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Bankrate: Future of real estate commissions grows murky amid legal challenges

By Jeff Ostrowski, Bankrate.com
Published: February 11, 2024, 5:30am

Real estate commissions have survived the rise of the Internet and decades of attacks from disruption-minded discounters. But a flood of legal challenges to the existing brokerage model poses a new threat to the status quo.

An industry-shaking lawsuit making its way through the federal court system could upend the long-established way of paying commissions — namely, the custom of home sellers footing the bill for both their own agent and their buyer’s. This typically totals 5% to 6% of the home’s sale price, taking away a hefty chunk of the seller’s proceeds. In October 2023, a federal jury in Missouri found that the National Association of Realtors (NAR), along with several large brokerages, conspired to inflate realtors’ commissions.

  • How might real estate commissions change?

It’s unclear exactly how or when that verdict will affect commissions, but the case’s price tag alone — $1.8 billion in damages, with the potential of billions more — is roiling the industry. Some predict big changes: One possibility is that home sellers will no longer pay both the listing agent and the buyer’s agent, so homebuyers who want representation might have to pay their own agents separately.

“The Missouri verdict and other court cases may lead to a revolution in our industry, not just reform,” Glenn Kelman, CEO of brokerage firm Redfin, told investors in a recent earnings call.

“The bulwark is falling apart,” said Brad Case, a housing economist at Middleburg Communities who has also worked for mortgage giant Fannie Mae and the Federal Reserve. “The realtors have held this situation together for 100 years, but it’s not tenable for the long term.”

Some see the federal verdict as a sign that the real estate industry finally will have to give in to pressures for discounts. Others say it will be years before the verdict will translate to savings for homebuyers or sellers. Stephen Brobeck, senior fellow at the Consumer Federation of America, expects commissions will ultimately fall below 4%, maybe even to 3%. But he doesn’t see that happening anytime soon.

“Any change is going to happen slowly,” Brobeck said. “The old guard is going to try to keep the old rates.”

  • How much do commissions cost?

If a homeowner sells a property for $400,000, about average for existing homes in the United States, a 5% commission amounts to $20,000. That amount is then split between the seller’s own agent and their buyer’s agent (which hardly matters to the seller, who still has to pay the full amount regardless).

Long ago, 6% was the going rate for real estate commissions; 3% to each agent. But after decades of competition and regulatory scrutiny, the typical commission now is slightly less than 5%, according to data from Anywhere Real Estate, the parent of Coldwell Banker, Century 21 and other large real estate brands. In its filings with securities regulators, publicly traded Anywhere reports that its average commission “side” — half the commission — is currently about 2.4%.

While commissions briefly rose during the Great Recession and again in 2023, rates in general have been falling steadily for decades. For realtors, this decline in commission rates has been offset by rising home prices: They’re getting a smaller piece of the pie in terms of their percentage-based fee, but the pie is getting bigger.

  • About the NAR lawsuit

In the case that went to trial in 2023, Missouri home sellers alleged antitrust violations by NAR and four major brokerages: Keller Williams, Anywhere, RE/MAX and HomeServices of America. Anywhere and RE/MAX settled before trial — paying $83.5 million and $55 million in damages, respectively — while the other defendants opted to take their chances in the courtroom.

The jury ruled against the industry, and a judge ordered NAR and the two remaining brokerage firms to pay $1.8 billion in damages to home sellers. That figure could eventually balloon to $5 billion.

Keller Williams has since settled as well, for $70 million, while NAR and the remaining defendant are appealing. But if the verdict stands, it could mean that a home seller would no longer be required to pay the agent who represents their buyer.

Keep in mind: If the verdict stands, home sellers might no longer be required to pay the agents who represents their buyers.

The success of the Missouri suit, filed on behalf of hundreds of thousands of home sellers in that state, has spawned similar legal complaints in Texas, Florida, Pennsylvania and elsewhere. However, it could be years before those suits are settled and the fallout comes into focus.

  • Other dramas

NAR is also facing other headwinds in addition to the antitrust lawsuit and related cases. A sexual harassment scandal led to the resignation of the organization’s then-president in 2023, and the organization’s next president and longtime CEO have since stepped down as well.

All the drama has created unease and unrest in the ranks. Redfin cut ties with the trade group, requiring many of its brokers and agents to cancel their memberships, and other brokerages have followed suit. In addition, two influential real estate agents have announced the launch of a competing trade group, known as the American Real Estate Association (AREA).

One of the new group’s cofounders, Jason Haber — a broker/agent at Compass in New York City and an outspoken NAR critic — described AREA as an alternative, not a replacement. “We’re not trying to replace NAR. We’re not trying to replicate NAR,” he said. “They have a 108-year head start.”

  • A ‘perfectly competitive’ industry?

The residential real estate industry long has presented a dichotomy. On the one hand, it has essentially controlled the marketing of properties for sale through a nationwide network of multiple listing services (MLSs). That reality has led to grumblings about collusion and price-fixing, along with scrutiny from the U.S. Department of Justice.

On the other hand, real estate sales is a relatively easy business to get into, as evidenced by NAR’s membership rolls of more than 1.5 million agents. To earn a real estate license, an agent typically needs to take a couple of classes and pass a state exam. No college degree is required, and the costs of entry are modest.

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Lawrence Yun, NAR’s chief economist, points to these low barriers to entry as evidence that competition is alive and well: “Real estate is a perfectly competitive industry,” Yun said during the organization’s annual conference in November.

Brobeck, the consumer advocate, disagrees with that assessment. “It’s not a free market right now,” he said. “There’s intense competition for clients. But there’s no competition on rates. In a normal marketplace, you compete based on marketing, but also on the price you charge.”

Meanwhile, the industry mantra long has held that commissions are negotiable, suggesting that sellers and buyers call the shots when it comes to how much they pay agents. In practice, though, consumers buy or sell a home only once every 5 to 10 years, and many aren’t knowledgeable enough about the process to successfully negotiate the rate down.

“Consumers are at a disadvantage,” Brobeck said. “They buy and sell homes infrequently, and they’re mostly concerned about sale price and timing.”

  • Historically, discounters have not succeeded

For decades, detractors have predicted the demise of real estate commissions. These fees were sure to go the way of stockbrokerage commissions and travel agency fees, the naysayers said. Instead, real estate commissions have proven stubbornly resilient.

It’s not for a lack of trying. Many disruptors have seen commissions as a problem to be solved, but most have fallen short of reshaping the industry.

In the early 2000s, for instance, a splashy discounter known as YourHomeDirect (and later Foxtons) offered 2% commissions in New York and New Jersey. But after advertising heavily and gaining market share, it ultimately collapsed.

A decade later, London-based Purplebricks pushed into the U.S., wooing sellers with a flat fee of $3,200. It, too, overestimated demand and pulled out of the U.S. market in 2019.

One high-profile discounter, Seattle-based Redfin, has achieved greater staying power. It launched as a cheaper alternative to traditional brokers and touted listing fees of just 1%, although it has since shifted to focusing on 1.5% listing fees.

  • How home sellers can save on commission

If you’re not keen on paying 5% or 6% of your home’s sale price, here are some alternative options:

—Go it alone: Sell your home without an agent in a “for sale by owner” transaction. Between July 2022 and June 2023, 7% of home sales were sold by owners without the help of an agent, according to NAR data. But selling without professional help is a lot of work to do on your own, and it only saves you one agent’s commission — you’ll still have to pay your buyer’s agent.

—Negotiate: If you don’t want to go it alone, ask agents about their commission rates upfront and compare the terms of each person you talk to. If you think the fee is too high, see if they’re willing to lower it. If both agents in the transaction are from the same brokerage, you might have more leverage to negotiate.

—Hire a discount agent: A low-commission real estate agent will likely charge much less than a traditional agent would — usually 1% to 1.5% of your home’s sale price. (However, you might not receive the personalized attention you would with a traditional realtor.) There are also brokerages and agents who work on a flat-fee basis, earning a preset amount on the sale rather than a percentage of the sale price.

—Sell to a cash-homebuying company: These companies, which often advertise “we buy houses,” pay in cash, close quickly and typically charge no fees. However, if you sell this way you’re likely to get a lower price for your home than you would with a traditional sale.

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