Real estate commissions have survived the rise of the Internet and decades of attacks from destructive discounters. However, a growing number of legal challenges to existing mediation models pose new threats to the status quo.
An industry-shaking lawsuit filed in federal court would upend the long-established practice of paying commissions, in which home sellers pay both their agents and buyers' agents what they charge. there is a possibility. This typically amounts to a total of 5% to 6% of the home sale price, taking away a significant portion of the seller's profits. In October 2023, a federal jury in Missouri found that the National Association of Realtors (NAR) conspired with several major brokerages to raise fees for real estate agents.
How will real estate brokerage fees change?
It's unclear exactly when and how the ruling will affect fees, but the amount in this case alone could result in damages of $1.8 billion and billions more. It's causing a stir in the industry. Some predict big changes. One of the possibilities, he said, is that home sellers will no longer pay fees to both listing agents and buying agents, so home buyers who want to be represented may have to pay a separate fee to their own agents. about it.
“Missouri and other cases could lead to more than just reform, they could revolutionize the industry,” Glenn Kelman, CEO of Redfin, told investors during a recent earnings call. ” he said.
“The bulwarks are crumbling,” said Brad Case, a housing economist at Middleburg Communities who also worked for mortgage giant Fannie Mae and the Federal Reserve. “Real estate agents have been maintaining this situation for 100 years, and it is not sustainable in the long term.”
Some see the federal ruling as a sign that the real estate industry will finally have to bow to discount pressure. Some say it will be years before the ruling translates into savings for homebuyers and sellers. Stephen Brobeck, a senior fellow at the Consumer Federation of America, predicts that fees will eventually fall below 4%, perhaps as low as 3%. But he doesn't think that will happen anytime soon.
“Any changes will happen slowly,” Brobeck said. “The old guard will try to maintain the old interest rates.”
How much does it cost?
If a homeowner sells a property for $400,000, which is the average price of an existing home in the U.S., a 5% commission equals $20,000. The amount is then split between the seller's own agent and the buyer's agent (this is of little importance to the seller, and the seller still has to pay the full amount).
In the past, the going rate for real estate commissions was 6%. 3% for each agent. But after decades of competition and regulatory oversight, typical fees are now 5%, according to data from Anywhere Real Estate, the parent company of Coldwell Banker, Century 21 and other major real estate brands. It has become weak. In a securities regulatory filing, publicly traded Anywhere reports that its average fee “side” (half of the commission) is currently around 2.4%.
Although fees briefly rose during the Great Recession and rose again in 2023, interest rates have generally been steadily declining for decades. For real estate agents, this decline in commission rates is offset by rising home prices. Real estate agents are getting a smaller pie in terms of percentage-based commissions, but the pie is getting bigger.
About the NAR lawsuit
The lawsuit, which went to trial in 2023, alleges antitrust violations by NAR and four major brokerages: Keller Williams, Anywhere, RE/MAX, and HomeServices of America. insisted. While Anywhere and RE/MAX settled before trial, paying damages of $83.5 million and $55 million, respectively, the other defendants chose to take their chances in court.
The jury found against the industry, and the judge ordered NAR and the two remaining brokerages to pay $1.8 billion in damages to the home sellers. This number could eventually grow to $5 billion.
Keller Williams subsequently settled the case for $70 million as well, but NAR and the remaining defendants are appealing the case. However, if the ruling stands, home sellers may no longer have to pay agents who represent buyers.
Keep in mind: If the judgment stands, home sellers may no longer have to pay the agent who represents the buyer.
The success of the Missouri lawsuit, filed on behalf of hundreds of thousands of home sellers in Missouri, has led to similar legal claims in Texas, Florida, Pennsylvania and other states. However, it could take years for these lawsuits to be resolved and for the impact to come into focus.
Other dramas
In addition to antitrust litigation and related litigation, NAR also faces other headwinds. A sexual harassment scandal led to the organization's then-chairman resigning in 2023, followed by the organization's next president and longtime CEO.
