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Washington, D.C. – Recent interviews with 281 active buyer agents in 26 metropolitan areas revealed their strong resistance to negotiating commission rates but their willingness to lower these rates when faced with pushback from home sellers. These findings were part of a report written by Stephen Brobeck and Wendy Gilch – The Homebuyer Experience: Contracts and Commissions – published by the Consumer Policy Center (CPC).

“Our research reveals an important reason that commission rates have not declined since the settlement of class action litigation forced changes in realtor practices over a year ago,” noted Brobeck, a CPC senior fellow. “The settlement provided home buyers with new opportunities to negotiate commissions, but the industry has figured out how to minimize these opportunities,” he added.

More specifically, the report concluded that buyer agents make it very difficult for home buyers to negotiate lower rates. Buyers who try to do so are met with a barrage of arguments starting with the statement that negotiation was not necessary because sellers pay the buyer commission. Some buyer agents noted that there was a local “standard rate” while others said that if sellers didn’t offer compensation, that “discourages buyer agents from showing a house,” to quote one agent.

Yet, two-thirds of responding agents said they would accept a lower rate from a seller than the rate the buyer agents requested in the offer. Of those accepting a lower rate, nearly one-third would accept at least one percentage point less. A number of agents said that, since the settlement, more sellers were insisting on lower buyer agent commissions.

Other commission-related findings of the report include:

• Nearly all responding agents (95%) quoted a commission rate of between 2.5 and 3 percent. Most agents quoting rates below this level were from the Boston area. Only one agent quoted a rate above 3%.
• There is evidence that more agents are trying to charge 3% today than three years ago. Since rates were roughly the same in the two periods, some buyer agents may view rate hikes as a “risk premium” to maintain rates above 2.5% faced with seller insistence on lower rates.
• In individual metro areas, there is remarkable homogeneity of quoted rates. “This homogeneity largely reflects the influence of informal industry standards that are supported and enforced by most agents and brokers,” said Gilch, a CPC fellow. “Unlike prices for other consumer services, real estate commissions do not vary with the competence, reputation, and efforts of individual agents,” she added.

The study also reported what buyer agents said about required buyer contracts:

• Nearly half of agents interviewed said they would offer a short-term (“touring” or “showing”) agreement or would agree, if we were dissatisfied, to terminate the contract with no penalty. The report also noted that by the terms of many contracts, the broker could re-assign the buyer to another agent.
• A number of agents ignored the settlement’s requirement that buyers sign a contract before the first showing. Some said no contract was necessary.

The report offers related advice to home buyers and sellers. Noted the CPC’s Gilch: “Buyers should negotiate their agent’s commission upfront and ignore the ‘99% of sellers will pay it’ sales pitch as commissions are negotiable at multiple points. The more you negotiate, the more opportunities you create for savings. On the seller side, watch for uniformity in buyer agent commission requests; it’s often a red flag for unchallenged risk premiums. Don’t advertise a specific rate upfront, and work with listing agents willing to negotiate these fees when offers arrive.”

The report also discusses policy implications. The report recommends the revival and prioritization of complete separation of buyer and seller compensation, with buyers and sellers each compensating their own agents. The most viable way to facilitate this separation is for federal agencies to more easily allow buyers to include buyer agent compensation in their mortgages. Over time, with mortgage lenders also offering this opportunity, this compensation, now implicitly financed as part of the sale price, would be explicitly financed, allowing much more meaningful buyer negotiation with their agents.

“The continuation of near-uniform commission rates, prima facia evidence of price-fixing, is an easy, tempting target for critics,” noted the CPC’s Brobeck. “There will be continuing public criticism and eventually there will be more class action litigation,” he added.

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