Is It the End of 6% Real Estate Commissions?

by Xin Lu on 30 May 2008 17 comments

This week the Justice Department reached an antitrust settlement with the National Association of Realtors that is meant to spur competition and bring down the standard 6% commission that comes with each real estate transaction. Basically, the NAR is no longer able to withhold the information on multiple listing services from discount online brokers such as Redfin and ZipRealty. Will consumers like us see a huge deduction in real estate transaction prices soon?

Before I make any predictions, I would like to say that I have always found it odd for a buyer's agent to take commissions on the sale of a house. The reason is that technically a buyer's agent is supposed to negotiate for the best price for the client, but the dangling carrot of the commission probably tempts some of them to hype up the property price as high as possible. Instead of taking a percentage on a sale, I think buyer's agents should just charge for the time they spend showing homes to a client and perhaps get a bonus on the amount they save the client by negotiating for a price below asking. That way, they will be actually paid for their work, and they will have no stake in hyping up prices. For agents with picky clients, it is possible that charging by the hour is more lucrative than charging 3% on a sale.

I think this settlement will definitely promote competition and bring down commissions as more people start to use the internet to search for real estate. It is good for sellers because their listings will get more exposure on many different sites rather than a closed multiple listing service. It is also great for buyers because information will be more freely available and they no longer have to depend on realtors to find real estate of their choice. On the side of the agents, I think excellent selling agents could still make great commissions because discount online realtors have limited services that may not be advantageous to a seller in our current tough market conditions. However, I think buyer's agents really need to cut down their commissions or change their billing model to compete with discount realtors that refund up to 2/3rds of the commission because many more people will be picking out homes online in the near future.

Ultimately, this settlement shows us that knowledge is power, and the internet is a great place to obtain knowledge. The real estate industry can no longer take 6% commissions for granted, but as long as the agents are able to adapt to the situation and keep their customers happy I think they will still thrive in our turbulent economy.

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Guest's picture
Lucille

I think your correct, buyers agents should be working on a different compensation structure. Having done multiple real estate transactions, some buyers agents earn their commission and others really just don't.

The internet has made a huge difference in how buying a house works. With having MLS online, our last purchase we had a pretty big list of houses already printed out. Our agent did find some ones that were not online yet. Oddly, one of the ones that she found had been on the market for almost a year but was not online.

I would like to see more non realtor listed properties as part of a real estate search. Most realtors want nothing to do with self sellers or "help you sell" listed properties. We had one realtor absolutely refuse to have anything to do with a self seller home we wanted to look at.

Guest's picture

This is good news and it's all about transparency in the real estate transaction. I always thought 6% was some cast-in-stone figure that everyone HAD to pay. I never realized that a real estate agent's commission was negotiable when I first started buying and selling houses because no one ever told me (or anyone else I knew at the time) any different. My last home buying experience was terrible. I had a good agent but the agent on the other side of the transaction was basically unintelligible and illiterate. How she ever passed the state test and received a license I will never know, but then I've since met a good number of so-called agents with the same affliction. Real estate transactions are, for most people, the largest financial dealing of their lives. Standards have to rise. Competition is good. I don't know of any other profession where an untrained, under educated individual can rake in thousands of dollars for simple paperwork. A good number of "agents" don't even take care of THAT.

Guest's picture
Guest

http://www.territoryre.com/about.php

redfin claims to be doing something "different" but they still take a percentage of the sale price when working with home buyers as does zip realty ... It is all about flat fee and information freedom!

Guest's picture
Guest

.... did i mention our agents are salaried and they get paid more only when our clients pay LESS!!

Guest's picture
Meg

Real estate agents today are not worth their commissions anymore, just as stockbrokers are no longer worth the hundreds of dollars a trade they used to be able to get.

With the advent of modern technology and free flowing information, they will be replaced with computers, just as the stock broker has been with online brokerage sites. Perhaps the very wealthy or those seeking complicated, customized transactions might still opt to pay a realtor, but even so commissions must come down.

When I bought my condo I found all the properties online I wanted to look at and gave the list to my agent. The only reason I needed her was for access to the property to look around. She never knew anything about the properties I hadn't already found online or couldn't discover with a quick phone call.

They do draw up the contracts/paperwork, which is helpful, but all they do is buy the software once and then plug in the variables (name, address, contract price, closing date, etc). You could easily get those documents yourself (again, online) for very cheap.

Sellers agents are not really needed either anymore, as all they do is post a listing online and wait for people to submit offers. A better use of your money would be to hire someone to paint your home or otherwise make it ready for sale.

So tell me again why they get 6% of every home sold?

Guest's picture
Scott

It's true that the whole commission structure for real estate brokers is a bit shaky, but good agents do locate, investigate and coordinate property purchases for buyers and should be compensated for their work. The problem is that nobody wants to pay an upfront fee to a buyer broker because they don't know how they are going to perform. If we do away with the commission structure, you would not have buyer brokers leaving you to deal directly with the seller's broker who has no fiduciary responsibility to you whatsoever. You would then need to hire a lawyer to protect you in the transaction (which is actually common practice in many cases.)

