As a real estate investor since 2003, I've been disappointed by the real estate buying and selling process for a long time. While transaction costs have declined to zero or near zero for every industry due to technology, real estate commissions have remained stubbornly high. Could real estate collusion be involved?
After I sold a rental property in 2017 and paid a 4.5% commission, I swore I would never sell another property again until commission rates came down.
Paying over $120,000 in total commissions to sell my home already felt bad. But as the home seller, having to pay the buyer's real estate agent a commission felt even worse!
The Real Estate Commission Is Negotiable
Originally, my listing agent wanted to charge me 5.5%, but I negotiated the commission rate down to 4.5%. Please know that the commission rate is negotiable, but many home sellers don't seem to realize this. Or maybe home sellers know, but are too timid to negotiate.
When my real estate agent finally accepted 4.5%, she made it seem like she was doing me a favor by saying, “I had to really negotiate with my brokerage to lower the rate. They never do so. I'm only going to earn a 2% commission while I pay the buyer's real estate agent a 2.5% commission.”
The buyer's real estate agent earning a higher commission rate than the selling agent who has to prep and market the property didn't seem fair. So I responded, “Then how about paying the buyer's real estate agent 2% or less so I can save money?”
The agent then responded, “It will be much harder to get buyers if we pay the buyer's real estate agent less than a 2.5% commission. In the past, they earned a 3% commission, so they are already accepting less.”
This sounded like real estate collusion to me, but I couldn't prove it.
A Buyer's Real Estate Agent Should Show Their Clients A Property Regardless Of The Commission Rate
How absurd is it that a buyer's real estate agent wouldn't be willing to show a property to their client because the commission isn't at least 2.5%? If this happens, the buyer's real estate agent isn't acting in the best interest of their client, especially if the house or condo is exactly what their client is looking for.
The home seller paying the buyer's real estate agent a commission creates a misaligned incentive structure. The more the selling agent is willing to pay the buying agent, the more the buying agent is willing to convince their buyer to buy the home.
On the flip side, a home seller paying a higher commission rate to the buyer's real estate agent might increase the chances of getting a higher price for the home. This is what multiple listing agents said to pitch me to list my home with them.
I wasn't buying it because I don't think buyers are stupid. Thanks to technology, buyers can easily see what comparable properties have recently sold for. In addition, I wasn't selling a starter home marketed to first-time homebuyers. Finally, I wasn't willing to pay tens of thousands more in commission.
The Experience That Made Me Realize Paying The Buyer's Agent Commission Is Wrong
Once I got into contract to sell my home, the buyer put in financing and inspection contingencies. I didn't initially mind because I wasn't in a rush to sell my home. I also wasn't quite sure I wanted to sell my home. If the buyer wanted to do some inspections so I could get a free report on what I should do to fix my home, that was fine.
But ten days after the deadline to remove financing contingencies, I began to get a little frustrated. While the buyer was waiting for the bank to grant him a loan, the buyer's agent informed my agent the back windows needed to be replaced. They were leaking.
The total cost to replace all the windows and fix the wood in the back would supposedly cost $35,000. As a result, the buyer's agent argued for a $35,000 credit.
I said “no,” so they stalled for another week. The buyer's agent kept pressuring us to give a credit given they had raised their offer price by $150,000 after we countered their original offer.
After more time passed, I finally offered them a $10,000 credit to fix the windows and close the deal. They ultimately accepted.
Felt So Dumb Paying Someone To Make Me Poorer
Here's the thing. I felt like a FOOL to be paying the buyer's real estate agent a $68,500 commission (2.5% of $2,740,000) when he was trying to hammer me down on the selling price! It made no sense!
The buyer's real estate agent has a fiduciary duty to their client to get the best deal possible. Therefore, a home seller paying the commission of the buyer's real estate agent is illogical. But this is what happens when there is price fixing.
A Home Buyer Should Pay Their Agent A Commission
Given we can all agree that a buyer's real estate agent represents the buyer and the listing real estate agent represents the seller, commissions should be paid according to representation.
A home buyer should pay their agent a commission if their agent finds them a home and successfully closes. It is the logical thing to do.
The value in a buyer's real estate agent is in:
- identifying suitable properties
- discovering local economic catalysts to boost a property's future value
- submitting an attractive offer
- keeping the buyer's real estate FOMO in check
- negotiating terms
- navigating the escrow period
- protecting the buyer from costly surprises
- identifying local economic catalysts
- introducing helpful people such as a handyman
Personally, I'd be willing to pay a buyer's agent up to $10,000 if they can find and negotiate a great off market deal. But I wouldn't pay more because I'm an experienced buyer and negotiator.
I'm confident enough with my abilities that I've purchased the last three homes via dual agency. In essence, I acted as my own real estate agent in order to lower the commission the seller has to pay and lower my purchase price.
So why isn't an aligned real estate commission system in place? Real estate collusion!
Listing agents prefer to pay the buyer's agent their commission in order to make as many commission dollars as possible. If you control who gets paid, then you have better control over outcomes. Both agents are incentivized to keep commissions as high as possible.
Remember, listing agents are also buyer agents too.
Legal Verdict Shows Collusion In The Real Estate Industry
After 11 days of testimony, an eight-person jury in Missouri found the National Association of Realtors, HomeServices of America, and Keller Williams guilty of collusion to maintain high commission rates. The jury took just a little over two hours to decide its verdict in the Sitzer/Burnett Commission lawsuit trial.
Two hours to deliberate indicates an easy decision. It was clear the real estate industry colluded to keep commission rates high to the detriment of home sellers and home buyers. Collusion is the only way they could keep commission rates averaging above five percent when commission rates in all other industries have declined to zero or near zero over the past 20 years.
