Exploring the Reasons Behind Typical Real Estate Commissions and How They May be Changing

CNN, reporting from Washington, DC, reported that --

 For a long time, when selling a house, a homeowner was expected to pay a percentage of the sale cost to the realtor, who would then divide the money with the broker who introduced the buyer.

 The commission rate is usually in the range of 5% to 6%, which is often equivalent to tens of thousands of dollars for the seller. However, the seller also accounted for this cost in the listed price of the home, meaning that the buyer is, in a way, also shouldering the cost.

 What has been the cause of this becoming the standard? Will this trend proceed?

 A Kansas City jury's $1.8 billion judgement in October may lead to changes in real estate commission rates. This significant antitrust court case, in addition to other similar legal actions, could revolutionize the standard 6% commission and who pays it.

 On January 1, the way fees are charged in New York City is set to change. This could enable purchasers and vendors to haggle not only the commission rates with brokers, but also who should pay them - the purchaser or the seller.

 It had been predicted that the internet would eventually cause the 6% real estate commission to disappear. However, this has proven to be untrue as today it is still roughly double the amount that is paid in other countries, according to a report from the Brookings Institution. Although the number of stockbrokers and travel agents has decreased due to their commissions becoming obsolete, the number of real estate agents has only increased, and the commissions they receive have grown even bigger as home prices have risen. This is mainly because of the impact of the National Association of Realtors, a hugely influential lobbying organization that represents 1.5 million real estate agents.

 The National Association of Realtors (NAR) has lodged an appeal against the most recent ruling and has asserted that the commissions of their members are negotiable. Nonetheless, it appears that the current system for selling a home is beginning to show some signs of instability.

A Look at the Process Behind Real Estate Commissions

Those looking to sell their home are commonly responsible for compensating their real estate broker as well as the agent that supported the buyer. Typically, the commission is divided between the two brokers, with the amount varying based on the location and usually falling between 5% and 6%.

 The total commission on a $500,000 home sale is $30,000, with each broker receiving $15,000. Nevertheless, the agent's take-home pay is less than their side's share since there is an additional split between the participating brokers and the agents responsible for the sale.

 Real estate agents may tell you that their commissions are negotiable, and this is indeed true. There are other alternatives like using flat-fee or discount brokers to sell a home. However, there are systemic forces in the industry that make it difficult for sellers to offer less than the typical 6%. This is because the commission is listed in a regional database called the multiple listing service, or MLS. Some MLSs even restrict sellers from not providing anything to the buyer's agent.

 Vendors may have apprehensions that real estate agents will give them advice to avoid a property that would generate less commission for the agent. Unfortunately, this fear is not without reason.

 A recent analysis of Redfin-listed properties indicated that agents who charged lower than the standard commission rate in the area experienced a decrease in foot traffic and a longer time to sell the property.

 Jordan Barry, a professor of law and taxation at the University of Southern California and co-author of the study, noted that the ones who suffer most from the situation are those sellers who offer the going-rate commissions due to their concern about guiding. He went on to mention that for most homeowners, their property is the biggest asset they possess, and thus giving up 6% of the sale price in commissions is a significant burden.

A long-standing tradition

In 1913, the National Association of Real Estate Exchanges (NAR) established a commission structure as part of their first Code of Ethics, which had been created five years prior.

 The code contained a part titled "Duties to Other Brokers," which stated that an agent should be eager to evenly divide their commission with any other member of the Association who could find a buyer for a client.

 The National Association of Realtors' Code of Ethics (Article 3) does not require commission sharing, though it does permit it. A link to the full document can be found here.

 On Sunday, Jan. 22, 2023, a home for sale in Larchmont, New York was visited by prospective buyers who attended an open house. 

In 1950, the Supreme Court put a halt to the practice of regional boards of realtors setting commission rates in a schedule. These boards had a rule that forbade any reduction of the existing rate, which was continually increasing.

 A study published in November 2015 revealed that the commission rate in the Boston area had increased from 2.5% in the 1920s to 5% in the 1940s. Source.

 The agents asserted that the percentage taken as commission was equitable because they had access to listings that were not accessible to the public on the MLS. The MLS databases, which were managed by NAR member organizations, were the places that agents put their listings, ensuring that only other agents could view them. In some cases, this is still how it is done.

 In a communication to its membership, the National Association of Realtors (NAR) stated that its policy of commission sharing has been in place all along in order to safeguard the rights of consumers, support market-driven pricing and foster competition in the business world.

A timeline of court cases

A review of the past events concerning lawsuits can be seen throughout history.

 In 2005, the Department of Justice initiated a civil antitrust lawsuit against NAR in response to their gatekeeping practices that hindered the ability of real estate brokers to utilize new, internet-based tools to provide services at a more affordable cost. In 2008, NAR reached an agreement with the DOJ that prevented MLSs from withholding listings from brokers operating online. The settlement was publicized in a press release.

 Providing more access to the MLS opened the door for the likes of Zillow and Redfin to expand. As the web grew to become a fundamental component of the home-buying process, the commission rate remained steady despite the increase in home prices.

 As per the US Census, in 1950 the median price of a home was $7,354 (the equivalent of approximately $93,000 in 2023, after adjusting for inflation); the 6% commission due to the agent was then estimated to be $441 (or about $5,500 in 2023). By the year 2000, this median home price had increased to $119,600 (or $215,000 in 2023), thus allowing brokers to collect a commission of $7,176 (or $12,800 in 2023). As of October, the National Association of Realtors (NAR) reported that the median home price had soared to $391,800, with the typical seller thus having to pay an agent a 6% commission of $23,500.

 NAR is now preparing to appeal a $1.8 billion lawsuit from October, though a resolution is not going to arrive in the immediate future.

 June Babiracki Barlow, the general counsel for the California Association of Realtors, noted that while antitrust cases usually take around 10 years, "we've never seen a damage award this big."

 If commissions were divided up, home sellers could benefit from savings due to only having to pay for their own real estate agent. Buyers, however, may be faced with the challenge of having to foot the bill for representation or go without a broker, unless they manage to negotiate for the seller to cover the cost.

 Vasi Yiannoulis-Riva, a partner at the New York branch of Withersworldwide, suggested that the recent lawsuits against the NAR and other brokerage firms might lead to divisions in seller commissions. She continued, saying that these alterations may spur competition among agents, as well as cause "a significant impact on the way brokerage fees are paid nationwide."

Already, Alterations have been Made

 Prior to the judgement, certain MLSs had already started to make progress in adapting the means of residential real estate, permitting more variant commission agreements to be detailed in the listings.

 During August, Bright MLS, a real estate listings provider for the Mid-Atlantic region, modified its rules to permit the inclusion of any percentage or monetary amount of compensation for a buyer's broker in a listing, even if it was $0.

 In October, the National Association of Realtors (NAR) declared that they were not mandating or promoting MLSs to alter their data fields to include $0 fees, but they did suggest that this would now be in line with the NAR's MLS policy, which was a change from preceding policy.

 The Real Estate Board of New York, a prominent trade association for New York City, has recently introduced a new policy that they have designated as the "future of how residential real estate is transacted". This policy will separate agents' commissions and require any payment for a buyer's broker that is coming from the seller to be done directly from the seller, instead of another broker. This could be a sign of what is to come for the rest of the country.

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