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Hidden Commission & Emerging Transparency

Hidden Commission & Emerging Transparency

How easy is it to find out how much real estate commission you’ll pay to sell your home—before you sign a listing agreement?

Disruption and transparency are driving forces in many industries, but not when it comes to learning the cost of selling your home or the possibility of negotiating real estate commission, which is based on a percentage of the sale price. 
Disclosure of fees has become the norm online and off, but not in real estate. 
Consumers expect to easily, quickly receive personalized online quotes for home and auto insurance and a range of home services, but real estate websites still do not openly post real estate commission percentages or offer self-initiated quotes.

According to the Consumer Federation of America (CFA; consumerfed.org), real estate fees are hidden and poorly understood by consumers. CFA is a national organization of more than 250 nonprofit consumer groups, founded in 1968 to advance consumers’ interests through research, advocacy, and education.

CFA recently released the second Report in its series on the lack of real estate agent transparency on representation, compensation, and service. “Hidden Real Estate Commissions: Consumer Costs and Improved Transparency” explores “the secretive nature of real estate commissions which prevents true price competition and inhibits consumer understanding of the high cost of real estate commissions.”

The “secretive nature” associated with the annual collection of an estimated more than $100 Billion in commission is compounded in the following ways:

• Real estate advice is common on broker and individual real estate sites, but this does not include discussion of brokerage fees, the most significant expense faced by sellers.
• Phoning or emailing a brokerage to learn what commission percentage or range they charge, will not automatically result in discovering the cost of doing business with that brokerage. 
• Even though claims of “commissions are negotiable” are common in the industry, 73 percent of the 200 agents interviewed said they would not negotiate down the commission level they quote.
• An online national survey of 2000 representative adult Americans revealed only 32 percent of all respondents and 44 percent of recent home sellers and buyers knew that commissions quoted are almost always 5 or 6 percent.  On a $400,000 sale that would be a commission of $20,000 or $24,000, respectively.
• Sellers typically pay the commission out of the proceeds of the sale. The total commission is split between the listing and selling brokerages, however, details regarding the buyer-side of the commission split is not shared with buyers. 

Research methodology included the national consumer survey, role-playing interviews with real estate professionals, a review of 263 real estate Google-listed websites, and an in-depth review of existing research on real estate commissions.

CFA attributes consumers’ lack of commission knowledge with elevated costs for sellers and home buyers, individually and collectively:

• Without knowledge of typical commissions in the area, commission splits, and the uniform standard fees, a seller may be charged a higher than necessary commission. Sellers may not investigate area brokerages to locate those offering lower fees because the information is hard to find. Sellers may miss opportunities to negotiate the real estate commission split paid the listing brokerage or the buyer brokerage.

• CFA research supports earlier research which revealed buyers can be disadvantaged when some real estate professionals place their commission ahead of the buyer’s interests. Buyers have been steered away from listed properties offered at lower commission splits.

• Price competition is discouraged by the lack of information about commissions, apparently-hidden commission splits, and the charging of uniform real estate fees across large areas. In five of the areas researched, agents quoted the same rates; over the total 20 areas studied, 70 percent of the agents quoted 6 percent rates while 19% quoted 5 percent.

Report author and CFA Senior Fellow Stephen Brobeck offers these Report takeaways: “In today’s marketplace, we recommend that:

1. Sellers interview several agents making certain to discuss compensation, including whether the rate is negotiable and whether it will be reduced if the listing agent ends up working with both seller and buyer.
2. Buyers discuss compensation with their agents and also independently search portals such as Zillow for properties they might be interested in purchasing. That will minimize the chances for agents steering away from low-commission properties.”

Let’s take a closer look at a real estate transaction:

• The seller is intent on at least netting the price they consider right for their property. That means the significant cost of real estate commission is added to that figure to create the sale price. 
• In actual fact, buyers pay the commission because the sale price they pay for the property includes the real estate commission of 5 or 6 percent. The buyer then finances the sale price through cash down-payment and mortgage. Lower commission would mean less financing for the buyer. 

