The 6% Real Estate Commission is Doomed

[Sanchez]

I know the title is dramatic but it certainly appears that the end is approaching for real estate broker price fixing. On October 31 a jury in Missouri awarded homesellers $1.8 billion in damages in a suit against the National Association of Realtors ("NAR"), Keller Williams Realty and Homeservices of America. Other brokerages settled with the plaintiffs prior to the judgment. Many other suits have been filed across the country and the U.S. Department of Justice is also involved.

The thrust of the lawsuit is that the NAR requires commissions, typically paid by sellers, to be split with buyer agents in order to list on the MLS. Therefore, sellers have no ability to negotiate commissions with buyer agents - thus collusion and elevated prices for homes. Buyer agents are not going to show homes unless they receive a commission.

I don't want to regurgitate all of the facts and history so you can see a relevant article and opinion below. The bottom line is that there is likely to be a reckoning which will result in commissions totaling 3-4% rather than 5-6%. Buyers will negotiate a commission with their agent rather than rely on payment as a percentage of the home price. I have long believed that the commission structure is onerous, unfair, unethical and self serving. The conflict of interest is apparent and buyer agents benefit from higher prices. Sellers are paying 3% (usually) to a buyer agent with whom they have not negotiated, may not be qualified, and may be advocating against their interests. Also, the notion that a broker can serve in a dual capacity representing both buyer and seller is a farce. While real estate brokers can perform a service, the value of that service is almost never equivalent to the commission paid. Hopefully these verdicts, action by the DOJ and the advance of internet presence will serve to greatly reduce, if not eliminate, commission based sales and provide some relief for buyers and sellers.




https://www.cnn.com/2023/11/05/homes/nar-verdict-real-estate-commission-fee/index.html

Using a travel agent to buy a plane ticket or a stockbroker to trade equities seem like relics of the past. And yet, every day, people across America hire a real estate agent to help them sell a home. It’s one of the few industries that has been able to largely avoid the disruption that has helped consumers cut costs in the Internet age.

And that is largely because of the power of the National Association of Realtors, the largest professional organization in America and a significant lobbying group for the real estate industry.

But the verdict handed down in a Missouri court on Tuesday that found NAR and two brokerage firms, Homeservices of America and Keller Williams Realty, were liable for $1.8 billion in damages for conspiring to keep commissions artificially high, may mark the beginning of the end of how homes are bought and sold.



https://www.cnn.com/2023/11/15/opinions/nar-lawsuit-real-estate-commissions-brobeck/index.html​

On October 31, a Kansas City, Missouri, jury ruled that the National Association of Realtors, or NAR, and several residential brokerages engaged in illegal price-fixing and awarded damages to Missouri home sellers that could total more than $5 billion. This decision has made it highly likely that in the future, the industry will no longer be able to charge 5% to 6% commission rates across the board.

What plaintiffs successfully challenged was the industry requirement that for a home to be listed on a local multiple listing service, sellers must offer compensation to buyer agents. That mandatory offer has allowed industry agents and brokers to collude by setting rates.

Homes listed below the going rate of 2.5% to 3% may not be shown by buyer agents. And buyers do not believe or see a reason that they can negotiate the rate down because they are told by their agents that sellers typically pay this expense. NAR has said it will appeal the verdict.

 

[kdonnel]

It seems to me that real estate agents are going down the same path as travel agents.

They will remain but in a much more limited capacity. The internet will allow for a direct purchase search model.

 

[easyas123]

We negotiated agents commissions several times, I'm surprised more folks don't at a minimum talk to the agents they are interviewing about this.

 

[tvguy]

Can't remember the name of the company, but they advertise on national TV that their agents work for as little of a 2% commission.
Not sure I agree that the MLS having requirements to use their service in a certain manner is collusion. As others have pointed out, you don't need MLS to sell a house and you can negotiate commissions.

 

[GAN]

In this day and age I’m not sure that a 6% real estate commission buys you much. Does it take much more work to sell a $1M home versus a $500K? Trying to justify in my mind the difference of $30,000 vs. $60,000 …seems like a lot of money. No doubt an experienced agent carries value, but we aren’t performing life-saving heart surgery here.

 

[Cannot_Wait_4Disney]

The lawsuit against the NAR should have been dismissed. As for the companies involved maybe.

