When someone needs to sell their house and hires an agent, typically the agent will disclose the commissions, including the cooperating broker’s commission; usually 2.5-3%. This commission is then advertised on the MLS with the house listing, letting buyer agents know how much they can make by selling that house. Because commissions are based on a percentage of the agreed-upon gross sale price, both the selling and the buying agents are incentivized to sell every house for the highest price possible. Since the commission is paid for by the seller and both agents are pushing prices high, all agents involved are really working for the sellers. This is an inherent problem with the current structure and part of the reason a Department of Justice (DOJ) antitrust lawsuit has come out against the National Association of Realtors (NAR).
The lawsuit claims that selling agents are conspiring with buyers’ agents to keep commissions high for sellers who are forced to pay for the benefit of using brokers and gaining access to the Multiple Listing Service (MLS). NAR argued that commissions are always negotiable and that not having buyers pay commissions is a benefit to them as they already must raise funds for a hefty downpayment, closing costs, inspections, appraisals, loan origination fees, etc.
The NAR is an advocacy group for Realtors that holds a strict code of ethics from agent members. Membership in NAR is typically mandatory as part of local boards of realtors who usually control the Multiple Listing Service (MLS). The MLS is the service where real estate is listed for sale or rent. It is usually the best place to find a property for prospective buyers and thus the best place for prospective sellers to list their house for sale. Because of the MLS real estate brokers have sustained their roles in local markets and have not succumbed to the power of the internet like many other service agencies.
Fighting this type of lawsuit is one of NAR’s main roles to protect the interests of real estate agents. The jury saw that competition was restricted to a 5-6% range for all commissions and therefore violated antitrust law. If you have ever worked with an agent, you will know that it can hinder your ability to sell a house if your buyer’s agent commission falls below 3%. Agents are not incentivized to point their buyers towards that house.
Before the emergence of the internet, real estate brokers would have to physically go to the local board of realtors, print off a list of real estate for sale, filter the listings for their buyers, and then curate that boiled-down list for their buyers. Now, a buyer is usually given a link or automatically sent emails with properties that fit their criteria. The agents still must schedule showings, and negotiate pricing, among other things. The workload over time has drastically decreased, allowing agents to take on more clients.
According to a study from Cornell and Penn, real estate commissions in 1920 were 2.5% of the gross sales price, which was then split with the buyer’s agent, similar to how the average 6% fee is split now. These commissions were also a much smaller percentage of the average wages. In 1920 the average commission equated to 7.3% of the average household income. Compare that to 34.9% in 2022. That is almost five times the amount. This is in large part due to the increase in sales prices, but also the more than doubling of the commission.
Does this mean that the time has come for the real estate industry to yield to the pressures of the Internet? It likely means that how commissions are structured will change, very soon. This will align agents’ interests with their clients, on both sides of transactions. However, with the change in compensation will also come a major change in the way buyers find properties. This might reduce the number of agents, it will also reduce buyer commissions, and it might even make housing prices more affordable. These are much-needed changes, especially after the large price increases we have seen over the last two years.
**Antitrust law prevents monopolies or unfair business practices. In this case, the thought is that brokers were price fixing to all of their benefit, but at the expense of the consumers.
