We caught up with real estate writer, D. Sidney Potter, who writes about commercial and residential real estate, and asked him about the most recent kerfuffle on commission rates in the residential sector for brokers, who usually charge a standard 6% commission.
With the recent November 2023 court holding, and according to the Kansas City Star, a “jury ordered the National Association of Realtors (NAR) and major real estate brokers to pay nearly $1.8 billion in damages, finding the groups conspired to inflate costs for Missourians selling their homes.” In short, the jury felt that the commission agreements between sellers and agents were unfair.
Are real estate agent commissions too high in the U.S.?
I read somewhere, that the US would save $70 billion a year if real estate commissions where the same as they were in the UK. Firstly, I would like to know the source of that data. And secondly, if that were true, then why stop there. Let’s go after the salaries of heart surgeons, Wall Street analysts and NBA basketball stars. It’s actually an elitist argument. One of the great things about being a real estate broker, is that it has a low level of entry. Meaning, you do not need a college degree, Wall Street connections or know how to dunk a basketball to make a lot of money. This is especially true and applicable for African American and Latin American people in the US, where favorable educational settings – typically no fault of their own, are lacking in urban settings, which impedes professional development, which in theory impedes higher income jobs. Hence, brokerage is a great opportunity for those without a favorable socioeconomic setting to make a great living with only one characteristic. That characteristic being determination and persistency. Excuse me, make those two characteristics. And a third characteristic, might be luck. Which never hurts. For curiosity sakes, commissions in the UK are typically 1.3%, and 2.5% in Australia.
How has the Internet effected real estate commissions?
According to Lynn Reaser, Chief Economist with Fermanian Business & Economic Institute, “The Internet has sharply reduced the cost of matching buyers and sellers compared to the common 5-6 percent commissions set up prior to the advent of computers.” Bottomline, over the past 25 years, modern technology has made it possible to find a home for the average consumer without a lot of effort. Hence, economic market forces have worked perfectly in forcing commission rates downward, below 6%. And as a result, this has made it easier for sellers and buyers to connect much more efficiently, and to consummate a deal. Brokerage today is not your Daddy’s brokerage from yesteryear. The days of Leave It to Beaver, where everything was in black and white, are a thing of the past. People scan a pdf document and send it by email, not a certified USPS mail to send an executed Grant Deed. Who does that!
Is 6% a required commission rate?
To answer that question – No, 6% is not required to consummate the services of a residential agent and/or especially a commercial real estate broker. Everything is negotiable. The jury of 12 people in a Kansas City court room apparently did not get that memo – or email. I’m guessing if their decision was made in a boom market – and assuming they’re homeowners, paying a 6% commission on a home in a down market would not be so personal. Where incidentally, the average residential commission in the US is 5.49%, according to recent data from Clever Data Center. It varies market to market, with California having one of the lowest averages, at 4.92%, with a median range of 4.39% to 5.45%. There is no law that says “You must pay 6 percent commission when you sell your home.” Millions of home sellers utilize flat rate, fixed rate, to low-rate commission structures to sell their homes. It’s quite possible, if those commission structures were averaged into the prevailing rates above, that the 5.49% average US commission rate would lessen, and especially so if you factored in the For Sale By Owner transactions (FSBO), which would be anywhere from 0% to 3% commission.
Perhaps if not for the passive aggressive characteristical element of some consumers, many more would negotiate when 6% is clearly outrageous and not applicable. This is especially so, when much of the justification on the commission percentage is tied to the actual price of the home. Most consumers for example – even if wealthy, realize that paying a 6% fee on a $2.5 million home is outrageous. At that percentage, which is $150,00, and nearly enough to buy a small vacation rental in the mountains, is patently not equitable. To be certain, smart money won’t write that check. It’s important to realize, real estate agents work on commission, not salary. And given approximately 20% of the homes they list do not close within the listing period, means they do not get paid. Period. Which is likely the reason homeowners are soft on paying a commission, since they realize the effort of an agent may be all for naught.
In closing, it is likely – and hopeful, that the appeals court that hears the arguments from the NAR will agree with the above sentiment, and that an industry organization with deep pockets like the NAR is not responsible for consumers who failed home economics in high school.
Author Bio:
Writer D. Sidney Potter, former commercial real estate broker in Los Angeles, writes about commercial and residential real estate.
