War on real estate commissions

The unwritten, unspoken 6 percent benchmark for real estate broker commissions is no longer a benchmark, nor is it 6 percent. Also, traditional ideals of an even 50-50 commission split between the listing broker and the buy-side broker are under pressure in some markets.

Something fundamental is shaking the foundations of agent commissions. Whether it is an isolated fleeting tremor or a nation-sweeping groundswell depends on your perspective on the market.

During these past few years of robust real estate growth, as membership in the National Association of Realtors has swelled to about 1 million and home prices are setting records in many regions, commission rates have dropped. In fact, average mean commission rates declined from 5.4 percent in 2001 to 5.12 percent in 2002 among hundreds of firms that offered data, and that rate remained at 5.12 percent in 2003, according to research by Real Trends, a real estate publishing and communications company.

Take an Inman Pulse survey on uneven commission splits.

Some brokers cite the gains of discounters and the technological maelstrom of real estate-related Internet sites and services as major contributors to this war on commissions. In an informal survey of Inman News readers, about 64 percent of respondents said they believed limited-service, low-commission brokers threaten opportunities for higher commissions, and about 67 percent said such enterprises are gaining market share. About 67 percent also said traditional brokers should not attempt to compete on a cost basis against low-commission competitors.

Jack Harris, a research economist at Texas A&M University, said a national Harris Interactive study on home buying and selling trends conducted last year found about 40 percent of respondents attempted to negotiate a lower commission with their agent, and about 74 percent of this group said they were successful.

“The market is good now, and there is a lot of room for everyone,” Harris said.

That good market may have contributed to a downward trend in commissions. But as the market slows down, commission rates could become a more pressing issue, he added.

Also under pressure is the time-honored practice of even splits in commission between listing agents and buyer’s agents.

Randy Hooker, designated broker and co-founder of Dreamcatcher Realty in Phoenix, Ariz., said he has seen an increase in the use of uneven splits, “particularly in the past five years.” These uneven splits tend to favor the buyer’s brokers, he said, with the listing brokers in some cases making 1 percent to 2 percent while the buyer’s broker takes 3 percent.

Competition might be a contributing factor. As the number of Realtors has grown, Hooker said, “the result of such an influx of new agents competing for listing clients has resulted in an increasingly common use of discounted listing commissions.”

“In our area, if a listing broker offers less than 3 percent co-broke commission on any given listing, they are running the great risk — if not probability — of lessened exposure to prospective buyers, and perhaps even an eventual reputation that will make some buyer’s brokers avoid that listing broker’s listings completely,” he added.

The commission split can work the other way, too. Thomas A. Early, a buyer-side broker who operates in the Columbus, Ohio, area, said he has seen some uneven commissions in which the listing agent gets 4 percent and the buyer’s agent gets 3 percent.

“It most certainly is not in the best interest of the seller to offer low splits” to the buyer’s agent, he said. He suggested that “greed” and the facilitation of an “in-house double-dip” are possible motivating factors for uneven commissions and that uneven splits are likely more common in “hot sellers markets” such as West Coast and East Coast regions.

Stephen Ellis, an agent for RE/MAX United in Raleigh, N.C., said uneven commissions tilted in favor of listing agents seem to be a fairly common practice in the Raleigh area. He moved to Raleigh last year from the Atlanta, Ga., area, where commission splits were more commonly an even 3 percent for listing agents and buyer’s agents. He said he was surprised to find that buyer’s agents in the Raleigh area frequently find a split of about 2.4 percent, regardless of the listing agent’s share.

Even more curious, he said, is that commission splits in the nearby Durham and Chapel Hill areas of North Carolina tend not to favor the listing agents in such a way.

“What has become the tradition is a 2.4 percent commission to the buyer’s agent, regardless of the total commission,” he said. “On a 7 percent (commission) that is still all that is offered.”

The discrepancies in splits among neighboring counties has “erupted into a bit of a Civil War between agents in these counties,” he added.

North Carolina is very much a buyer’s market these days, Ellis added. He said he wonders whether regional commission discrepancies might amount to a “disincentive to get out there and promote each others’ listings.”

Marina Sarabia, a Realtor for Coldwell Banker in Ft. Lauderdale, Fla., said discounters “are forcing lower splits for both sides of the transaction,” and discount listing services can leave buyer’s agents with the bulk of the work and a fraction of the typical commission.

“The burden of the services really leans heavily on the buyer’s agent” in some deals that involve discount listing companies, Sarabia said.