This post was last updated Feb. 4, 2022.
Jay Thompson is a former brokerage owner who spent six years working for Zillow Group. He retired in August 2018 but can’t seem to leave the real estate industry behind. His weekly Inman column publishes every Wednesday.
When you were taking your licensure test, you probably learned that commissions were variable by the individual market. However, once you got licensed, you probably found that the real story was somewhat different.
When I first started out in real estate, I asked my broker — who had been in the business for decades — why commissions were 6 percent.
“It’s always been that way, always will be,” he said.
Having never been a fan of “that’s the way it’s always been done,” I set out on a mission to find the origin of the “6 percent commission.” And yes, I’m fully aware that there is no set commission, and commissions are negotiable. But let’s be real: It’s basically 6 percent. You know it, I know it, the Department of Justice knows it, and the attorneys filing class-action lawsuits know it. Most importantly, consumers know it.
That mission to find the reasoning and source of “6 percent” has now stretched 16 years without an answer. Maybe it really has just “always been that way.”
I don’t think it “always will be.”
Mike DelPrete penned a piece, “The quiet iBuyer war on real estate commissions.” Full disclosure: I think Mike Delprete is a genius. He is hands-down the source of info on iBuying, and he’s got the best data — and uses it — to make salient points. Read DelPrete’s article, it’s undeniable the big iBuyers are lowering buyer’s agent commissions on the homes they are selling. Which raises the obvious question: Will “traditional” brokerages follow suit?
I believe so. I don’t think brokerages will have a choice. Consumers are demanding it, and those nasty class-action lawsuits might very well force it.
Sorry, you’re not going to get DelPrete-level data and analysis here. This is an opinion piece, so for what it’s worth, you’re going to get my opinion, sans a lot of data. Real estate commission data is notoriously hard to dig up. Frankly, I don’t have the time or inclination to take a deep dive into what little information is out there and readily accessible.
We’ll also save the debate over whether the buyer or seller pays the commissions on a real estate transaction for a future column. I know what many will say; heck, they splay it across websites and advertising, “My services are free for buyers!”
Future column spoiler: It’s the buyer forking over the commission dough. It’s baked into the price they are paying. Most with a mortgage are paying it out over 30 years, with interest.
The brief stroll I took through the internet looking for average historical interest rates shows it’s bounced between 5-6 percent since at least 1992. I strongly suspect it’s quite similar no matter how much farther you go back in time. Because… it’s always been that way.
More important than the actual number is:
- How consumers feel about what they pay in real estate commission
- How commission rates will drop in the future
One doesn’t need to conduct a massive statistic-backed consumer survey to understand how consumers feel about paying tens of thousands of dollars to sell or buy a home. They don’t understand where the commission rate comes from. The industry doesn’t understand that, so consumers certainly don’t.
Amazon-sized forests of trees have been felled to provide the paper for articles about how much real estate agents get paid and how to justify it. Yes, I’m fully aware that you don’t get 6 percent. Guess what? Most consumers think you do, and they are none too happy about it.
Careers have been forged from helping agents justify their commissions, prove their value-add and handle the ever-present commission objection. Think consumers are cool with commission rates? Then why is so much time, effort and energy spent on how to handle commission objections? Agents are taught from Day One how to deal with questions like, “Will you reduce your commission?” and “Explain to me why I’m paying you so much.”
We respond with answers like, “You get what you pay for!” Or we do the ridiculous exercise of getting out a dollar bill and slicing it up — this much goes to the other agent, this much goes to the brokers and this much goes to pay my taxes!
Pro tip: Your sellers pay taxes on their income, too, and they don’t care nor feel sorry for the fact you also get to write the IRS checks.
I’ve even seen it promoted to say, “Not every transaction closes. Sometimes I bust my ass and get nothing. So commissions cover all that non-paid work.” Although that statement is quite true, an agent’s work often goes unpaid, telling Joe and Sally Consumer they are paying for that work is insane. Trust me; this is never well-received.
Put yourself in their shoes and think about how you would feel hearing such a statement. “Thank you for paying what someone else did not.” Really? Don’t go down that road. Just don’t.
How do you explain, to a consumer, why it costs them three times as much to sell a $900,000 home versus a $300,000 home? How do you justify that $54,000 bill for selling said $900,000 home? Why are typical commissions in Australia, Denmark and Finland 2 percent, and 1.5 percent in the U.K., yet 5.5 percent in the U.S.? (according to The Wall Street Journal)
And why hasn’t the internet — and all the newfangled technology that has made real estate transactions more efficient — lowered commission rates? I don’t know; it’s quite the mystery, especially given that efficiency improvements drive prices down in virtually every other industry.
Please, don’t spool up an argument that tech hasn’t made you more efficient. I didn’t sell a home until 2004, but just 16 years ago, I was driving across town to get a signature on a contract using the trunk of my car as a desk in the 117-degree heat of a Phoenix summer.
My client, who was sitting in a plane on a cross-continent flight, electronically signed the contract on the last home I sold.
It took 10 minutes to upload and sign, rather than driving 45 minutes (each way) in the Phoenix inferno.
In 2004, I was finding my way to showings using an MLS map book. Today, GPS makes planning day-long multiple showings only a few taps away. Today, your marketing reach is worldwide, and you can advertise on platforms that reach billions of people. Try doing that with envelopes and stamps.
Someday, who knows when, the efficiency of technology will result in lower commissions. The time to start learning to deal with commission compression is now — before it gets ugly.
The primary factor in commission compression will be the consumer. It seems safe to say that consumers are becoming more educated and more annoyed about how much they fork out to buy or sell a home. Consumer behavior, demand and expectations are going to reduce commissions.
It’s a matter of when not if.
The iBuyers might be kickstarting the downward trend — and providing a handy target for angst spewing vitriol — but it’s the consumers (and maybe the lawyers) who will be driving commission compression. Deny this if it makes you feel more comfortable, but the savvy agent is preparing for it — or at least acknowledging it is a very distinct possibility.
Jay Thompson is a real estate veteran and retiree living in the Texas Coastal Bend, as well as the one spinning the wheels at Now Pondering. Follow him on Facebook, Instagram and Twitter. He holds an active Arizona broker’s license with eXp Realty. “Retired but not dead,” Jay speaks around the world on many things real estate.