If you are willing to do the searching yourself, cool – don’t hire a buyer broker. But don’t think for a second that the listing agent won’t take both sides of the commission when you approach them off the street. In the end, no money is saved by you not having a buyer broker – in most cases, the listing fee is rolled into the property price to begin with.

In the end, real estate brokerages come in all shapes and sizes to fit a diverse marketplace. As mentioned in the article, there are discount investment trading firms for the DIY and there are cheap real estate agents that charge much less for the DIY property buyer. There’s room for both. I started investing with a discount brokerage house years ago, and as time progressed, I found the need for the advice and other services of a larger investment brokerage. The challenge was finding a good one.

The last point to consider is that using a licensed brokerage offers you some protection under the states real estate commission. In Arizona, there is a fund set aside to remedy situations that are not resolved by the brokerages involved. Rarely do issues get this far, but it is nice to know it’s there.

Guest's picture
Kevin

I agree with Meg. I am planning on buying my first house in the next year or two and I have a real hard time swallowing the 6% commission structure. As a frugal DIYer I'm happy to sift through listings, drive around, and negotiate for myself. So all the realtors will really do for me is unlock doors, draw up documents, and sit with me at closing.

On an even playing ground this service would be equivalent to about 10 hours with a lawyer ($2000?) and 10 hours with a security guard ($300?), or $2,300. A 6% commission on a $300k house is $18,000! That's an outrageous upcharge.

I'm sure some people benefit more from what realtors do, just as some people benefit from what full-service stock brokers do. Full-service brokers have their place in any marketplace. But I'm happy the NAR guild-monopoly is being disrupted. I don't like being forced to pay for a higher level of service than I want.

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jordan7

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Guest's picture

When I bought my house, the real estate agent did nothing but forward a MLS site that I could use to search the listing and drive me around.

Buyer agent: How can we rely on the real estate agents that barely know us to "guess" what houses we'd like to buy/live in?

Seller agent: What else do they do other than taking a few photos, posting the house in the MLS, and sitting the open house?

Guest's picture
guest

The six percent has tradionally broken down like this - 3% to buyer's agent and 3% to seller's agent, more or less. The structure might be different depending on the brokers and their arrangement, but for the sake of argument let's say it's split 50-50. Of that 3%, let's say half of that goes to the principal broker, who runs the agent's real estate office, and half of that goes to the agent. Again, this might be different per agency, but the principal broker is really on the hook if something goes wrong because of the agent, and they generally get a cut of the agent's slice of the pie. Also, agents are self employed, so taxes are a little higher than for a W2 earner.

Now, let's say the listing price of a home is $200,000, you offer $190,000, and the owner counters with $195,000. 1.5% of $190,000 is $2850, and 1.5% of $195,000 is $2925.

Five or ten grand is a lot of money to most people in terms of selling price - it could make or break a loan. But ask yourself, if the difference in commission is really that minimal, $75, is it necessarily in the agent's interst to fully advocate for your price, or is it to move a unit?

Another way to think of it is, how many home sales would it take for an agent to cover monthly expenses at home, for continuing education and licensing, and for paying desk, office and NAR fees? Lately, that question hasn't come up due to high home prices, but things work in cycles.

One of the comments hit it right on the head - agents offer some layer of protection through the transaction. Sure you could find a home on your own, and maybe fill out a form you printed from the internet, but if you've never done it before, be careful.

Broker's have known for years that the 6% would someday erode, but NAR has advocated it as they should. It's no different that the AARP fighting for octogenarians to keep their driver's licenses without periodic testing, or any for other lobby advocating for the intersts of their clients.

Sure there will be a reduction in commission rates over time because of this ruling, but there is a floor. Everybody has got to eat, and a lot of hands want a slice of that commission pie. Real estate already works on feast or famine, let's see who stored something for the inclement winter.

Guest's picture
Guest

One of my parents is a real estate agent, and I can say she works hard to earn what she can.
There are several problems with the discount realties.
First, the lower rates they advertise are only one sided unless the other agent agrees to lower their rates as well. After that, they do not do anything for the buyer or seller, having the other agent fill out forms and do everything that the discount broker should be doing. They also circumvent some of the fees that individual agents have by listing all their buys and sells as a single "agent" on multiple listing services instead of paying for individual agents. Then, in the end, they take half of the reduced rate, despite doing almost nothing besides allowing access to a multiple listing service.
I do agree that a commission system based on the amount of time required to get a house bought or sold, with come costs paid in advance, would be a much better system. For one thing, think about the cost of gas required to show a person several houses. There have been cases where a person has basically used my mother as almost a cab service, asking to be picked up in one location, looking at one or two houses, then telling her to drop him/her off at a totally different location. They never ended up buying a house. Then, some picky home buyers and sellers take years to actually decide on what house they want, forcing my mother to drive them to each one. Some buyers and sellers are just irrational about the prices they expect. The negotiations between buyer and seller can be long and arduous.
Then, keep in mind that most people reading these articles have a do it yourself perspective. For many other people, they would be completely lost in the real estate search. Real estate agents provide a guide through the system. For many other people, the realtor has to expend far many more hours and energy to get the deal set up.
All in all, there are good and bad realtors, just as there are good and bad people. A good realtor makes sure everything is worked through the system correctly. He or she handles the negotiations and a great deal of interpersonal communication that would drive me and I would hazard many other people crazy. The high commission is partially due to the large numbers of people who take a great deal of time to decide. Not everyone can take to do it yourself attitude.
Sorry about the rambling nature of this comment. Its a bit late, and I'm not completely coherent.

