There’s no getting around it: there’s simply too many real estate agents out there.

I wrote in a recent post that real estate investors who work with a Realtor will generally end up overpaying for their services; if you pay a $12,000 commission check it’s highly unlikely that you’ve actually gotten $12,000 worth of time or effort out of the Realtor that supported you. And note that a healthy portion of that fee will be passed directly to the buyer – the idea that “the buyer doesn’t pay a commission” is a myth.

This isn’t to suggest, however, that agents are greedy or that they’re raking in the big bucks. Average Realtor income, according to the National Association of Realtors, is under $50,000. This is more than the average elementary school teacher but less than a financial service representative or an engineer.

Buyers and sellers pay too much in commission but many agents still struggle. What gives? The answer is simple too many real estate agents.  

But there is an odd phenomenon at work here. Usually when there is a glut of supply for services the price for those services drops accordingly. Supply and demand reset that price accordingly, delivering better value for the consumer at the new equilibrium point. However, in this case the National Association of Realtors has done everything in its power to resist the market’s natural ability to find equilibrium: everything from attempting to monopolize MLS data to doggedly defending the current commission structure to fighting to keep the banks out of the game.

I lived in Bogotá Colombia for three years. Bogotá is a beautiful city with great people and I enjoyed my time there. But the traffic is awful – mainly because there are too many taxi cabs on the roads. And the taxi drivers have to work morning, noon and night just to scrape by because there is so much competition – and that just keeps everyone on the road more hours (using more gasoline) which in turn creates more completion...and so on and so on.

The same thing is happening here in our real estate industry. As the market booms more and more agents are pulled into the industry chasing the same number of 6% commissions. And the industry’s leadership clings to the status quo instead of encouraging new business models that will evolve with the consumer’s needs.

:: So what does this mean for investors?

First of all a new business model is coming. Will it be Redfin? This question makes me think of a now forgotten company who’s stock I bought back during the dot com boom. This particular company was working on a groundbreaking new music format called MP3. I saw that this technology was going to be big, but unfortunately I bet on the wrong horse. Apple won and the stock I bought tanked.

So...has Redfin picked the right model? I think so. But will they win the race? Who knows – but the odds are against them. If I were a betting man I’d put my money on someone coming out of left field. Citibank? Google?

But for now: no investor should be paying 6% to sell a house. New options are already popping up – I'll talk about this in a future post.

Update - 11 July:  I posted this topic over on Active Rain, a blogging network populated primarily by Realtors.  I got a pretty lively reaction...