Ask most agents what they charge to sell a house, and you’ll get the standard response: that their fees are negotiable. Ask any agent what they charge to help you find and buy a house, and they’ll say the fee is set by the seller’s agent and comes out of that agent’s commission.
Only the latter statement is true: The agents that buyers use to visit houses and write up a contract are paid their share of the sales commission by the seller’s agent. They are paid whatever the seller’s agent offers – usually half of whatever the seller’s agent charges.
As far as the listing agent goes, commissions are negotiable – at least in theory. In practice, though, they hardly ever are, according to a hard-hitting report from the Consumer Federation of America.
In its analysis of 17,800 home sales in 35 cities throughout the country, the CFA found that in 10 cities, at least 87 percent of sales had identical commission rates. And in 18 others, 70 percent had the same rate.
In a competitive marketplace, that wouldn’t be the case. Rather, the report says, commissions would “vary considerably” because agents have different skill sets and experience levels. They might have to work harder to sell some properties than others, and would likely charge accordingly.
In that perfect world, “it would be very unusual for more than half of all service providers to be charging the same rate for their services,” reads the report.
Said CFA Senior Fellow Stephen Brobeck, the report’s author, “this rate uniformity is striking evidence of the lack of price competition.”
Of course, the industry as a whole does not engage in price setting; that would be patently illegal. Instead, rates are set by individual brokerage firms, Brobeck says. If an agent wants to charge less, they have to seek individual approval from their broker/boss. And if they are given the OK, they usually have to absorb the entire difference.
“Prices are not set in smoked-filled rooms,” Brobeck said, hearkening to bygone days of the industry, “… but the effect on consumers is still the same. When an agent tries to deviate from the norm, he runs into difficulty.”
Brobeck says sellers’ agents also run into trouble if they try to cut into a buyer’s agent’s fee, because some agents tend not to show houses on which they make less money. Even if the buyer’s agent’s fee is raised to draw interest, showings diminish because an agent doesn’t want to be seen as only taking buyers to places where he or she will make more money.
The way out of this conundrum is to “uncouple” the buyer-side portion of the commission from the seller-side, the CFA report advocates. Previous reports have argued similarly: that allowing each side to pay their own agents will improve the bargaining position of both.
As a rule, listing agents – technically, the brokers under whose names they hang their licenses – decide how much the buyer’s agent receives. Splits are all over the ballpark, depending on whatever deal the agent and broker can strike. But usually, the broker takes half the fee the listing agent earns, and the buyer’s agent splits the remaining half with their own broker.
Because the listing agent sets the other agent’s fee, it effectively denies buyers the ability to bargain with their own agents. So says the CFA report – and so do several lawsuits, including one in Missouri that has been certified as a class action. The Department of Justice is also investigating the situation.
Most multiple listing services require that all brokers specify what cut the buyer-side agent will receive. And that, says the report, is the “linchpin” of a system with uniform commissions. All agents can see the buyer-side fee offered on all listings, which tends to “reinforce the legitimacy” of standard rates, as well as discipline agents who are tempted to deviate from the norm.
“Uncoupling” commissions is not likely to happen anytime soon. The powerful 1.4 million-member National Association of Realtors maintains if it happened, buyers would have to pay more at closing. That’s true; the buyer would have to pay their agent’s fee at settlement.
But the CFA does not find that argument very persuasive. Since commissions tend to be added to homes’ asking prices, Brobeck believes the final sales price would be that much lower if there was no buyer-side fee. It may also be possible to add the charge to the buyer’s loan amount.
Until an uncoupling day arrives, if it ever does, buyers can ask their agents to rebate a portion of their share of the commission. While a large majority of agents don’t offer rebates, some do.
In March, the CFA asked 1,040 buyers if they had sought such a rebate. Sixteen percent did, but only 7 percent actually received one. Of those who bought in the past five years, 29 percent asked, but only 6 percent received. Moreover, nine states – Alabama, Alaska, Iowa, Kansas, Mississippi, Missouri, Oklahoma, Oregon and Tennessee – have seen fit to outlaw these rebates.
Still, you can ask, and should. You never know. If enough buyers request rebates, says Brobeck, maybe the industry will sit up and take notice.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at firstname.lastname@example.org.