According to the Report, lower commission can be achieved by hiring brokers that charge less than area rates or by negotiating commission percentage at the time of listing or before signing the final contract:

• Nationally and locally, commission rates tended to be uniform or near-uniform at 5 or 6 percent, although Portland and Baltimore were exceptions. Quoted rates varied somewhat, though buyer-side rates varied less than seller-side rates.
• Reportedly, negotiation for lower rates is more successful for high-priced homes.
• Sellers may negotiate a 1 or 2 percent drop in commission rate if the listing agent brings the buyer and will also be paid the selling commission. However, seven states have banned this practice of “serving two masters” or dual agency. Brobeck described dual agency as “an oxymoron” because you cannot equally represent two people with competing interests. If a real estate professional takes on both sides of a transaction, Brobeck suggests they must “become a transactional agent or side with one or the other to the disadvantage of the other.”

The Report also revealed that fifteen of the agents surveyed “disclosed an application or listing fee that typically was several hundred dollars.” Four Baltimore agents charged a fee ranging from $250 to $450; in seven other cities, one or two agents disclosed a fee ranging from $125 to $490. The Report stated it is “unclear” there is need for this fee in addition to a five to six per cent commission. Always ask if there are additional fees or charges beyond the listing commission percentage and typical closing costs.

With current home prices at historic highs in many areas, sellers and buyers can be so overwhelmed by the amounts involved they lose focus of the true commission cost. Do the math to learn dollar values involved. 

Keep in mind that uniform real estate commission rates do not reflect differences in the quality of professional services, which include depth of experience, range of services, consistency of results, customization of follow-through, and the unique talents of those delivering listing or buyer services.

Transparency is emerging…

• On August 29, 2019, technology-based Redfin announced it would be the first brokerage to publish the commission percentage offered to the buyer’s agent for homes listed with a Redfin agent on Redfin.com. This is intended to help buyers understand costs and incentives in the real estate transaction. A Redfin survey had revealed that 51 percent of recent homebuyers didn’t fully understand how the real estate professional they worked with was paid.

• As of October 1, 2019, the Northwest Multiple Listing Service (NWMLS), which operates across Washington’s Seattle-Tacoma area, added transparency to selling office commissions—the part of the split that sellers pay to the brokerage representing the buyer. Listings now include the commission percentage that goes to the buyer side of the transaction with the added change that sellers have the choice of how much to pay buyers’ agents. This is the first of the 600 Multiple Listing Services across the country to allow brokers to publish selling office commissions to support buyers.

• Earlier this year, a class-action law firm filed an antitrust lawsuit focused on hidden splits. Report author Brobeck explains: “The lawsuit argues that the current form of commission splits is anti-competitive and anti-consumer.  Neither buyers nor sellers have a real opportunity to negotiate these rates today. Most buyers are not informed of the rates, unless they ask, until closing. Most sellers are urged by their agent to compensate buyer agents adequately enough so they don’t steer clients away from these properties.

It would help encourage price competition if the commission splits were clearly disclosed to consumers on the property listing. But the real solution would be to decouple commissions, so that sellers were able to price and negotiate the listing agent’s commission, and buyers were able to price and negotiate the buyer’s agent commission.

Some have argued that buyers will balk at paying a commission, but that is unlikely to happen if this commission is added to the mortgage, which effectively it currently is. And when both sellers and buyers have greater opportunity to negotiate commissions, these are likely to decline to the benefit of both.”

Additional resources:

  1. CFA’s first report, January 2019:  “The Agency Mess: Home Buyer and Seller Confusion and Costs Related To Diverse and Poorly Enforced State Laws about the Role and Responsibility of Real Estate Agents” explores dual agency and other agency flaws. 
  2. PJ Wade’s Decisions & Communities article “Agency Mess” Report: Are You Doing Enough?

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