The National Association of Realtors and the HomeServices of America have been ordered to pay damages of $1.78 billion. While subsequent damages could rise to over $5 billion! Obviously, the defendants will appeal and the final penalty payment will likely be two years from now and lower.
But WOW! That is a huge sum of money for price fixing! After all these years about railing against the high cost to buy and sell a home, I finally feel vindicated. I couldn't prove there was any real estate collusion in my past deals. Now I don't have to.
Why The Plaintiffs Brought The Lawsuit Forward
A group of home sellers in Missouri represented by class action attorneys filed a lawsuit alleging excessive real estate commissions. The plaintiffs sold their homes through an agent who listed the properties on one of four Multiple Listing Services (MLSs) in Missouri. They claim the commissions paid by home sellers are inflated due to the way listing brokers compensate buyer brokers.
The lawsuit centers on the typical practice of listing brokers offering a portion of their commission to agents representing potential buyers. This incentivizes buyer brokers to show homes on their MLS platform. The plaintiffs argued this arrangement harms consumers by enabling higher total commission rates. The case aims to challenge the long-standing MLS compensation model and the commissions earned by both listing and buyer agents.
One of the plaintiffs, Hollee Ellis, a former high school English teacher, had paid a 6% commission on her home sale. The buyer's agent's share of the commission amounted to 21% of her “net equity,” effectively consuming 40% of the equity she had accrued in the property. During the trial, which lasted two weeks, Ellis reportedly said: “It was a hard pill to swallow that we would walk away with so little.”
In Ellis’ view, she should not have been forced to pay for both the seller and buyer’s agent, reportedly telling the court that: “The buyer who chose them and who they’re working for should pay them.”
Situations like this are sad. Paying a 6% commission today is outrageous.
What's Next For Realtors And The Real Estate Industry?
After the verdict was announced, publicly-listed real estate brokerage firms declined by 5% – 10%. Clearly, the verdict is a net negative for the profitability of these companies.
This lawsuit could significantly disrupt traditional real estate commission structures if the plaintiffs prevail. In the worst-case scenario for the defendants, Judge Bough could impose a nationwide ban on multiple listing services allowing listing agents to set predetermined commission rates offered to buyer's agents. This practice of cooperative compensation (aka real estate collusion) is at the crux of the lawsuit.
The ruling would prohibit listing agents and sellers from defining buyer agent commissions upfront in the MLS. Buyer broker commissions would instead need to be determined independently without advance knowledge of the rate.
Judge Bough could also bar listing agents from sharing any of their commissioned amounts with buyer agents. This would prevent commission splits between listing and buyer brokers, the standard industry practice. Ultimately, the lawsuit threatens to upend the traditional MLS compensation model between real estate agents representing home buyers and sellers.
Finally, Michael Ketchmark, the lead attorney representing the plaintiffs in the original Missouri lawsuit, has filed a new class action complaint on behalf of three additional home sellers.
The new lawsuit names the National Association of Realtors, Compass, eXp World Holdings, Redfin, Weichert Realtors, United Real Estate, Howard Hanna and Douglas Elliman as defendants. It alleges these real estate companies and trade associations participated in an industry-wide conspiracy to inflate real estate agent commissions.
I wish Redfin did more to reduce commissions, but sadly it did not.
What Does The Real Estate Lawsuit Mean For Home Sellers And Home Buyers?
Eliminating collusion is almost always good for customers. Excess company profits tend to get redistributed to the consumer. Therefore, I expect the following to happen:
- Real estate commissions should take a step function down by 2026.
- Buyer's agents will be paid by buyers, listing agents will be paid by sellers, creating an aligned incentive structure.
- Short term, at the margin, there will be a decline in housing supply as home sellers hold off to listing their homes to see if they can pay a lower commission rate. Listing agents will initially resist.
- At the margin, due to a short-term structure decline in supply, home prices will get a boost.
- Longer-term, transaction volumes will increase due to lower commission rates and higher supply, thereby creating happier buyers and sellers.
- Home buyers will ultimately get a better deal because the home seller won't have to pay as large of a commission. Even if the buyer has to pay an agent to represent them, the buyer will save because the fee to the agent should be way lower than 2.5% commission the listing agent would pay the buyers agent in the past.
- The quality of real estate agents should improve as the weakest ones leave the industry, thereby, improving win-win transactions.
- If you sold your house in 2022 or before, you might get reimbursed for the commissions you paid.
On March 15, 2024, I'm glad my concerns were proven correct when the National Association Of Realtors settled for $418 million in the landmark real estate collusion case. Real estate commission rates should come down immediately as a result.
My Conversation With Attorney Mark Ketchmark
Here's my hour-long conversation with Mark Ketchmark, the lead attorney responsible for busting the real estate cartel and stopping their real estate collusion and price fixing ways. I think you'll find the conservation fascinating!
Hold Onto Your Properties For As Long As Possible
Personally, I'm unwilling to sell my home if the overall commission rate is above 4%. At 4%, I'll only sell if the listing agent is able to find a buyer at a price above what I perceive to be fair market value. A more reasonable commission amount might be 2% to the listing agent and 1% to the buyer agent.
Ideally, I prefer a flat fee commission structure. It can be based on the price point of the house, such as $3,000 commission for homes up to $500,000, and $500 more for every $100,000 increase in home price.
It doesn't take a lot more work to sell a more expensive home. But a flat fee real estate commission structure sounds too fair and logical for the consumer, which means companies won't go for it.
Alternatively, a lower commission rate for higher-priced homes can also make sense. For example, a 4% commission on homes up to $1 million and a 0.1% decline in commission for every $100,000 increase. The cost to sell a home is egregiously high, which means fewer people will sell.
In a way, I'm thankful for high real estate commissions and transfer taxes. If real estate commissions were zero, like commissions are for trading stocks, I probably would have sold at least one other property before the pandemic real estate boom. If I had, I would have missed out on hundreds of thousands of dollars of gains. So hooray for collusion!
To build wealth with real estate, I recommend holding for as long as possible. There will be the usual downturns likely every 7-10 years, but over the long run, owning real estate tends to be a great wealth-building move.
Reader Questions
Do you think there was/is real estate collusion? Do you think the home seller paying the commission of the buyer's agent is absurd? Why do consumers accept this type of incentive structure?
How do you think the real estate industry will change after the landmark verdict against the National Association of Realtors, HomeServices of America and Keller Williams?
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Wow…that’s quite the slanted read. Looks like you are all for putting people out of a job and modifying an entire industry, possibly out of existence, that you think is a cartel. Think for a moment who will be impacted.
Let’s start with the buyer of a property. They will need to come up with more money on top of their downpayment or full purchase price to seek a professional to represent them. This may not be a big deal for those with lots of liquidity or the seasoned real estate investor. But for the young and/or first time home buyer that is simply trying to buyer their first home and not get hosed in the process, it IS a big deal. Many first time home buyers simply don’t have a 5% downpayment in the bank (let alone 20%!); I know I didn’t. How could they possibly come up with anything to pay for representation? Buyers/consumers have other options, of course. They can do it themselves and hope for the best. Write a contract themselves, use legal zoom or a napkin, perhaps. They could go directly to the seller. Not a problem there, until there’s a problem. Then what? Consult the legal zoom attorneys? Work out their problem on the other side of the napkin? Ask the seller? Or better yet, hire an attorney at $500+ an hour?
The ENTIRE REASON the buyers’ agent came into existence is because this is basically how it used to be. Guess who got screwed? I’ll give you a hint…NOT the seller. And NOT the attorneys. They make a living “fixing” the problems of the un- or under-represented consumer. But hey…while you’re in the mind set to support the judgement that could destroy lives, why stop there?
One of the very valid reasons the seller typically pays the buyers’ agents is they usually can afford to. Otherwise, buyers will go unrepresented in trying to buy a home from a seller who obviously wants to get the most for the property for the least amount of trouble. Of course, many sellers are honest and don’t want to take advantage. BUT, there are many that will. Furthermore, if the seller is represented and the buyer is not, OR the seller tells their agent they have a fiduciary duty to represent them and basically double end a sale, it will have a similar feel to your article. ONE-SIDED. We have professionals and laws in place to protect the buyers AND sellers. These come at a price! Commission! Realtors and Brokerages have been horribly vilified in this whole process and have lost sight of why things are the way they are.
In the end, the sellers’ net sheet may not look much different. Granted, they may not pay as much in commissions – their sale price might be lower. (On a side note: commissions can be written off on tax returns as an expense of the sale.) Buyers will potentially be spending more to be properly represented by a professional Realtor and may affect their buying power, aka: offer. Which begs the question: What’s the point? Just because a few bad actors made bad decisions, an entire industry should not have to pay for it. This could have a HUGE NEGATIVE IMPACT on our entire economy. I don’t see how this is a win. There will be a clear winner, though. Any guesses?
Thanks for your thoughts. The decision was made up by the jury of our peers. It seems like the only people complaining are real estate agents and brokers.
What is it that you do? I’ll come up with an upcoming post on How everybody can win. And no, buyers will not be paying 5% or even 2% commission of the value of the house.
I wouldn’t look at listing agents as evil, all looking to screw over the buyer. They have a duty to be transparent, and honest, otherwise, there will be legal consequences for misleading the buyer.
I’m a Broker; 20 years in the business. I am not a millionaire or even close.
The only people complaining are not Real Estate agents and Brokers. Most first time home buyers did not pay for representation and were not unhappy about this.
Yes, a jury decided. But, I’m pretty certain the inflammatory rhetoric in the article above was not a quote from any one of them.
Regardless, it’s good to hear all sides and know that some (not just Real Estate professionals) will absolutely be getting the short end of the stick. No doubt about it.
On a couple other points in your response…”Legal consequences”? Are you ‘hearing’ yourself? Who is getting paid then? Realtors are taking the place of lawyers and preventing problems before they become problems. Realtors have a value in which they should absolutely be compensated for. (You think they get to keep the entire commission? 70%+/- might go to the agent – untaxed – of which the agent pays the DRE, the MLS Board, food, clothing for the children, college, a car, health insurance…The rest goes to the Broker who in turn pays for the cogs that drive the entire industry and then some: Office rent, corporate officers, office staff, IT, Accountants, utilities, serviceman, cleaners, daycare providers, health care, and Lawyers!.)
It is clear you have no idea how much the sellers’ agent or the buyers’ agent actually do and what they need to know and understand to best represent their client.
The listing agents aren’t “evil” and are certainly not looking to screw over anyone. The seller is likely being honest. However, honest and equitable are two very different things when negotiating a purchase. The listing agent is employed by the seller. Their agent can advise the seller what to do, but it is the sellers’ choice. Why? Agents have a fiduciary duty to look after the CLIENTS best interests. Within the law, of course. What’s the law, you ask? Ask your agent! This is why it is SO important to have both parties equally represented. Going back to my original post, buyers will have a very difficult time getting properly represented if they can’t pay 2-3% or go to the sellers’ agent. If they can only afford $1000 and find an agent to work for them? Buyer beware!
Sounds good. Can you please share your background so we can understand why you are so passionate about keeping real estate commissions high? What is it that you do and why do you think real estate commissions have stayed high versus a decline in almost every other industry?
I see you answered here
“I’m a Broker; 20 years in the business. I am not a millionaire or even close.
The only people complaining are not Real Estate agents and Brokers. Most first time home buyers did not pay for representation and were not unhappy about this.
Yes, a jury decided. But, I’m pretty certain the inflammatory rhetoric in the article above was not a quote from any one of them.
Regardless, it’s good to hear all sides and know that some (not just Real Estate professionals) will absolutely be getting the short end of the stick. No doubt about it.”
I don’t think you guys are evil and deceptive. As a result, I don’t worry so much about a homebuyer getting screwed over by listing agents. Those buyers who need help will hire buyer’s agents. And the price they will hire them for will be affordable.
Here’s a post highlighting how all 4 parties can win.
Also, given your passion about this topic, I would contact the judge and jury people to explain why real estate commissions should be stay higher for longer.
I believe I made it clear who I am and why I think commissions should stay as they are. I do not understand your statement about commissions not declining with almost every other industry. That is not the case at all. I think you know that, as does every other American when they buy gas, groceries, go to the Doctor, buy a pair of shoes, fly on a plane, keep the lights on in their home. Prices are up everywhere and for every thing. Commissions have actually come down from where they were 20 years ago when I first got into the business. It was not uncommon to see total commissions for a parcel of land at 7 or 8%. Now, they are down to 5-6%.
Good idea. I’ll gladly speak my case.
“buy gas, groceries, go to the Doctor, buy a pair of shoes, fly on a plane, keep the lights on in their home”
I don’t think you pay commissions to get or do these things. But maybe it’s just semantics.
Whatever the case may be, we must adapt with the times.
I am a former Keller Williams agent.
I questioned this commission collusion in 2022 upon taking a listing in Braintree, MA.
The home owner was an elderly lady who has been a caretaker of her sister for her entire life. She asked if I am ok with 3% commission and didn’t mind how I split or pay to the buyers agent.
The other agents from the office called on me and complained about me taking lower commission.
The owner broker fired me and sent a clearly intended e-mail to all agents in KW about this.
I am glad I left the brokerage because I knew it in my heart that what they are doing was unethical
Sorry to hear. Seems harsh to fire you and not be flexible on commission to win business and help the old seller.
This is the marching orders that I get from almost every single real estate agent when I asked to negotiate, “my brokerage firm on 5% and will not take less.”
The good thing about being firm on a high commission rate is that I found a solution to go directly with the listing agent, and figure things out on my own. I hope more people will do the same who want to save.
I am a lender and now see one particular realtor still receive her full 3% commission but charging buyers additional $995 as a Broker Fee – I can’t bite the hand that fees me. But whats worse, is that she arbitrarially charges the client the fee. The less informed (minortity) homebuyers always gets charged. She is also a minority and those clients have english as a 2nd language or don’t understand so don’t question it at all.
Please let us know what listing agents say when you tell them you want pay 3.5% total in commissions… and how many agents you go through until you find one (and a buyer’s agent) that will do it for that. And how long your home is on the market for and how many price reductions you have. This is pure entertainment. Thank you and Good Luck!
Glad you’re entertained! One has said yes so far. Whoo hoo!
If you’re in the real estate industry, I would try to embrace change. Change is inevitable. The travel agent industry has changed, so has the RE industry.
Good luck, Sam. Keep us posted on how everything goes! I’ve got my popcorn ready!
Will do! And don’t be shy and share with us what you do and your real estate situation.
Realtor of 10+yrs. RE Investor/LP. I don’t think the lawsuit will change much of anything on commissions, but who knows, I could be wrong. There have always been discount brokerages. RE is a relationship business. My guess is the buyer will write in you pay more to their buyer’s agent in the offer to buy your home. Good luck and keep us posted!
Relationships are key. I used to think things would be slow to change, but after this landmark real estate collusion ruling, I think it will change sooner than we think now.
Check out my podcast interview with Mike Ketchmark, the attorney, as to why.
I know it’s capitalism to try and make as much money off your customer as possible. But the goal of this lawsuit victory is to let market forces dictate prices, not collusion.
Instead of realtors scaring potential clients into listing with them for a 4.5% – 6% commission, the tables are turning where the realtors will be scared to charge a price fixed rate out of fear of collusion and getting sued.
I’ll join you with some popcorn too!
Scaring potential clients? Most Realtors are good, hardworking people who put their clients needs/interests first. At an agreed upon price. You get what you pay for. Good luck.
Yep, listen to the podcast about what Mike said. It’s true. When you are scared your house won’t sell or think selling is a really difficult process, naive sellers will be more apt to pay the 5-6%.
But as you understand the process and market, sellers won’t be scared anymore.
Change is inevitable.
I’m busting out some popcorn and chips to watch realtors like you be forced to play by the law and market rules.
Keep us posted as real estate commissions come down as buyers and sellers finally say enough! So entertaining!
I was so frustrated by the high commission fees that I got my real estate license earlier this year just to avoid/reduce them on the sale of my townhouse and purchase of a SFH. I live in the bay area where home prices are high, so the total commissions I received on those two transactions was about $50k pre-tax. The total costs of getting my license was about $2,400, and I also spent about 80 hours of time, composed of 30 hours for online class work + 40 hours of studying packed into the week before the final + 10 hours of administrative work (understanding the process of getting a license, determining which online class provider to take, etc.). That said, you don’t need to get your own real estate license to save on fees…
For people looking to save on fees selling their home, in markets with high housing prices you can absolutely negotiate the fee paid to the listing agent. The trick is to avoid the big national brokerages (e.g. Re/Max, Coldwell Banker, Keller Williams etc.) and to instead find a small local broker with more flexibility. I know of several brokers in the bay area that charge a 1% listing fee, and they don’t mind doing this because when home prices are $2-3M, they’ll still receive $20-$30k. In parts of the country where home prices are $200-300k, it would be be hard to find a listing agent willing to accept 1%, since they would only earn $2-3k.
For people looking to save indirectly on fees buying a home, you can do what Sam did, which is have dual agency where the listing agent also represents you. I only recommend this for experienced buyers who understand the terms of the documents they are signing and/or hire a lawyer to review the documents on your behalf. For perspective, in a lot of countries there is no buyer’s agent in real estate transactions, only a seller’s agent. I’ve met people from Europe, India, China, and Australia that have all mentioned in their home country generally there is no agent on the buyer’s side.
Well done getting your license and getting the fees yourself!
“The trick is to avoid the big national brokerages” You are right. The problem is, big brokerages have been gobbling up small brokerages around the country, thereby controlling commission prices more. Hence, the price fixing case.
I just spoke to Mike Ketchmark for the FS podcast on the entire price fixing case he won. It’s a fascinating episode I’ll drop this month.
I am curious why you didn’t mention Sale by Owner in this well done article? With the strength, penetration and ease of use over the Internet it seems a viable option. Even if you have to negotiate a partial commission for a Buyer’s Agent involving themselves.
Good point. It’s a viable option, but due to real estate collusion, I’ve been told time and time again agents will NOT bring their clients to see as many FSBO homes. With FSBO, in this system, you’re still need to pay 2.5% or more to get the real estate agent’s attention. So that is/was the risk.
Hopefully this will change!
$1.8 Billion in MO is chicken feed now that Pandora’s Box is open for business. Florida, California, NY, etc will be 10X each. About time in my opinion.
Also read an article a couple years ago that the same law firms that took down Big Tobacco were going after NAR and the collusion.
When we lived in Europe there were no buyers agents in the country we were in. the sellers agent held open houses and arranged viewings. it was super easy to find properties online. and a low cost flat fee is paid to an attorney to ensure the contracts were fair. it was easier to negotiate this way too
I am a licensed agent in MO. It’s not my main gig, I just got the license because I am a small time investor and it helps with MLS, supra access. I recently sold a $1.5M multifamily building and earned a 4% commission. I gave the buyer’s agent 2%. So I made 2%, or $30k. I then gave my broker his cut, which is 20% of my $30k, or $6k. So I walked away with $24k BEFORE taxes (most agents are 1099). After taxes (including self employment taxes), I probably walked away with $15k. It took around 4 months start to finish and it was ALOT of work and more complicated being an income property. There is a ton of work (just like any job) to be a successful agent. You have to realize it’s not just about your property, it’s also about all the leads that ended up not paying a dime, and really the agents time/costs involved. You have to hustle in a mid priced market to make a decent income in an industry that does not provide for health care, vacation, retirement, etc.. It’s no different that any kind of sales person or contractor that you hire anyone for. What kind of margins do contractors make? I don’t know the details of the court case but keep in mind that no one is forced to use an agent to buy or sell property. Most buyers and sellers have no idea how to complete a transaction and commissions are always negotiable. Agents have disclosures that we must provide and have fiduciary responsibilities. There are way too many different scenarios to lay out in this topic to come up with a one size fits all solution. Maybe it should be hourly? Maybe it should be a bid process? (kinda is if you are negotiating commissions), just like getting a contractor to build something. Every industry finds efficiency eventually and is dictated by the consumer. Bottom line is if you don’t want to pay commissions, then don’t, just do it yourself. But it is up to you, the consumer to educate yourself on how to proceed and handle your own business.
There aren’t any easy solutions. Buyer’s agents came about as one of the orignal concepts when the MLS was founded, to foster coopertive sales. The other was of course a combined list of property for sale in a market. Originally, it was in the best interest of the client to have one person search the market, assisting the buyer identify properties to look at and not have to deal with 5 different brokers to see 5 properties. There is no doubt Zillow changed the equation, and the industry has been asleep at the switch, or more accurately resisting change.
Buyer’s agents can be lot’s of help with negotiation. I bought 8 properties in one year at the end of the real estate crash in 2013/14. He easily saved me his commissions during negotiations. But of course I didn’t pay him, the seller did. This isn’t new, it’s been this way since the dawn of time. Is it right? I don’t know. As mentioned by others, it’s a necessity for many/most first time home buyers with 5% or less financing.
In general I see comments over valuing the listing agent. In many markets, you provide the pictures and text, and there are agents that will list the property on the MLS for $500. Then list you as the contact for showings, you can use a combination lockbox if you choose, either published or on request. You choose if you want to offer a buyers agent commission or not. Then the listing agents steps back and is finished working. Make sure you are getting something valuable for money spent beyond the $500. Lots of things possible, staging, pictures, drone shots, negotiation etc. But it’s not advertising and exposure, that’s pretty much a thing of the past. Unless it’s a dump, the open house should be free, agents value the exposure to buyers.
Remember the buyer’s agent brings the buyer to the table, that’s really valuable to the seller too, especially in an ordinary market.
How much is this worth, and who pays, definately needs scrutiny. And I agree, there is industry pressure to maintain the status quo, which is an inefficient process with most agents spending more time marketing than actually working with clients. Maybe finally we will see the needed changes. But this lawsuit is a Yellowstone sized eruption and the skies are gonna be cloudy for awhile.
The amount of work required to sell a home has almost no relation to the home price. To sell a $800K home is not alot more than a $400K home. A % commission makes no sense at all (execpt to the realtor). We don’t pay our other professionals (accountants, lawyers, etc.) like this. Also, Realtors should make less in hot vs. cold/neutral markets. The homes sell themselves in a hot market. The only time they really have to work is in a difficult/down market. Similar to Financial Managers charging a percentage of AUM, for the same reasons. A rip off. In their case, it is not uncommon for someone with lower AUM to be more difficult/complex than someone with higher AUM. Ask why, in both cases, they don’t make a good business case for their compensation, only “its the business norm.”
