Realtor commissions are one of the most contentious issues in today’s real estate industry. A lot of realtors love them, for obvious reasons; it gets them a nice chunk of the sale price, no matter how much work they put in. For the same reasons, just as many buyers and sellers resent the 6% commission, so much so that many of them are opting to use “for sale by owner” listings to sell their homes, or turning to new flat-fee services.
Worse yet, a lot of buyers and sellers don’t even understand how commissions work. A recent survey found that 40% of buyers don’t understand how their agent was paid, and another 13% have “no idea” how much the agent was paid, or even who paid them.
It’s no coincidence that many consumers have a hazy idea of how commissions work. The main power players in the real estate industry, the Multiple Listing Services (MLS), have deliberately kept a lot of information about home sales under wraps. That could change soon, though, as several class-action lawsuits are trying to change how that information is disseminated. If the lawsuits succeed, the MLS will almost certainly lose its stranglehold on the market, and consumers will be able to negotiate their own commissions.
How MLS Affects Real Estate Commissions
Right now, the typical 6% commission is split between the listing agent and the buyer’s agent. This is more or less non-negotiable. If a listing agent is a member of the National Association of Realtors and lists a property on the MLS, the rules require that agent to offer a commission split to the buyer’s agent.
Further complicating things, the buyer’s agent commission has never been openly disclosed, though it’s discoverable on the MLS. That means that many buyers, especially first time buyers, have no idea how much their agent stands to make from the transaction. It also means that buyer’s agents could screen listings and steer their clients away from any properties that weren’t offering buyer’s agent commissions.
The MLS exchanges have a long history of keeping their data secret. In 2008, the Justice Department had to force them to allow private companies to access their listings data; once that information was able to freely circulate, companies like Redfin and Zillow emerged and flourished. Today, the majority of buyers find their target properties on these sites but are forced to use an agent for the real estate transaction, since the MLS still keeps some information accessible only to realtors.
This ongoing struggle between the MLS and its opposition is really about the control of information. Before they had to share listings, they were able to essentially monopolize the multi-billion dollar home sales industry, and keeping the pay structure hazy has allowed them to prop up a 6% commission that isn’t really supported by market forces.
But that’s already changing.
The Future of Real Estate Commissions
The lawsuits are still making their way through the court system, but some companies are already reforming their practices. This year, Redfin began listing buyer agent commissions on individual property listings, a surprising touch of transparency in what’s been described as a “protectionist” industry.
Even the MLS is changing its ways. The Pacific Northwest’s regional MLS announced earlier this year that they were going to start allowing the publication of buyer’s agent commission details. They also removed the requirement that listing agents had to offer a buyer’s agent commissions. According to the head of Redfin, other MLS exchanges are considering similar moves. Maybe it’s a change of heart, or maybe they can see the writing on the wall.
In addition to the class-action suits against the industry, the Department of Justice has taken a recent interest in the commission model, requesting information from the MLS’s main tech partner. The DOJ said they were looking into “practices that may unreasonably restrain competition,” and requested “all documents relating to any MLS member’s search … on the amount of compensation offered by listing brokers to buyer brokers.” This specific information is available through MLS searches, but not third-party sites like Zillow and Redfin.
The DOJ’s actions imply that, whatever the outcome of the class-action suits, more transparency is coming to the real estate industry in the near future. The net result? Lower commissions for sellers, and buyers too.
After all, even though sellers are technically the ones who pay the commission, they’re paying it out of the proceeds of the sale. That means the 6% commission is baked into the sale price; the money may come out of the seller’s pocket, but it’s the buyer who put it there. So lower realtor commissions will benefit sellers directly, by saving them money, and benefit buyers by making homes slightly more affordable.
The truth is, it’s a change that’s long overdue. The United States pays some of the highest real estate commissions in the world, and it’s due, in large part, to our opaque system. In Canada, they’ve long required that buyer’s agent commissions be disclosed in property listings, and Canadians pay lower commissions, on average, than United States citizens. It’s no different in the rest of the world, where realtor commissions average close to 2.5%, and range as low as 1.5%.
While we probably can’t expect our 6% commission to sink as low as 1.5% – America is, above all, expensive – it looks like some relief is on the way. Don’t hold your breath, though. People probably had similar hopes way back in 1950, after the government busted realtors for illegal price-fixing the first time.
This article has been contributed by Ben Mizes.