All the drama caused anxiety and turmoil within the ranks. Redfin severed ties with the trade group and required many brokers and agents to cancel their memberships, and other brokerages followed suit. Additionally, two influential real estate companies announced the launch of a competing trade association known as the American Association of Realtors (AREA).
One of the new group's co-founders, Jason Haber, a Compass broker and agent in New York City and an outspoken critic of NAR, said AREA is a replacement, not a replacement. “We're not trying to replace NAR. We're not trying to recreate his NAR,” he said. “They're off to a 108-year early start.”
A “perfectly competitive” industry?
The residential real estate industry has long presented a dichotomy. Meanwhile, the company has substantially controlled the marketing of real estate for sale through a national network of multiple listing services (MLS). This reality, along with scrutiny from the U.S. Department of Justice, has led to complaints of collusion and price-fixing.
On the other hand, real estate sales is a relatively easy business to enter, as evidenced by the fact that over 1.5 million agents are registered members of NAR. To obtain a real estate license, agents typically must take several classes and pass a national exam. No college degree is required and admission costs are affordable.
NAR Chief Economist Lawrence Yun pointed to these low barriers to entry as proof that competition is alive and well. “Real estate is a perfectly competitive industry,” said Yun Yun at the NAR Annual Meeting in November. he said.
Consumer advocate Brobeck disagrees with that assessment. “It's not a free market right now,” he says. “There is fierce competition for clients. But there is no competition on rates. In a normal market, you compete not only on marketing, but also on the price you charge.”
Meanwhile, a long-standing industry belief is that commissions are negotiable, suggesting that buyers and sellers decide how much to pay their agents. But in reality, consumers only buy or sell a home once every 5 to 10 years, and many consumers do not have sufficient knowledge of the process to successfully negotiate lower interest rates. not.
“Consumers are at a disadvantage,” Brobeck said. “They buy and sell homes less frequently and are primarily concerned about sale price and timing.”
Historically, discounters have not been successful.
For decades, detractors have been predicting the end of real estate commissions. Opponents said these fees would certainly replace stockbroker fees and travel agent fees. Instead, real estate commissions have proven stubbornly resilient.
It's not for lack of effort. Many disruptive companies see fees as a problem to be solved, but most have not gone so far as to reshape the industry.
For example, in the early 2000s, a flashy discounter known as YourHomeDirect (later Foxtons) offered a 2% commission in New York and New Jersey. However, despite extensive advertising and gaining market share, it ultimately collapsed.
Ten years later, London-based Purplebricks entered the United States, luring sellers with a flat $3,200 fee. The company also overestimated demand and withdrew from the U.S. market in 2019.
Redfin, one of the prominent Seattle-based discounters, has achieved greater staying power. Founded as a cheaper alternative to traditional brokers and touting listing fees of just 1%, he has since shifted his focus to listing fees of 1.5%.
How home sellers can save on fees
If you don't want to pay 5% or 6% of the sale price of your home, here are some alternative options.
—Go it alone: Sell your home in a “for sale by owner” transaction without an agent. According to NAR data, between July 2022 and June 2023, 7% of home sales were sold by owner without the help of an agent. But selling without professional help requires a lot of work to do on your own, and you'll only save on one agent's commission. You still have to pay the buyer's agent.
—Negotiate: If you don't want to go it alone, ask your agent about their commission rate in advance and compare the terms of each person you talk to. If you think the price is too high, see if they are willing to lower the price. If both agents participating in the transaction are part of the same brokerage firm, they may have more leverage when negotiating.
—Hire a discount agent: A low-commission real estate agent is likely to charge much less than a traditional agent, typically 1% to 1.5% of the home's sales price. (However, you may not receive the personal attention of a traditional real estate agent.) Some brokers and agents earn a preset amount of money from a sale on a flat fee basis, rather than a percentage of the sale price.
– Selling to a company that buys your home for cash: These companies, which often advertise themselves as “buying your home,” pay you in cash, close quickly, and usually don't charge fees. However, selling this way can result in a lower price for your home than a traditional sale.
