On Friday afternoon, my real estate agent called with good news.
“Congratulations!” she said. “You just sold your house.”
The agent wished me well and said that she would appreciate a review on her website. And that was that!
A little backstory: The four-bed, 1.5 bath house in the Poconos showed well and I priced it very competitively – at $269,000. Within 72 hours of it being listed on April 1, I had two full-priced offers in hand and expected to receive a third. I wanted to close before May 1, so I selected a buyer who was already in underwriting.
My agent exchanged a few emails with the buyer’s agent over a few minor repair requests, but this was all buttoned up very quickly.
My personal experience speaks to a data trend we’re seeing with agent commissions – when the deal closed, the agents received the full 6% – $16,140, which they’d split evenly.
I had sought out the agent because she had the best track record in the area, worked with a lot of investors on the buy side, and had a history of closing quickly. She made clear in our first conversation that the commission would only drop to 5% if she also found the buyer.
Unlike loan officers, whose commissions are highly regulated by the government, real estate agent commissions are based largely on long-standing industry practices and market forces.
According to RealTrends’ historical data, agent commissions reached a high point in 1991 at an average of 6.10% and fell to a nadir of 4.94% in 2020 before climbing to 5.06% in 2021 and 5.32% in 2022.
What’s especially interesting is that unlike average or low-performing agents, top-performing agents simply don’t lower their commission rates very often.
“I think one of the underreported factors that we first noticed back in 2020 was that the top-performing individual agents and teams were grabbing a rapidly increasing share of the market — a trend that continued in 2022,” Steve Murray, a senior advisor for HW Media, told my colleague Tracey Velt. “If we were to look at the average commission rate for top agents and teams, we would find that it mirrors these results.”
By that measure, we might expect commissions to remain elevated for the foreseeable future.
It wasn’t so long ago that experts said the internet would drastically bring down agent commissions. They were wrong. Relatedly, discount brokerages have promised big savings to sellers for decades. They’ve never caught on.
I briefly considered a “listing only” agent, but chickened out. No one wants to be the fool who steps over dollars to pick up pennies.
Because selling a home is a high-stakes, low frequency transaction, the vast majority of homeowners stick with full-price brokers and bake the fee into the sale price.
But what happens when that calculation collides with the worst period of housing affordability in decades?
Two forces could quickly change the calculus – inventory shortages and strong demographics demand, as well as the specter of class-action lawsuits that attack the traditional agent commission structure.
The legal threat that looms largest is what’s known as the “Moehrl case.” The National Association of Realtors and several of the country’s top real estate brokerages are going to trial in a class-action commissions lawsuit that has potential damages of $13 billion. The plaintiffs essentially argue that sellers are subsidizing buy-side agents and it’s an anti-competitive practice that lacks transparency.
If the NAR and brokerages lose, buyers would likely have to negotiate commissions with their own agent.
The case applies to sellers who paid a commission between 2015 and 2020 but could also apply to “current and future” sellers across 20 MLSs. Should the NAR and brokerages lose the Moehrl case, commissions would almost certainly fall. We could also see portals like Zillow step in and create a platform for buyers to negotiate commissions with agents. The more comfort people gain in negotiating commissions through a portal, the more commission discounts we would see.
We are also seeing new models proliferate, albeit on a small scale and in targeted markets. Opendoor in the fall launched “Opendoor Exclusives,” an Amazon-like marketplace for off-market deals that don’t involve real estate agents. See the house? Like the price? Click the button and buy it. Real estate industry consultant Rob Hahn also recently launched Decentre PX, an online auction marketplace that will allow homeowners to sell without having to pay a commission. In a world of ultra-low existing home sale inventory, where many buyers still have multiple bids and can sell their homes quickly and at full price, I expect other models that put pressure on agent commissions to gain some headway.
Still, it would be foolish to bet against the remarkably resilient traditional real estate commission model. Over the decades it has survived scrutiny from the Justice Department, beaten discount brokerages in federal court, and has even persevered in the Internet age. Consumers have more information than ever, but rarely choose to go it alone or even with discount brokerages or listing-only agents.
Like me, when sellers are dealing with one of the biggest transactions of their lives, they’re too chicken to try the alternatives or simply don’t believe it’s worth the risk.
DataDigest is a newsletter in which HW Media Managing Editor James Kleimann breaks down the biggest stories in housing through a data lens. Sign up here! Have a subject in mind? Email him at [email protected]
Great article with amazing insights!