An inflated, variable commission rate for real estate services should not remain the status quo simply because it has always been that way.
Higher commissions for high end property listings or purchases unfairly punishes “high end” consumers, who are likely better educated, better informed and more capable of making decisions regarding the sale or purchase of a home.
Buyers often lack a thorough understanding of who pays their representative, believing the seller pays this fee and they are off the hook; in reality, a standard 3% commission rate for the buyer’s agent affects the final sale price of the home, and the buyer is picking up the tab for the inflated commission amount whether they realize it or not.
Traditional real estate brokerages are dependent upon the inflated 6% commission rate to remain in business. High overhead including management salaries, franchise fees and operating costs necessitate two things: a large number of agents paying monthly office/desk fees to the brokerage (whether or not these agents are productive); and an inflated level of commission sufficient to allow the agent to contribute a significant percentage of gross commission earnings to the brokerage.
If consumers across the country demanded a flat $2,500 fee be paid to the buyer’s agent in lieu of an inflated 3% commission, brokerages across the country would be out of business; high overhead and outmoded business models would not allow them to survive.
Q: Should the cost of real estate services be variable and commission-based?
A: Both sides of a real estate transaction should charge a flat fee, not variable commission.
Many brokerages have proven a home can successfully be sold and a profit made on services rendered for $2,000-$3,000, but this pricing does not address the commission on the buy side of the transaction – the 3% traditionally offered to the buyer’s agent.
Buyers are often misinformed about who pays for the cost of real estate services in the purchase of their home. They believe their agent is ‘free’ or the cost is ‘passed along to the seller,’ when indeed they are paying the 3% commission for their side of the transaction in the form of a higher price for the home. The industry does not address this misinformation, and despite the obvious benefit of a lower price for the buyer, sellers are fearful of lowering this fee lest agents refuse to show the home. As an example, agents may refuse to show a property to their buyers because the compensation advertised is a flat fee of $2,500, or 2.5% instead of the 3% they are accustomed to in their marketplace. They may show clients a home offering a flat fee or non-standard commission rate, but actively steer the client toward listings offering the traditional 3% commission rate.
According to NAR’s own research in partnership with Google, 90% of buyers say they found their home themselves, not their agent. Just 14% of buyers initiate their search with the assistance of an agent. This underscores two points: Buyers are doing a significant portion of the work of the buyer’s agent themselves, and the seller’s fear that offering a lower commission rate to the buyer’s agent will result in fewer showings is unfounded, since 9 out of 10 buyers find the home they desire to purchase themselves before reaching out to an agent. Finding the right home to make a purchase offer on is a decreasing aspect of the buyer’s agent job description.
The high end buyer/seller scenario points to the ridiculousness of inflated variable commission rates placed on real estate transactions. High end buyers and sellers (the definition of this term varies regionally; $750,000+ in some areas, $1million+ in others) are often better educated and able to make informed decisions about the transaction more quickly. They are arguably easier to work with, yet they are charged significantly more for nearly identical services.
High end buyers are typically more financially stable than their lower-priced purchase counterparts; benefits of this scenario include increased financial stability (they may be able to purchase their next home before their current home sells), increased flexibility in terms of purchasing a home in need of repairs (buyers at lower price points may be pinching pennies and unable to afford repairs or upgrades in a home), and the ability to hire a moving company and other services to assist with the transition to a new home. The overall process for a high end buyer is better funded, removing many sources of stress that arise for buyers at a lower price point.
Consumers must face the fact they are charged by their income, not the work it takes to sell their house. A flat fee on both sides of the transaction is the answer to this inequity.
If every agent in the country dropped the commission for either buyers or sellers to a flat fee of $2,500, brokerages across the country would go out of business. The current real estate brokerage model is not designed to support a singular cost of doing business; rather it is designed to support a top heavy infrastructure in which high level executives, owners and managers benefit from the excessive profits tallied as a result of commissioned real estate transactions.
Overhead costs are too high to be sustained by a flat fee for real estate services, and the cost of remaining in business is covered, in part, by two sources:
- A large number of unproductive Realtors who contribute to the brokerage through monthly office fees, but engage in little productive business activity within the industry.
- The commission split is a policy of revenue capture for the brokerage wherein agents pay a varying percentage of each earned commission, the “split,” directly to the brokerage. This policy explains why it is in the brokerage’s best interest to advocate for inflated commission-based fees.
When a flat fee for real estate services becomes the standard, one result will be a net decrease in the number of Realtors. The value of each transaction will decrease, forcing non-productive agents out of the business. This exodus of haphazard agents will provide greater opportunity for educated, top producing agents and the level of service for consumers will rise. The evolution of the real estate industry will force traditional brokerages to either innovate or expire.