Editor’s note: Real estate commissions once again are at the center of debate after a recent “60 Minutes” segment on online discounters and a federal report on industry competition. In this three-part series, Inman News looks at recent research on commissions, the mystery around what agents and brokers can and cannot legally discuss, and how the new discount entrants are collaborating to add pressure to price. (Read Part 2, “‘Mum’ sometimes the word with commissions” and Part 3, “Discount brokerages band together.”)
Real estate commissions once again are at the center of debate. A recent “60 Minutes” television segment on commissions and a report issued jointly by the Justice Department and Federal Trade Commission have prompted dialogue around the questions, “Are real estate commissions too high?” and “Does the industry create artificial barriers to lowering them?”
While some forms of discounted real estate services have been around for decades, the Internet has enabled some brokerage firms to instill efficiencies, which they say allows them to cut costs and pass savings onto consumers.
But critics within the industry argue that these efficiencies many times are at their expense. Many discount firms, they say, are able to cut costs by shoving the workload onto the agent working the opposite side of the deal.
Further complicating the debate is a lack of information about commission rates, and recent data indicates the median income of Realtors has decreased.
Some research has concluded that traditional commission structures and few barriers to entry for new agents create billions of dollars of waste in the real estate industry — and neither consumers nor agents benefit.
Mark Nadel, a government lawyer not affiliated with the DOJ or FTC, last fall published a draft research paper at the AEI Brookings Center, arguing that the percentage-based commission structure is off-base and doesn’t serve to motivate seller agents to obtain higher prices for homes.
In a typical real estate transaction, the home seller pays a percentage of the home-sale price to his agent (typically 5-7 percent), who then splits the fee with the buyer’s agent. Nadel says it’s counterproductive to reward the buyer’s agent because the listing agent was able to get a higher price.
“I believe that the traditional structure is going to collapse in five years,” Nadel said in an interview with Inman News. He feels that consumers and real estate brokers alike would be better served by a non-percentage-based model such as a flat fee or hourly service charge and that buyers should be able to negotiate fees with their own brokers.
“I’m not the first person to suggest this fee-for-service model,” he said, pointing to Julie Garton-Good, a real estate educator, author and broker, who has said that agents often give away what is most valuable while charging for relatively routine tasks.
Nadel argues that the percentage-based model prompts “steering” by buyer brokers who may be more motivated to show clients homes that offer better or higher commission splits than other similar homes. He points to anecdotal evidence that shows sellers having a tough time selling their home often will raise the co-op fee to the buyer’s agent as an incentive to bring buyers to that listing.
“If you ask brokers they will say no, this doesn’t happen,” Nadel concedes, but he questions why they would raise the co-op fees to the buy side if it didn’t prove to sell homes faster.
Some brokers inside the industry agree with this notion that the commission-based model set by the listing agent can create problems that inflate the debate over whether sales commissions are too high. Jeffrey Bastress, a broker with StartPoint Realty based in Sterling, Mass., recently wrote a perspective article arguing for the eradication of the mandatory MLS offer of compensation structure that currently forces brokers to instill what he calls a “one-size-fits-all” policy.
Bastress argues that this structure forces consumers to pay the same amount of money whether they received good or bad service.
“This is another reason consumers feel they pay too much,” he said. “Ninety percent of the time they pay the same amount for inexperienced service that the other 10 percent of consumers paid for more experienced service. This contributes to the bad rap that real estate professionals have to combat, and makes it harder for the experienced agents to justify their fees as horror stories abound.”
Industry officials and participants say that the so-called 6 percent standard commission fee is a myth and that commissions are negotiable, with the national average declining to between 5 percent and 6 percent in the last few years.
Bastress’ argument targets the idea that brokers who participate in the local MLS must agree to cooperate with certain fee structures set in place via the mandatory offer of compensation — they must agree to pay a buyer’s broker whatever commission rate they’ve offered through the MLS regardless of the level of service the consumer receives.
Lyle Martin, co-founder and CEO of national discount real estate company Assist-2-Sell, also recognized inefficiencies in the MLS co-broke model and chose to build his company outside the MLS. Assist-2-Sell, founded in 1987, charges sellers a flat fee typically starting around $3,000 and graduating up depending on the home’s value.
“For that fee, we do everything but put the home in the MLS,” Martin said. “Because we’re not putting our (properties) in the MLS, we don’t need to charge the seller the 3 percent buyer broker fee.”
The company’s brokers instead are charged with finding a buyer, who gets no-cost representation from one of its buyer agents.
The company does offer full MLS marketing if the seller requests, but sellers have to pay an extra 3 percent on top of the flat fee so the company can offer it to a cooperating buyer broker.
Assist-2-Sell’s flat-fee model is opposite other flat-fee companies that charge one fee to list a home in the MLS without additional services. These newer businesses have become more common over the last few years and have come under fire from many traditional buyers’ agents who complain that sellers using the service often do not understand that they aren’t paying for representation and end up relying on the buyer agent to push negotiations along.
“The reason the target is still attractive is because the real estate industry is filled with inefficiencies,” Martin said. The industry will continue to see new low-cost entrants as new technologies and the Internet enable lower advertising costs and consumers begin to demand that the costs they pay go down as well.
Whether commissions are rising or falling is a tough statement to make. An industry trade publication, Real Trends, tracks average commissions charged by the nation’s top 500 brokerages and finds in its most recent data that the average commission charged was 5.1 percent.
But a critique of that survey, written by John C. Weicher, director of the Hudson Institute’s Center for Housing and Financial Markets, found the commission data limited by its focus on the largest brokerages and most expensive homes. Weicher says this situation is the most likely in which agents charge lower than 6 percent commissions.
The National Association of Realtors produces data on median agent incomes, but not average commission rates charged to consumers. The lack of open discussion about commissions will be discussed in Part 2 of this series.
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