This section explains why commissions were set at an industry standard of 6% for over 30 years, prior to the creation of the Internet.
Before cell phones and the Internet, Realtors needed to meet to talk about new homes for sale. They would meet one day each week with Realtors from other real estate companies, and one day each week in their office, with other Realtors that worked for the same company (“broker”).
Each Realtor would talk for about 30 to 60 seconds about any new homes for sale. After discussing the homes for sale, the Realtors would get in their cars and drive around looking at these homes. This is called a “Broker Caravan”.
Before cells phones and the Internet, Realtors had to spend a lot of money advertising homes. Local and regional newspapers were the preferred method of advertising, but many Realtors also advertised in magazines targeted at home buyers.
Realtors also advertised to other Realtors as well. There were companies that delivered property flyers to real estate offices. The office clerk would put a set of flyers into each Realtor’s mail folder, and the Realtors would review the flyers.
Back then open houses were critical because there was no other way for prospective buyers to see the home, other than seeing 1 or 2 pictures in a newspaper.
This meant three things:
Realtors had to spend a lot of money (often thousands of dollars) advertising each home.
Realtors had to spend a lot of time promoting each home to other Realtors.
Realtors has to hold “open house” as often as possible for prospective buyers to see the home.
And things were even harder for Realtors working with buyers because there was no way to show the buyers pictures of the home. The Realtor had to take the buyer to each home, which took a great deal of time.
Because selling a home was so time consuming (for the Realtor representing the homeowner and the Realtors representing the buyers), plus the high cost of advertising, the industry standard for commission became established at 6% of the purchase price of the home.