Why are newbie agents who just received their licenses able to charge the same fees as their colleagues, many of whom have decades of experience and have closed hundreds of deals?
Why is it that agents who go out of their way – let alone spend a ton of money – to market a property for sale get paid the same way as glorified agent-drivers who do little more than drive you. house to house until you find one that tickles your heartstrings?
That’s because real estate commission rates are only a notch below the fixed rate, according to a new report from the Consumer Federation of America.
A study of over 10,000 sales in the eastern United States found that agent commissions are “very consistent.” But while stopping just before saying the rates are fixed, report author Stephen Brobeck told reporters in a press conference call that “while the rates are all similar, it is clear that ‘there is a price fixing.
Commissions are meant to be negotiable, and technically they are. But only to a small extent. In another CFA report two years ago, Brobeck found that only 1 in 4 agents were willing to negotiate with their clients. The rest – 75% – basically said, “No way – that’s what we charge; take it or leave it.”
“The current commission system is designed to counteract price competition between agents,” explains Brobeck.
This appears to be the case in most of the 21 cities analyzed by the Consumer Watch Group. In all but one case – Brooklyn being the only outlier – the sales charge levied by agents on the buy side was between 2.5% and 3%. Only in Chicago, Indianapolis and New Orleans do a significant minority of agents charge less than 2.5%.
But in eight cities – Atlanta; Baltimore; Columbus, Ohio; Grand Rapids, Michigan; Hartford, Connecticut; Roanoke, Virginia; Memphis; and Minneapolis – 80% or more of sales were billed at identical rates. In Grand Rapids, 95.8% of buying agents were paid the same rate.
Most buyers don’t know how the agent who helped them find their new home is paid. And most don’t care. If asked, agents say they are paid by the seller. And that’s often good enough for buyers.
But it’s important to understand how commissions work. Typically, the seller’s agent puts the house up for sale at a fixed price, usually between 5% and 6% of the sale price. If the listing agent also secures the buyer, he retains the full charge. But if another agent brings the buyer to the table, the commission is split, usually in the middle.
Buyers and sellers pay around $ 100 billion a year in commissions. But Brobeck is confident that if the fees are paid separately, that figure could potentially drop from $ 20 billion to $ 30 billion.
Recently, the National Association of Realtors adopted a new policy that allows – but does not require – listing agents to post on their websites the share of commissions paid to buying agents. The idea is to prevent buyers from pretending that their services are free.
But Brobeck wants to go further by decoupling the commissions so that sellers pay their agents and buyers pay theirs. And others seem to agree: The Cato Institute and the Brookings Institution have published studies arguing for fee untying.
The new NAR rule “will help consumers,” Brobeck says, but only to a small extent because it only tells them how commissions are allocated. Going further and really decoupling the charges would stimulate greater price competition, he argues.
Compensation for buying agents is currently “built into” the listing agreement – and, since many sellers add the agent’s commission to their selling prices, into the cost of the house itself. Under a new system, it “would rather be negotiated by buyers,” the report said.
“The only effective way to stimulate price competition is to decouple,” explains Brobeck. This would free agents “from the shackles of current industry rules” that require them to charge typical rates, and ultimately there would be “much wider” variation not only in rates, but also in service options that reflect l experience of an agent and the amount of effort they are willing to put in.
And, over time, the fees would go down, according to Brobeck, for both sellers and buyers. With the decoupling, he believes the commission on a house listed at $ 380,000 – the average list price in October, according to Realtor.com – could possibly drop as much as 2 full percentage points. This means that the total commission would drop from $ 20,900 to $ 13,300: a reduction of $ 7,600 that would be shared equally by the seller and the buyer.
This would mean, however, that at a time when many buyers are struggling to find a down payment, they would need even more money to close, as they would have to pay their agents with their own funds.
But Brobeck scoffs at this argument, saying that because sellers tend to include their costs of selling in their asking prices, buyers “will no longer pay gross.” And since the additional cost is usually mortgaged with the house itself, they also won’t pay interest on their share of the sales commission for 30 years.
Still, the NAR said in a statement that forcing buyers to shoulder the additional expenses “would lead to additional financial hardship and could completely exclude many buyers from the market, especially first-time and low- and middle-income buyers. could also force buyers to forgo professional help in what is possibly the most complex and significant transaction they will make in their lifetime, ”the statement said.
But Brobeck says if they were untied, commission rates would drop and discount agents who offer a choice of services according to their capabilities would thrive.
“In my mind,” he said, “there is no problem.
Lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous housing magazines and to housing and housing finance industry publications. Readers can contact him at firstname.lastname@example.org