I’ve always felt real estate commissions were outrageous, so I opted out completely. Granted, I’ve only owned 3 homes and sold 2, but on both sales I did it by owner and paid zero commissions. I did hire attorneys in both cases to handle the purchase agreements, although it was debatable whether I even needed that, since title companies often offer “FSBO packages” with the standard agreement language for your area. One of the attorneys that I hired actually specialized in FSBO transactions and even handled the negotiations with the buyer – all for a little less than $1,000 (this was 19 years ago – I’m sure the price for similar services would be higher today). I also utilized FSBO advertising services to get the listing in front of buyers – but it was not listed in the MLS. My first house sold within a week to someone who came to the first (and only) open house that I held. The 2nd house took about 3-4 weeks before I got 2 offers on it. Both houses sold for within $1,000 of my listing price, which I had thoroughly researched and knew was at the higher end of comparable sales. The homes were in excellent condition and I knew I could command a price near the high end of the range.
In the end I paid less than $2k on each transaction instead of the tens of thousands that I would have paid going with a Realtor. It was the right approach for me at the time, but I understand that it may not be practicable for everyone to take my approach. The 2 homes I sold were a starter home and a mid-priced home. Now that I’m in a more upscale home, I’m not sure if the FSBO approach would work as well, given that some of the buyers could be relocating in from other cities and may not look at any homes except through their realtor. But it only takes one buyer.
I recently bought my first home and wouldn’t have been able to afford professional representation on top of a down payment AND closing fees without a payout for my agent from the seller. Sellers typically, inherently, have the upper hand in any real estate transaction, especially in a market with constricted inventory, such as the present. List agent does far less work. Take photos and present offers, that’s literally it. My agent and I had to travel to multiple properties day after day. He had to write multiple offers, provide multiple CMAs, and negotiate a deal that not only protected my intereats, but was also attractive and fair to the seller. His reputation was a big factor in the list agent accepting my offer with the assurance he would get me to the closing table with knowledge and understanding of all the material facts and risks involved. This is just another shining example of greed in the purest form. When you list your home you aren’t just paying an agent to sell it, you’re paying for an experienced buyers agent to bring you an educated buyer who understands all parts of the deal from the START and isn’t going to waste your time. If you’re netting 400k on the sale of a home you literally did nothing to improve and didn’t lift a finger to make and want to whine about a 120k commission, I don’t feel sorry for you.
Glad you found your buyers agent so useful. They usually are more so for first-time homebuyers.
As your real estate transaction experience grows, you might have a different perspective.
I didn’t realize I gave off the impression you or others should feel sorry for me for paying the commission. I agreed to it. I change my behavior according to what I believe, which is to not sell again until commission rates come down. As an Econ guy, I don’t like economic waste.
The net proceeds was closer to $1.78 million, not $400K.
This verdict is fantastic. Realtor commissions have been debated ad nauseam. Technology has largely replaced most of the work of realtors. They were and still are middle men. Far overdue for a restructuring of their compensation to match their dramatically reduced workload. Flat fee, with additional flat fees over the median home retail price is probably best.
Realtors are just contracted workers and it is best to think of them that way. They are not your friends. You are hiring them to perform a limited service, so like any other contracted job it should be per hour basis, or per job basis. Giving them a significant % of your home sale is literally giving a stranger a significant % of equity in your life savings. Totally insane.
It is a world of ladies driving a Lexus and wearing St. John. What do you expect?
Real estate collusion: recently sold my home in the Seattle area. Prior to listing, I interviewed five real estate agents from four different agencies. Each agent independently told me she could not go below 2.5% buyer’s agent commission, their brokers would not allow it. I pushed hard. Nobody budged; take it or leave it. Hence commission mostly negotiated on seller’s side, we agreed to 1.5%. Total commission was 4.0%. Collusion? Absolutely. Looking forward to my $125 damages check in 2029 following the class action lawsuit against NAR…
I suspect the better selling agents will welcome upcoming changes to buyer’s agent compensation. In my case I supported 2.0% listing agent and 1.0% buyer’s agent commissions. The the hard working and effective listing agent earned less commission than I was willing to pay.
It always seems strange why some agents wouldn’t just accept a lower commission to get the listing and earn something, rather than miss out:
Competition for listings should drive commission rates down, especially in a lower volume market, not keep the rates the same. The power of collusion!
Yes, I discussed the lack of housing inventory available for sale, with more agents chasing fewer listings. No one budged on commission. As you state, the power of collusion.
Amen. I paid 3% commission as a buyer for house I purchased essentially unseen. No realtor in market charged less.
Just what did I pay tens of thousands of dollars for?
You raise some interesting ideas here. I totally agree that 6% commissions are pretty absurd, especially since most buyers do their own searches for properties they’re interested in, and seller’s agents don’t have to try so hard to market properties to get them before buyers’ eyeballs. I would propose a 2% commission for seller’s agents, and a 1% commission for buyer’s agents.
The buyer’s agent wouldn’t get involved until a buyer was ready to put in an offer on a property, and the agent would help take it from there. For me, I’d much rather find the properties I want to see and arrange to see them myself, without getting an agent involved at that stage. I know what I want; they don’t. And if the agent isn’t involved in identifying properties for the buyer, then there’s no incentive for the sellers to monkey around with the commissions they offer a buyer’s agent, because the agent wouldn’t be able to filter out the properties that are offering lower commissions.