1. The current situation with buyer's brokerage was not set up by the NAR. That was set up by state regulatory agencies who declared that agents working with buyers being subagents for the seller was a conflict of interest. And it was these same state regulatory agencies, that essentially just kept the same pay system. Now suddenly buyer's agents are a conflict of interest?
2. when the seller hires an agent to sell the house, the total commission is negotiated between the seller and their agent. The buyer's agent is paid out of that commission that has already been negotiated. The seller doesn't pay an extra dime to the buyer's agent. It comes out of his agent's pay and is negotiated between them.
a. If a seller doesn't have an agent, they can at their discretion, advertise a commission paid upon bringing an able buyer that results in a sale. The amount of or percentage is completely up to them. There is no requirement to advertise 3%. And there are plenty of places to advertise a home for sale. You don't need the MLS if you don't want to.
3. The NAR emphasizes in its writings to all members that commission percentage is in fact negotiable. They don't fix any commission percentage.
4. In many states, the very form filled out right up front to disclose who the agent represents comes from the NAR or their state affiliate of the NAR.
5. It is in the NAR's code of ethics that a buyer's agent shall not consider the amount of commission when determining which properties to show or not show a buyer.
6. So what if the commission paid to the buyer's agent is published? That doesn't make it price fixing any more than Kroger sending out a circular or Hotels publishing their nightly rates. If Kroger advertises Rib Roast for $7, and Publix matches it, that's not price fixing. That's competition.
7. The average commission in the U.S. is 5.49%, not 6%. That's total, per home, not what agents make. So people can and are negotiating commission.
8. Value, like beauty is in the eye of the beholder. If you don't think the services of a real estate agent are worth the price the agent charges then don't pay it. There are plenty that do. You're perfectly free to go FSBO, get less for your house, have far more hassle, and leave yourself far more vulnerable to making bad decisions by not hiring an agent. By the way, most agents have a negotiated split with the brokerage they are affiliated with. So some of that percentage comes right off the top. Most agents are self-employed and pay double the FICA taxes ordinary workers do. They pay all their own advertising, licensing fees, and for all their own supplies and everything. They even have to pay an office fee to whatever brokerage they are affiliated with. They have to pay their own E and O insurance and possibly their own health insurance too. Oh and if a house fails to close because of financing, the agent gets nothing. If a seller ends up a jerk and nobody wants to work with them, the agent gets nothing. Work down the drain. Suddenly that commission doesn't look so big. The bottom line for real estate agents is the same as anybody dissers want to claim is overpaid. If real estate agents are so overpaid, then why not become one? I should warn you however, that 87% of real estate agents fail.

 

[Cadiewampus]

I have no issue paying my real estate agent for selling my home but always thought why the heck am I having to pay the buyers agent anything. That should be the buyers responsibility. We do have an agent here that if you use them to sell your home the comission is less than 1% which is nice but then you still have to pay the buyers agent the other 3% which is crap in my mind.

 

[china mom]

We negotiated agents commissions several times, I'm surprised more folks don't at a minimum talk to the agents they are interviewing about this.

Same. Not only negotiated the percentage but also the split.

 

[china mom]

Can't remember the name of the company, but they advertise on national TV that their agents work for as little of a 2% commission.
Not sure I agree that the MLS having requirements to use their service in a certain manner is collusion. As others have pointed out, you don't need MLS to sell a house and you can negotiate commissions.

I think they were using a little play on words there. Pretty much all agents work for a 2% commission or less. On a 6% commission, the buyers brokerage gets 3% and the sellers brokerage gets 3%. each broker keeps 1% and each agent gets the remaining 2%.

This, of course is negotiated between the broker and the agent and top selling agents demand a better split with the broker but I think 2% is pretty normal.

 

[china mom]

I have no issue paying my real estate agent for selling my home but always thought why the heck am I having to pay the buyers agent anything. That should be the buyers responsibility. We do have and agent here that if you use them to sell your home the comission is less than 1% which is nice but then you still have to pay the buyers agent the other 3% which is crap in my mind.

Think of it this way... you are paying YOUR agent 4% to sell your house and he is paying the buyers agent 3% out of his 4%. Similar to a waitress tipping out her bartender or the bartender tipping out the barback.

The sellers agent is paying the buyers agent for bringing the buyer and helping them sell the house.

 

[princesscinderella]

There are already companies that have started to shake up the 6% commission. There are brokerages that don’t make their agents do a big split of the commission and charge a flat fee of less than $400 per closing. There are also brokers that will charge $500 to list your property on the MLS and leaves the buyers agent commission and showing of the house up to the owner. The industry was changing prior to this court case and will continue to evolve. MLS access is regional too for realtors so NAR isn’t just running so big database of all the real estate listings. There are many local NAR affiliates that run the MLS which then all work together on a national level. It’s companies like Zillow who have created aggregators of all these individual databases that has really helped out those buying to see all that’s available to them.

 

[gmi3804]

I daresay that if you don't believe that hiring a professional to market your home, find a buyer (many times through a buyer's agent), negotiate the terms of a complicated contract (it's not just about price), and keep the deal together so everyone achieves the shared goal of getting to the closing table before any commission (which is absolutely negotiable before a listing contract is signed) is paid, then there's nothing that's going to convince you. And, by the way, statistics show that you'll likely be leaving money on the table.

 

[TheIncredibles!]

