Washington, D.C. – The 2024 real estate industry settlement removed one key roadblock to much lower buyer agent commissions, but it has not produced lower fees. A new 22-page report identifies a remaining key barrier to lower fees: generally unwarranted consumer suspicions that lower real estate commissions are associated with lower service quality. The report exposes those fears as generally unfounded and urges consumers to seriously consider low-fee agents.
Faced with what is usually the largest financial transaction in their life, consumers are understandably risk averse. Most assume that there must be something wrong with agents who charge half the typical 3-percent fee for their services so they choose to play it safe, working with the majority of agents charging the long-standard rates in their area.
In this report, Consumer Policy Center senior fellow Mark Nadel explains why this assumption is wrong. In a rebuttal to the arguments that traditional agents offer to defend their practices, Nadel exposes the misconceptions that lead consumers to accept the high levels of current rates as reasonable.
U.S. Commission Rates Are High and Bear Little Relation to Service Quality
As many studies have noted, the current level of real estate agent commissions in the United States is about twice the average level in many other comparable nations, including Great Britain, the Netherlands, and Australia. These inflated fees are aided by agents’ insistence that they deserve a commission tied to the price of the home involved.
Thus, while agents helping to sell a $300,000 home generally request a 3% commission ($9,000) for their full, high-quality services, if the price of that very same home skyrockets in two years to $900,000 – say due to gentrification or other neighborhood conditions – the agent will ask for $27,000 for doing the very same work. They ignore the inconsistency of paying painters or plumbers their regular hourly rates to prepare the house for sale, irrespective of the price of the home, but tripling their fee if the sale price triples.
In this case, if a seller complained to a traditional agent that a low-fee agent was willing to charge only 1% ($9,000) to sell the $900,000 home, the latter would contend that the low-fee agent would have to skimp on the quantity and/or quality of services they are offering if they charge so little. Nadel urges sellers to turn the tables and, “Ask the listing agent why they charge double for the same level of work they would do for selling a home priced at half as much.”
Agents Are Not Like Other Salespeople Charging Price-Related Commissions
The report observes that many consumers view real estate agents as salespeople, for whom a percentage-of-sale-price commission is justifiable. Yet Nadel explains why the analogy is flawed. The report notes that for most salespeople, the price of the goods or services they sell is set to recover the employer’s costs (including a commission) plus a specific profit margin. Therefore, if a salesperson doubles their sales revenues, they also double their employer’s profit, justifying the doubling of their compensation. Yet the price of a home is not set to recover the seller’s costs plus a set profit margin; the seller wants to secure the highest price offered, and the seller can only sell their home once. Selling a $900,000 home does not generate triple the profit of selling a $300,000 home.
Some Agents Still Steer Clients Away From Low-Fee Agents
The report also admits that steering remains a problem. This is the practice that the industry has used to protect their many billions/year in excess fees against effective price competition. Traditional agents, eager to see low-fee agents and their low fees fail, are apt to steer their clients away from dealing with the clients of low-fee agents. The US Justice Department and Federal Trade Commission, among others, have long recognized the steering problem, but the difficulty of collecting evidence and the political clout of the industry have stymied those efforts. Although the report acknowledges that consumers who work with low-fee agents may be harmed by steering, it finds that the harm may be diminishing.
Advice to Home Sellers and Buyers
Nadel makes recommendations to both home sellers and to home buyers:
- Home sellers should try to make sure that the listing contract states that the seller retains any funds they have offered to pay to the buyer’s agent if the buyer’s agent has already offered to accept a lower fee. That way the seller can bargain with the buyer over how to allocate those extra funds, rather than allowing them to passively flow as a listing agent bonus. Buyers should try to require their agents to rebate to them any amount the agent receives from the seller that exceeds the agreed-upon fee.
- Home sellers should make sure that they understand how to accurately evaluate the net value to them of a buyer’s bid. They should focus on what amount they retain after both agents are paid, rather than the nominal amount of the bid, as they may retain more from a lower nominal bid.
- Buyers offered the option to avoid viewing homes where the seller has declined to offer to pay the buyer agent’s fee, should refuse that option. They should simply mentally add the cost of their agent to the asking price of such homes when they consider them. Such homes still might represent the best match.
- Buyers should continue to use an online search tool, like those offered by Redfin or Zillow, to identify homes that meet their search criteria to help ensure that their agents do not intentionally overlook homes represented by low-fee agents.
