin — a state senator at the time — and Assembly member Charles Lavine.

“An antiquated approach”

Prevu's Chase Marsh (right) and Thomas Kutzman (Prevu, LinkedIn, Illustration by The Real Deal with Getty)

Prevu’s Chase Marsh (right) and Thomas Kutzman (Prevu, LinkedIn, Illustration by The Real Deal with Getty)

Like Yoreevo, Manhattan-based brokerage Prevu was launched in 2017 by finance industry veterans aiming to outcompete the old guard on price.

Former equities traders Chase Marsh and Thomas Kutzman believed brokerages were charging high fees and commissions and taking what Kutzman called an “antiquated approach” that catered to agents, not home buyers and sellers.

But a brokerage that discounts commissions won’t be able to hold onto its agents unless it compensates them some other way. Prevu does that by paying them salaries.

“A lot of folks see TV shows like ‘Million Dollar Listing’ and everybody wants to be that great big personality,” Kutzman said. “But there’s a lot of agents out there that are truly very knowledgeable about the business and want stability in their lives. They love doing business, but they’re not necessarily a TV caricature of what an agent should be. So having a salary for folks is truly valuable.”

Prevu has grown much faster than Yoreevo. It now operates in New York, California, Connecticut, Massachusetts, Pennsylvania and Washington, and claims its revenue growth rate over three years ranks 34th in the real estate industry. This month it was named to Inc. magazine’s list of fastest-growing private companies in America.

In the Hamptons, Bespoke Real Estate recently rolled out its own version of a commission discount, reducing what it charges sellers to 1 percent. Like at Prevu, its agents get salaries.

Redfin has experimented with commission refunds, but in late July, it eliminated the one it was offering homebuyers in 22 markets and might drop the pilot program entirely as soon as January, CEO Glenn Kelman told investors during the firm’s second-quarter earnings call.