Guest's picture
Henry

I'm a Realtor and here are the facts:

1) The 6% commission is NOT STANDARD and neither is it enforced by ANYONE, not even NAR, CAR, what have you. Locally, there are plenty of people doing 1/2%, 1%, you name it.

2) The seller pays the percentage, not the buyer, and this also covers the buying agent. Thus, if you want to buy a home, you have NO WORRIES when it comes to this, as you won't be footing the bill.

3) Discounters cannot get a hold of the market because agents refuse to show properties, or are hesitant to do so, if their potential earnings from that sale will be the 1/3rd of what it could be from non-discount brokers. Would you take 1/3rd of what you normally make doing the exact same thing? Neither would we.

Agents get a bad rap but realize that you are the one in control. 99.9% of buying agents actually work without a contract, and quite often that means the buyer is tempted to get a "deal" from the listing agent, who has no sympathy for the buyer and instead wants to lure them in with some cheap discount.

Go out there and buy homes, now's the time!

Guest's picture
Pete

Submitted by Henry on May 31, 2008 - 19:11.

As the new paradigm sets in, the discount model will gain traction. Of course you're seeing opposition to it - that's natural. But soon enough, traditional house salespeople will be forced to take 1/3 less (if not more). Why pay 6% when you could pay much less? I wouldn't be surprised if realtors go the way of the travel agent.

And for a lot of the country, now is NOT the time to buy a home. Don't listen to commission-based salepeople who have a vested interest in any transaction. At least wait for the S&P/Case-Shiller and OFHEO indices to level off.

Unless you like to overpay...

Guest's picture
Justin

I think it's worth getting an honest buyers agent to deal with the negotiations and to have some legal protection. Seller's agents do not have to disclose even known faults (bad plumbing, water damage, foundation problems) of the property in my state. Good, honest buyers agents look out for that stuff.

As for the seller, I think a great selling agent can get your house sold in a hurry, but if you have time and can afford to go the DIY route, it could save you some cash.

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jordan7682

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Guest's picture
Guest

It's extremely unlikely that 6 percent commissions will survive this decision.

Why? Real estate brokers rely upon what economists call "information asymmetry." They have info that others don't, and can thereby exploit it for profit.

That information asymmetry now no longer exists.

Real estate brokers are extremely overpaid for the amount of work they do, and the amount of schooling and certification they have to undertake to do that job. Think about it: The plumbers, electricians and carpenters who actually built those same houses have far more specialized knowledge, and they get paid far less per hour worked.

The only thing justifying those outsized paychecks for real estate salespeople was their possession of certain information that others did not have. And that era is now over.

All the used-car salesmen and other lazy, low-to-medium-IQ types who drifted into the profession for easy money will soon be out of luck.

Those who can sell houses more efficiently will very quickly drive them out of business. The 6 percent commission will be very soon be driven down or gotten rid of outright by competition. Look for flat fees by online brokers soon.

Guest's picture
Guest

Here we are in 2011 and the 6% commission is alive and well. I think the information asymmetry still exists. Today, there is still important information that is difficult to get a hold of and compile related to market conditions. It is easy to search for current listings by many dimensions, which is very helpful to buyers and sellers. But what is hard is that there is no single place (unless you were to foot the bill for broker's account on the local MLS provider system) to get all the different characteristics to search/sort on, and to look up like info on past sales (to within the last 15 to 30 days). One has to seek out the information from several sources and not all of them are complete, surprisingly.

Agents have access to a single system that has all this info. Buyers can forgo the agent for searching for property, and can hire for fee or by the hour for other services (e.g. agent or lawyer for negotiations / closing, inspections). Sellers still have it tough to price it right and market it as well as a professional agent can.

I would prefer a competitive fee based system for the selling related services. Here are some with pricing I'm guessing at: Price determination - (use an appraiser) - $350. MLS listing - $300 for 30 days. Syndication of listing to multiple RE web sites (e.g. thru Postlets, FSBO) - $50. Professional Staging - $varies up to $10K. Professional Photos - $500. Signage - $300. Negotiation, Consulting, Legal - $150/hr. Brochures - $400 for a stack of 100. Hosting an Open House (if useful anymore) - $750+expenses. Answering service for inquiries and booking showings - $100/week.

There would be a lot more transparency and I believe there would be a ton of savings to the consumer.