If the buyer’s agent is just involved with the paperwork, home inspection, etc., and not the time-consuming property identification and driving-people-around work, then a 1% commission to the buyer’s agent would make more sense. The agent wouldn’t be burning all that time and gas driving someone around, and they also wouldn’t be wasting time and effort showing around wishy-washy buyers who never put in an offer. If a buyer wants to be driven around to different properties and such, the buyer could specifically request that (and pay the agent directly for their time in doing that).
If an area is too expensive or too cheap to make the percentage number make sense, the buyer/seller and agents can always negotiate something different. I had a client who had to sell vacant land in Arizona that was worth about $30,000. At 5% commission, that would have been a $1,500 fee to split between the agents. That obviously wasn’t going to work. I think we negotiated a $5,000 fee or so, and that got the deal done. Yes, it’s a huge percentage, but how else are you going to get anybody interested in a bare piece of dirt in the middle of nowhere?
I do see a problem with expecting the buyer to pay their own agent out of pocket for every purchase transaction, though. When I was a first-time homebuyer (millions of years ago), my down payment was pretty tiny, and if I had to pay my own agent the 2.5% commission, or even a 1% commission, that would have decimated my down payment amount, making it impossible for me to buy a home. We already have pretty huge barriers to people becoming homeowners in my HCOL area, so that would probably be the final nail in the coffin.
BUT, if seller’s agents’ commissions were dropped to 2%, reflecting the drop in the amount of work they have to do, and if buyer’s agents’ commissions were dropped to 1%, the total of 3% seems a LOT more reasonable for the seller to bear. And everyone who’s a buyer now will eventually become a seller later (or their estate will if they die owning that same property), so it would still work out to be relatively fair eventually.
The buyer is already paying the commissions in the sale price. If the fee for the buyer’s agent could come out of the loan amount at closing (which is what effectively happens today) that would solve the issue.
The buyer already pays the majority of the closing costs in a transaction (outside of the realtor commissions) and they are not getting a fat pay day from the sale of their home (if it is a first time homebuyer). Given that the cost of buying a home has doubled in the past few years from home price appreciation and rapid increase in mortgage rates, asking the buyer to also pay a 2-3% realtor commission would completely shut out first time homebuyers from the market.
The buyer wouldn’t pay a 2-3% commission to its agent. No buyer would pay that because a buyer would pay based on what the buyer agent is worth.
Let’s say we’re talking a $500,000 house. A buyer might be willing to pay $1,000 for representation. That $1,000 can be rolled into the mortgage amount.
No way would a buyer be willing to pay $10,000-$15,000 to the agent.
For the last three houses, I’ve paid $0 to an agent and haggled down the price to the max using the listing agent.
I understand what you are saying Sam, and I agree that the commissions coming down is a good thing for buyers and sellers. However, if the agent who helped us buy our house this year was paid only $1000 for his work, he would probably be making less than $5/hour based on the amount of time he put in for us. I am not sure if you are too far past your time as a first time homebuyer, but no agent would ever do the amount of work required right now for $1000. They do a lot more work than you may realize, or what is reflected in your article. I am not a realtor or involved in the RE industry in any way, just for the record.
I agree. And I think that’s just the free market at work. I might only be willing to pay $1000, but you might be willing to pay $5000 or $10,000. And then the market will decide whether the current number of real estate agents, in the country is enough, too many, or too little.
Every single industry has seen fees and commissions go to zero except for real estate industry.
Hi Sam, as an experienced buyer and negotiator what do you think about getting your own real estate license to avoid paying seller’s agent fees as the investment to getting a license isn’t too steep? Or do you think the fees can be worth it for the list of real estate agent value you provided? Thanks.
I thought about it before, and I was too lazy to get my license in time to sell, and I also didn’t want to pay the ongoing fee.
Because I don’t plan to sell property, only buy, I got the benefit of negotiating down the price and doing dual agency.
There are no laws explicitly requiring homeowners to hire listing agents or for the homeowner to hold a valid real estate license.
My realtor friend told me to do just this. $1k for a RE license could easily produce a 100x lifetime ROI.
I encouraged both my kids to get real estate licenses right out of high school. Last seven years I have made close to $150,000 in commission splits and, referral fees. And the income went in their name and their tax bracket is much lower than mine. Real estate commissions, and the structure basically amounts to racketeering. I’m glad something might change after this lawsuit.
This is a huge win for Americans and was overdue. Now sellers can sell at say 1.5% commission and pay nothing more in commission. Gone will be the days of taking a huge six figures hit to sell a home which was completely ludacris. This was definitely collusion, allowing an industry to get rich off of the backs of people needing to sell a home.
Buyers will be able to choose whether to hire an agent at all, and the use of technology will help aid those buyers who do not hire an agent. Redfin has built self-service technology for buyers to set up their own tours and to make offers, and other brokerages will probably need to follow suit to become competitive in the new playing field. Commission costs will FINALLY be coming down due to this power shift to the consumer. Booyah!
Probably not the same thing but yes, the commissions are way too high. I agree they should be more of a flat rate based on effort. Yes there would likely be way less realestate agents but it feels like there are way too many as it is.
I recently listed my mom’s condo after she passed away. The condo is in one of those Co-op independent retirement communities where there is a monthly fee attached to the condo. She essentially owns “shares” that represent the unit she lived in, and technically we are selling the “shares” in the co-op.
