6% Real Estate Broker Commissions – The End Is Nigh?

For many years the real estate sales market in the US has operated under a system of broker compensation structured around a buyer’s broker and agent being compensated by the commission charged to the seller by the seller’s broker.  Sounds confusing already, doesn’t it?

Typically, sellers of property will contract with a licensed real estate broker of their choice to “list” their home or commercial property.  In California there are differences between a real estate broker and agent, with the most significant difference being that agents are required to work under a supervising broker.  A broker can own a real estate firm and hire agents to work under their broker’s license. An agent cannot.  The standard contract between a seller and broker compensates the broker with a commission of around 6% of the sales price of the property. The percentage is not fixed by law and is subject to negotiation between the seller and broker.  It just so happens that the industry standard has evolved to a roughly 6% figure.  This arrangement authorizes the broker to utilize the service of the local MLS (multiple listing service), a proprietary database of properties listed for sale and controlled by various real estate trade associations.  Access to the MLS assures sellers that their home will be marketed across the region to subscribers of the MLS – namely, other brokers and agents representing potential buyers.  Zillow, Redfin, and other online services tap into information provided by the MLS, too.  Various local, state, and national organizations control the MLS and are guided by a strict set of rules and ethical mandates.

When a buyer’s broker or agent locates a property listed on the MLS on behalf of a buyer the arrangement will entitle them to split the listed commission to be paid by the seller to the seller’s agent upon closing of the transaction; thus providing the buyer’s agent with the motivation and compensation to engage in the transaction on behalf of the buyer.  Does this sound like the seller is paying for two brokers?  That’s the way a group of sellers saw it in Missouri.  A group of Missouri real estate sellers challenged the status quo in a class action lawsuit alleging that the historical commission-based arrangement described above violates well established antitrust laws and stifled competition in the marketplace.  It took only 3 hours for a jury to agree and award a staggering $1.8 billion verdict against the National Association of Realtors and selected brokers to compensate the members of the class whom the jury concluded were damaged by a conspiracy to fix commission rates to be paid by sellers.  The National Association of Realtors, one of the most powerful lobbying operations in Washington D.C., has appealed the Missouri verdict, and the case likely won’t be resolved any time soon.  However, the Missouri lawsuit is just the first in a wave of legal challenges to the lucrative commissions that real estate agents and brokers are paid.  Further, the Justice Department has launched an investigative probe into how real estate agents are compensated, concerned that the current system inflates the cost of housing and amounts to a monopoly.  Specifically at issue is the National Association of Realtors’ cooperative compensation policy which requires a seller’s broker to provide a blanket offer of compensation to buyer’s agents as a condition for the right to list the property on the MLS, which, it is claimed, locks in high commissions to the prospective transaction that inflate the cost of housing even as technology has allowed consumers to find homes online without the need of an agent.

Most watchers of the industry predict that the Missouri decision will lead to similar litigation in most states and perhaps in the meantime to more negotiated commissions; possibly even shifting the responsibility for the buyer’s agents commission from a split with the seller’s broker, to the sole responsibility of the buyer, lowering the cost of sale to the seller.  But how would that work?  In the traditional method there is a pot of money in escrow (deposited by the buyer to close the deal), from which the brokers involved are both paid, i.e. half of the stated commission to the seller’s broker and half to the buyer’s broker. Neither side has to come up with the commission sums in advance of the close of escrow for the worked performed by agents and brokers.  Without such an agreement in place, do buyers need to be ready to cough up 3% of the purchase price to their own agent before even knowing if they will close the sale, and if so, when and from what source?  Will lenders fund the cost?  Could it be handled as a reduction of the purchase price?   What will happen to the buyer’s agent market?  Will buyer’s agents be as diligent in locating properties for their clients without a “guaranteed” source for a commission?   How will buyers be professionally represented and advised concerning the details of what is a very complex transaction and often the largest financial commitment a family makes during their lifetime?  If buyers begin to leverage technology rather than use human agents and brokers to find properties and close transactions, will this create a basis for legal challenges down the road to invalidate what may later be viewed as a real estate transaction unfavorable to one side?  For example, where only a seller’s agent is involved in a transaction, could a buyer with remorse later claim the deal was not enforceable because of an advantage taken by a sophisticated seller’s agent against an unrepresented buyer?  And finally, a question that has to be asked in all industries:  How will Artificial Intelligence affect real estate transactions?  All this remains to be seen.

In this author’s opinion, the outcome will most likely be driven by market forces which may simply recalibrate the way real estate agents and brokers earn commissions:  more negotiation, more transparency—and probably lower marginal commission rates or flat fees across the board, especially on higher end transactions.  In the meantime, if you are a seller, it’s certainly permissible to negotiate the commission structure up front.  Most professional brokers are happy to work with a seller to achieve a realistic and fair percentage for earning a commission.  Buying and selling real estate is complicated, time consuming, and requires a detailed understanding of the documents and contracts involved.  Brokers and agents will continue to provide a needed service regarding the real estate market regardless of how technological advances change the way real estate is marketed. However, how brokers and agents might be paid for those services could change based on the recent legal challenges to the cooperative compensation system that arguably locks in high commissions to the detriment of consumers.