Unveiling the 6% Mystery: The Evolution of Real Estate Commissions and Signs of Change Ahead

Ever wondered why real estate commissions hover around the 6% mark? Well, historically, sellers would fork over a chunk of their sale proceeds to their broker, who would then split it with the buyer’s broker. This commission, usually ranging from 5% to 6%, translates to substantial sums, indirectly shouldered by the buyer through the home’s listing price.

But hold your horses; change might be in the wind. A recent $1.8 billion antitrust judgment in Kansas City has thrown the real estate commission landscape into question. Allegations of inflated commissions and collusion among brokerages could pave the way for a commission shake-up. Picture this: negotiating not just rates with brokers but also deciding who foots the bill—the buyer or the seller.

New York City has already embraced this shift, set to implement a revamped fee structure.

Despite predictions that the internet would disrupt the 6% norm, the real estate commission persists. The Brookings Institution reports that this percentage is double what’s seen in other countries. While stockbrokers and travel agents dwindle, real estate agents thrive, largely due to the National Association of Realtors’ (NAR) influence, representing a whopping 1.5 million agents.

While the NAR appeals the recent judgment, claiming negotiability in their members’ commissions, signs suggest the conventional home-selling method might be in for a change.

How do these commissions typically work? In a nutshell, sellers foot their agent’s commission and the buyer’s agent’s fee. Brokers then split this commission, usually ranging from 5% to 6%.

For instance, in a $500,000 home sale with a 6% commission, the seller hands $30,000 to their broker at settlement, who then shares it with the buyer’s broker.

Agents insist commissions are negotiable, and alternative models like flat-fee or discount brokers exist. Yet, industry forces often dissuade sellers from straying below the typical 6%. MLS listings, essential for exposure, might reject properties offering no compensation to the buyer’s agent, leaving sellers wary of steering concerns.

The commission structure, dating back to 1913, has deep roots. The NAR’s Code of Ethics emphasized equal commission division among agents, a practice still allowed but not enforced. Commission rates were historically set by regional realtor boards until the Supreme Court intervened in 1950.

Fast forward to 2023, and the $1.8 billion lawsuit looms large. If the commission structure undergoes a metamorphosis, sellers might save big, paying only their agent. However, buyers could face higher costs or forego a broker if they don’t negotiate seller-covered fees.

Changes are already underway, with MLSs like Bright MLS allowing varied commission arrangements, even permitting $0 fees. The Real Estate Board of New York is spearheading a policy separating agent commissions and redirecting buyer’s broker compensation directly from the seller. Brace yourself—residential real estate might be on the brink of a transformative shift.

Related posts: