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Paying a real estate agent when selling a home is a method that has been around for a long time. The seller gives a portion of the sale price to the broker, who splits it 50-50 with the broker who brought the buyer.
Commissions are typically 5% to 6% and typically account for tens of thousands of dollars of the seller’s proceeds. However, the seller has factored these costs into the listing price of the home, so the buyer is indirectly paying the costs as well.
How did it become the norm? And will this process continue?
Changes in real estate commission rates after a Kansas City jury found in a $1.8 billion verdict in October that commissions were being inflated and that brokers and industry groups colluded to maintain them. may take place in the near future. This landmark antitrust court case, like similar cases, could lead to an overhaul of his standard 6% fee and who pays it.
The changes could allow home buyers and sellers to negotiate not only commission rates with agents, but also who is responsible for paying. That’s already the case in New York City, which plans to change its fee structure on January 1st.
Many thought the internet would eventually eliminate the 6% real estate commission. However, the Brookings Institution’s report on fees shows that the share paid by shared home sellers has not yet been significantly affected. This rate is approximately double the rate paid in other countries. Despite the fact that brokerages and travel agents have been downgraded in recent years due to falling commissions, the number of real estate agents has increased as housing prices have risen, and typical commissions have become higher than ever. There is. This is largely due to the power of the National Association of Realtors, an influential lobbying group representing 1.5 million real estate agents.
Although NAR has appealed the recent decision and stressed that member fees are always negotiable, there appear to be some cracks in the current way homes are sold.
Home sellers are typically burdened with paying real estate agent fees and real estate agents who represent buyers. Typically, brokers will split the commission. Commissions are typically 5% to 6% depending on the market.
If you sell a $500,000 home with a 6% commission, the seller will pay the agent $30,000 at closing, and the agent will split it 50-50 with the buyer’s agent, so both parties will receive $15,000 in the sale. It means you get dollars. (Participating brokers share their share with the agent who closes the deal, resulting in an additional split for each side. Therefore, the agent’s actual compensation is less than the agent’s share of the total commission.) Masu.)
Real estate agents say their fees are negotiable, and they are. There are also other models for selling homes, such as using flat rate agents or discount agents. However, there are strong structural forces at work in the industry that prevent many sellers from offering prices below 6% of their normal price. Agent fees are included when a home is listed on a local database called the Multiple Listing Service (MLS). Some MLSs do not allow seller agents to list properties that offer nothing to buyer agents.
Sellers may worry that the agent will “steer” them away from the home, reducing the agent’s income. And that fear is not unfounded.
A recent academic study of real estate listed on Redfin found that agents who offered commissions below market rates in their area received less traffic and took significantly longer to sell.
“The people most affected by this are sellers who are concerned about steering and offer current rates of commission,” said Jordan Barry, a law and tax professor at the University of Southern California and co-author of the study. Stated. . “For most homeowners, their home is by far their largest asset. Paying his 6% of the sale price in fees is a huge burden.”
The shared committee structure was founded in 1913, appearing five years earlier in the first Code of Ethics of the National Association of Realtors, which later became NAR.
The section of the Code entitled “Obligations Toward Other Brokers” states that agents “are always ready and willing to share their regular commissions equally with members of the Association who are able to generate buyers for any client.” ” is stipulated.
NAR’s current Code of Ethics (Article 3) allows for fee sharing, but does not require it.
Tiffany Hagler-Geard/Bloomberg/Getty Images
Potential buyers attend an open house for a home for sale in Larchmont, New York, on Sunday, January 22, 2023.
Commission rates were set on a schedule by local boards of real estate agents until the Supreme Court in 1950 prohibited them. The board specifically prohibited the practice of lowering the interest rate below the prevailing interest rate, which is trending upward.
In the Boston area, for example, typical commission rates went from 2.5% in the 1920s to 5% in the 1940s, according to a study published in November 2015.
Agents argued that their commission rates were fair because they had access to MLS listings that were not available to the public. Agents submit their listings to an MLS database that is visible only to other agents. These databases were and may still be maintained by NAR member organizations.
In an update to its members in response to the recent ruling, NAR said the potential for fee sharing “protects and serves the best interests of consumers, supports market-driven pricing, and helps businesses compete.” It has always existed to promote the
Tensions over NAR’s gatekeeping of property listings would spill over again into further litigation in 2005, when the Department of Justice announced that it was using “innovative Internet-based tools” to provide better service. We filed a civil antitrust lawsuit challenging NAR’s policies and related regulations that interfere with the use of real estate brokers. It also reduces costs. A 2008 settlement with the Department of Justice no longer allows NAR-owned MLSs to withhold listings from brokers that serve customers online.
Expanding access to the MLS would later allow online real estate listing giants like Zillow and Redfin to flourish. But once the Internet became an important part of home buying, commission rates remained constant even as home prices skyrocketed.
According to the U.S. Census, the median home price in 1950 was $7,354 (about $93,000 adjusted for inflation), and the 6% fee would be $441 (about $5,500 in 2023). According to NAR, by 2000, the median home price was $119,600 (about $215,000 in 2023), and agents were paying $7,176 in fees (about $12,800 in 2023). Now it can be divided. According to NAR, the median home price in October was $391,800 and the 6% commission paid by the typical seller was $23,500.
NAR’s next challenge is an appeal of the $1.8 billion lawsuit from October, which won’t be decided immediately.
“Typically, antitrust cases like this take about 10 years,” said June Babilacki Barlow, general counsel for the California Association of Realtors. However, he added, “I have never seen such a large amount of damages.”
Moving to a fee-separated commission structure could result in significant savings, as home sellers would only have to pay their own agents. However, if you don’t negotiate with the seller to pay the commission, buyers will have to pay the commission themselves or go through an agent, potentially making the home purchase even more expensive.
Vassi Yanoulis Riba, a partner in the New York real estate team at international law firm Wizards Worldwide, said the recent spate of lawsuits filed against NAR and other brokerages could lead to the unbundling of seller fees. Stated. He added that the changes would increase competition among agents and “could have a significant impact on how brokerage fees are paid across the country.”
There has already been a step change in the way residential real estate is transacted, with some MLSs allowing properties to be listed with a wider variety of fee arrangements even before judgment.
In August, Bright MLS, which covers the Mid-Atlantic market, changed its requirements to allow publicly traded companies to offer compensation of any percentage or amount (including $0) to buyer brokers.
NAR said in October that it does not require or encourage MLSs to change data fields to allow $0 fees, but doing so is a change from previous policy for NAR’s MLSs. He advised that the policy would be followed.
In a sign of what’s to come for the rest of the country, New York City’s main industry group, the New York Real Estate Board, has launched a new policy it calls “The Future of How Residential Real Estate Transactions.” Separates agent commissions and requires that compensation to the buyer’s broker that comes from the seller is received directly from the seller rather than from another broker.