In this day and age I’m not sure that a 6% real estate commission buys you much. Does it take much more work to sell a $1M home versus a $500K? Trying to justify in my mind the difference of $30,000 vs. $60,000 …seems like a lot of money. No doubt an experienced agent carries value, but we aren’t performing life-saving heart surgery here.

I wonder about a 30k commission on a house that sold quick vs a 30k commission on a house that took 6 months to sell. The quick sale likely required little work but do you reward them for a quick sale that required little effort? What about the tough sale that the guy really hard to work for should he get the same even though it took longer? Less? more?

 

[gmi3804]

I wonder about a 30k commission on a house that sold quick vs a 30k commission on a house that took 6 months to sell. The quick sale likely required little work but do you reward them for a quick sale that required little effort? What about the tough sale that the guy really hard to work for should he get the same even though it took longer? Less? more?

An agent friend had a client who protested the commission because the home got a contract in a matter of days. The agent asked the seller if they'd rather the house sat on the market for nine months and had four price reductions, if they'd be more comfortable paying the commission at that point. I charge [x]% when I take a listing. That's what I charge, and I have many, many satisfied clients who give me their referrals. If you want to nickel and dime a broker and get the cheapest, then you should adjust your expectations about what kind of experience your home selling process is going to be.

 

[gottalovepluto]

Doubt it. They might inch down a bit as a few people come to the dawning realization they've been negotiable all along with all the headlines but the repeated headlines 6% is Totally Done For Like Ever are laughable. People who don't want to pay agent commissions already DIY it. Sometimes it works, sometimes it blows up in their faces. And then there is the middle ground where people do more of their own work to find agents who will take less commission, that's the area you find the industry disruptors.

 

[Sanchez]

I daresay that if you don't believe that hiring a professional to market your home, find a buyer (many times through a buyer's agent), negotiate the terms of a complicated contract (it's not just about price), and keep the deal together so everyone achieves the shared goal of getting to the closing table before any commission (which is absolutely negotiable before a listing contract is signed) is paid, then there's nothing that's going to convince you. And, by the way, statistics show that you'll likely be leaving money on the table.

I don't think the conversation is about the benefit of agents, but rather the commission structure. Of course, commissions are negotiable and I (one person) am not necessary saying that the court got this one absolutely correct.

But since you bring it up, the internet has basically eliminated much of the marketing component. I realize that there is more to it than that, but properties can be effectively marketed without a broker.

Negotiating a contract is problematic. This task should fall under the province of a lawyer - who ultimately are called upon to resolve disputes related to those contracts. Some agents are competent contract negotiators, but most are not. One problem is that agents, at least on the buyer side, are negotiating a contract where a higher price nets a larger commission. Dual agency is an absolute conflict and should never be permitted - it is an absolute joke that any licensing agency espousing ethical standards allows this.

As to "keeping a deal together," I have seen far too many instances where the commission is more important than the well-being of the client. Some deals should not be kept together. Nevertheless, I would agree that in most circumstances a good agent will keep matters on track.

As a lawyer, I am well aware that there are many lawyers who overcharge, underperform and sometimes outright steal. There are good and bad in every profession. Someone above said that 87% of real estate agents fail (whatever that means.) That simply means to me that pretty much anyone can become an agent. You don't need a degree. No professional schooling. Just a course and a test. When you add a very low standard for professional ethics, it just means there are a high percentage of agents who are not capable of providing professional services.

All of this means that the scope of the real estate broker in the information era, like every profession, is going to change. I think the commission structure needs change, but agents will always have some value.

 

[gmi3804]

I think the commission structure needs change, but agents will always have some value.

By structure do you mean who pays what? Seller pays listing agent, buyer pays buyer agent? I don't see a problem with that.

 

[Sanchez]

By structure do you mean who pays what? Seller pays listing agent, buyer pays buyer agent? I don't see a problem with that.

Yes. The seller should negotiate and pay an agent. The buyer should negotiate and pay an agent (in my perfect world this would be a flat fee, but that is negotiable.) I think this is exactly what the articles I cited are indicating will happen.

 

[gmi3804]

Yes. The seller should negotiate and pay an agent. The buyer should negotiate and pay an agent (in my perfect world this would be a flat fee, but that is negotiable.) I think this is exactly what the articles I cited are indicating will happen.

Before I work with a buyer, I have them sign a buyer agency agreement, which outlines my agency duties to them and the amount I expect to be paid. Whatever the seller's brokerage doesn't pay my brokerage, the buyer makes up the difference.

 

[Sanchez]

Before I work with a buyer, I have them sign a buyer agency agreement, which outlines my agency duties to them and the amount I expect to be paid. Whatever the seller's brokerage doesn't pay my brokerage, the buyer makes up the difference.

This is the part that is problematic - mainly for the seller (as the lawsuits prove.)

I am aware, though I assume most buyers are not, that they are ultimately responsible for direct payment of a commission. I would agree that standard forms properly disclose this.