The real estate industry is fighting to preserve its current system of agent and broker compensation. At issue: the transparency of commissions, especially of buyer-agent splits.
In most industries, consumers can easily discover how much products or services cost. When you buy a car or a funeral, you can find prices by examining the new-vehicle sticker or by requesting the FTC mandated funeral price list. One exception to this rule is real estate brokerage, an industry under attack for its alleged opaque pricing.
Although real estate agents say they’re transparent when it comes to costs, the industry has come under attack in recent years for its commission system. Under current practices, sellers compensate agents on both sides of a real estate transaction.
Consumer advocates argue that real estate brokerages resist full price disclosure. They say this helps to maintain the current commission system (5 to 6 percent of the sales price, split between the listing agent, the buyer’s agent, and their respective brokers). If full transparency were the rule, they claim, agent/broker compensation would decrease several points or more to what is normally charged in other countries. This would make real estate transactions less costly for U.S. consumers.
Another issue is the alleged lack of transparency in buyer-agent split commissions. This supposedly hampers consumers’ ability to ask for lower buyer-agent compensation. Being able to negotiate splits might give the property owner greater flexibility to lower prices in order to close a deal. The current system generates some $100 billion in annual real estate agent/broker commissions, among the highest levels in the world, says consumer advocates.
Commissions in the crosshairs
Multiple lawsuits surfaced in 2019 alleging that the National Association of REALTORS®, local multiple listing services (MLSs), and major brokerage firms are in restraint of trade. The first one, Moerhl v National Association of REALTORS® (NAR), claimed that the real estate industry forces property owners listing their homes on an MLS to pay a fixed percentage of the total commission to the buyer-side agent. In effect, the plaintiff (a Minnesota home seller) alleged that the industry violates antitrust laws by forcing home sellers to pay inflated buyer-agent commissions. Result: home sellers are saddled with costs for which buyers would normally pay in a fully competitive market.
In addition to NAR, four major brokerages have been named as defendants: HomeServices of America, Keller Williams Realty, Realogy Holdings, and RE/MAX Holdings.
According to the Washington Post, the NAR rejected the premises in the lawsuits and moved to aggressively defend the industry.
The law firms behind the litigation have a long history of winning judgments against major corporations such as Volkswagen (emissions fraud), Apple (eBook collusion), and Exxon (Valdez oil spill). This explains why industry observers are watching the litigation with concern. Rob Hahn, founder and managing partner of 7DS Associates, a real estate consultant, told Marketwatch that the lawsuits are a potential “nuclear bomb on the industry.”
The stock market is taking the threat seriously, as well, driving down share prices of Realogy and RE/MAX, the two publicly traded defendants involved.
With the above events as background, the Consumer Federation of America (CFA) recently issued a report that further stirred the pot. Hidden Real Estate Commissions: Consumer Costs and Improved Transparency alleged that commissions are not visible or well understood by the public.
The study found that real estate industry practices make it hard for consumers to learn about commission levels. Price opacity explains why a large majority of consumers are ignorant of the standard 5 to 6 percent commission of a property’s selling price, CFA said.
The consumer advocacy group claimed that real estate brokerages and their sales agents don’t:
- Advertise commissions.
- Provide commission information on their websites.
- Typically discuss commissions on general-inquiry phone calls.
- Routinely provide information on seller costs until pressed to do so.
What’s more, CFA questioned the industry practice of restricting a buyer’s ability to uncover the buyer agent’s share of total commissions.
“The reluctance of traditional real estate agents and firms to provide information about commission levels helps explain why there is so little price competition in the industry,” claimed Stephen Brobeck, a CFA Senior Fellow. “It also helps explain why most consumers, even recent home buyers and sellers, do not know that nearly all commissions range between five and six percent.” In a national on-line survey of 2009 representative adult Americans undertaken by Engine Group (formerly ORC International) for CFA, only 32 percent of respondents, and 44 percent of recent home buyers and sellers, knew that a typical commission is five or six percent.
The consumer advocate argues that commission opacity increases consumer costs in real estate transactions. He also claims that real estate agents face little pressure to lower their commissions. If asked to do so, they have several common responses:
- If the seller requests a lower commission be paid to the buyer’s agent, the selling agent will recommend against it, claiming that lower compensation will result in fewer buyer’s agents showing the owner’s property.
- If the seller objects to the listing agent’s commission, the agent will refuse to negotiate some 73 percent of the time, the CFA report claimed.
However, in most cases, sellers are unaware of the nuances of real estate compensation. They simply ask the listing agent about commissions and are told they (the sellers) are responsible for paying them. They may never learn that they’re also paying for the buyer’s agent, who, if successful, may generate a less profitable deal for sellers.
Furthermore, CFA says that information about buyer-agent split commissions is usually not disclosed by multiple listing services. According to CFA, this harms consumers because:
- If buyers could negotiate for a smaller commission split, sellers could be more flexible regarding price concessions (without reducing their profits).
- Buyers who are ignorant of commission splits are vulnerable to buyer agents steering them away from low-commission properties. CFA claims this issue has been documented in academic research and was mentioned by a number of agents interviewed in their study.
CFA says its conversations with 200 listing agents validates earlier research that commission levels are highly uniform in most markets. The most common commission rate agents cited was six percent (70 percent of agents). Five percent was the next most common rate (19 percent). In some markets, there was even less rate diversity. In five of the 20 local markets, all agents cited a 6 percent rate. In ten other areas, seven to nine agents (out of ten) all quoted an identical rate.
The CFA says it documented reluctance among agents to negotiate on commissions. Only 27 percent said they’d be willing to do so, CFA found. As you might expect, agents with the highest rates were most open to lowering their compensation.
Increasing commission transparency
To address some of the issues uncovered in its study, CFA has some suggestions for real estate agents, brokers, consumers, and regulators that it says will increase commission transparency.
- More home sellers should broach the issue of commission flexibility when they initially speak with listing agents.
- More homebuyers should ask their agents whether they’re open to showing homes with lower buyer-agent commissions.
- The real estate industry should provide consumer groups, journalists, and other third parties with more information about the commissions paid to real estate agents and brokers and whether they are negotiable.
- The U.S. Department of Justice should keep investigating commission splits, if necessary.
- More MLSs should follow the Pacific Northwest MLS in allowing brokers to disclose commission splits to buyers and sellers involved in real estate transactions.
“The industry is beginning to feel more pressure from litigators and regulators to increase price competition,” noted CFA’s Brobeck. “We believe that more visible pricing would not only lower costs for consumers but also increase consumer confidence in agents who play a critical role in most home sales,” he added.
The lawsuits and CFA report paint a portrait of an industry potentially being forced to adopt a new compensation model. If the plaintiffs win and/or the U.S. Justice Department launches an antitrust action, real estate brokerages and their agents will be looking at a brave new world of sales compensation. A potential decoupling of listing agent and buyer-agent commissions is just one of the possibilities lying in wait. In either case, agents and brokers may likely experience turbulence while transitioning to a new compensation approach.
The good news? That it might take years for these cases to move through the courts. In the meantime, the real estate industry has already changed. The advent of fee-for-service brokers and of online platforms such as Redfin has put downward pressure on commission rates. But external forces will continue to target the industry, with the goal of reducing transaction costs.
NAR is not taking these developments lightly. Responding to the class-action lawsuits, it said the complaints are baseless and contain multiple false claims. “U.S. courts have routinely found that Multiple Listing Services are pro-competitive and benefit consumers by creating great efficiencies in the home-buying and selling process,” NAR said. It has also moved to dismiss the lawsuits and published a member FAQ to help agents address public concerns.
Are you ready for possible turbulence ahead? One action to consider: revisit your E&O insurance to make sure you have robust coverage for consumer claims arising from compensation-related and other covered disputes. And if you currently only have insurance through your broker, consider lowering your risks by purchasing your own policy.
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