The “community” contracted with a single onsite brokerage to sell buy/sell properties in the community. The commission is 5.25% (2% to buyers agent). I pushed back but they refused to change the rate. I had no leverage because they are the only broker authorized to sell units in the community per the bi-laws of the co-op. My listing agent is terrible. The unit has been on the market for 4 months and she has not even once called me or emailed me. I’ve had to reach out twice just to find out if the unit had even been shown to anyone and if there was any feedback. She is the only listing agent for the whole community but last I checked there are only a dozen units actively for sale. The whole thing has left a bad taste in my mouth. The unit isn’t even listed on the MLS. The only way anyone finds out about the property is if they express interest in the overall community, take a tour then ask about available units, then they are handed a paper sheet with tiny pictures of the units, it’s ridiculous. IMO the commission should be like closer to 1% because there is next to zero marketing of the property or really any effort whatsoever. There is a picture of the listing on the community website, which is terrible (imagine a web site from 1998). You wouldn’t even be able to find it if you didn’t know where to look. So, I’m paying full commission rate for a fraction of the work a typical broker would do to market a property. I’d love some advice if anyone has any as we’re going to have to go through this all over again as my wife’s mother lives in the same community. were probably SOL because of the bi-laws that tie you up into this mess when you buy the shares in the association/condo.
Holy cow, that’s ridiculous! Somebody needs to sue that community. Sounds like you need a class action lawyer. Yes, you signed the bylaws when you moved in, but I’m sure you didn’t imagine that the community was going to get a crappy broker who doesn’t do anything and doesn’t even list the properties on the MLS. That’s the sort of anti-competition that the courts typically love to smack down.
Thank goodness I had a much better situation when I sold my dad’s co-op unit this past summer (sold his “share” in the retirement village cooperative). In our area, the retirement housing demand exceeded the supply, and the coop managers office had a waiting list of people waiting to buy in. Our unit was sold fairly quickly after I had some rehab work done to spruce it up.
Since those monthly co-op occupancy fees (rent) still come due every month until the unit is sold, you might have to take more proactive steps to get the unit sold. Right away I made friends with the coop office manager. I still find it more effective to meet with people in person rather than solely by phone or email. The coop manager is bound to have a relationship with the listing agent and may be able to help you in getting the agent more focused on selling your unit before the other 12 units. Is your unit in great shape? Is the unit priced correctly? It has to stand out from the other units in some way. If the coop office manager contact doesn’t work for some reason, make an appointment with the president of the coop board. They like to feel important. Kill them with kindness. Let them know how much you would appreciate any ideas or helpful suggestions on how to get your unit sold.
I hope you get the unit sold sooner rather than later. Good Luck.
This is great news for the public. I sold 3 properties and always felt cheated. The whole process costs way too much for sellers and buyers. I’m holding off selling another property for 5 more years. Hopefully, the process will be more efficient by then.
Hi, long time reader, first time commenter.
I absolutely love this article and I have also written about the stupid structure of the real estate industry.
Thanks for such a clear, well-thought out post.
You may be interested on some of my thoughts too. Please don’t disregard as spam, (but if you do consider it such, I understand). I have a minuscule blog called HouseRat and I wrote a couple posts you may enjoy, “commissions aren’t the NAR’s only problem” and “ramblings on real estate disruption”. I doubt it even shows up in google… (gah, how embarrassing. blog is at HouseRat.net). Lots of other tips and stuff too.
Okay, please don’t skewer me. I’ve never shared my writing. Literally.
When we bought our house the best heads up we got was “Every single person involved in the home-buying process is incentivized to make you pay as much as possible for the house. No one benefits from getting a lower price but you.”
And it really makes you think. The city gets higher property taxes, the lender gets more interest, the seller profits more, and both real estate agents get a higher commission.”
The entire process was a racket so I’m glad to see change is on the horizon.
Next up should be a change in the deduction for capital gains from selling your primary residence. Doesn’t seem right that the government gets to cause an exorbitant amount of inflation and then get to take a big chunk of your now-devalued money. It also doesn’t make any sense that married couples get twice the capital gains exclusion.
Wow this is great news. I always thought the commission structure was so bizarre and very expensive. I think most sellers don’t fully grasp this until the sale is done and they see how much was actually taken out before their profits (if any).
I agree that the industry is behind on reducing fees. I’m very glad that this lawsuit happened and hope it will bring major changes on fee reduction.
Thanks for highlighting this and explaining it in an easy to understand way.
Generally speaking, I think a home seller paying anything above 3% (1.5% to seller agent, 1.5% to buyer agent) in total commission is not really getting their moneys worth. I know there will always be exceptions, but the value proposition of RE agent commissions have fading over time. Technology definitely shifted the dynamic. 6%? I don’t know…
Back then, agents provided most of the critical information to both the buyers and sellers. Comps. Information about the neighborhood. Their general thoughts about the RE market. Good agents also made sure it was a worry-free transaction and negotiated on your behalf to give you more ROI (when home prices were negotiable). For a $500,000 home, it was $30,000 well spent. But now, buyers have all of the information at hand. They typically do most of the legwork and conduct research and provide an agent a list of houses that they’d like to see. Transactions are more transparent and conducted online so there’s little room for hiccups. So 6% needs to be buried and a new standard should in introduced.
However I recognize that it’s difficult to get a RE agent license and that it takes a lot of work and resources to maintain a good network, to provide value to clients. A good agent will always be worth the commission they charge, but it’s hard finding them.
I’ve thought the real estate industry has been a racket for decades. The amount of money realtors are paid makes no sense. These people are not rocket scientists. Don’t even start on bank loan closing costs and the outrageous fees for items like title searches. The most overpaid professions during the last 20 years:
1. Home builders
2. Realtors
3. Bankers
The Federal Government has subsidized this industry with low-interest money for too long. It’s not good for money to be free. I agree with every point that you’ve made in this post.
Hey Dan, have you ever built a house? Just curious. I’m with you on #2 and #3.
Heh, agree with Chris here. Picking on Home builders? Seems pretty random. Those men are doing hardcore complex manual labor and creating permanent homes for people to live… Not much more important than that. Most of them probably deserve to be paid more.. Maybe you meant to say Real Estate Developers? Even then that’s a big money business and they take huge risks on developments..