If you’ve been following the real estate industry for the last few years, you’ve most likely taken part in the perennial debate about the future of real estate commission, particularly in the United States. This has been a thorny issue for decades. It reached a fevered pitch in 2019 when the stakeholders who consider the commissions as products of collusion brought a lawsuit against the National Association of Realtors.
Let’s see how real estate commissions work and how they are taking a new shape.
How Do Real Estate Commissions Work?
Here is what realtors do to set real estate commissions:
- Negotiate the Cost of Service: Listing agents charge a percentage of the sale as commission. It ranges between 2-to-3%. These agents are taught in real estate colleges that they can negotiate for higher rates since no agency or regulatory body controls the pricing.
- Some states allow listing agents to charge a non-refundable retainer fee upfront. They argue that this takes care of various services such as marketing. Others allow the agents to set a “fee for service.” This permits listing agents to charge extra for additional duties that they want to perform.
Some states don’t allow listing agents to charge these extra costs.
- Sign Listing Paperwork: A listing agent formally signs the listing paperwork that identifies the property owner’s brokerage and states the amount the licensee charges to represent the seller in that particular transaction.
- Remit the Commissions to the Brokerage: The buyer’s agent gets paid a fraction of the commissions.
In short, the seller is technically footing the bill for the buyer’s and seller’s agents.
Why does this matter? Before the real estate industry evolved, the buyer had no right to hire an independent agent. They worked with agents that were paid as sub-agents of the sellers. This caused a lot of confusion about who the agents owed a fiduciary duty.
The debate on this continues to date, with some people arguing that the older system worked fine as it allowed the buyer to settle the service fee through the seller. Many real estate companies and realtors also think they offer value for money and have to take care of the high operational costs.
The Fluctuations of Real Estate Commissions
The fluctuation of the real estate commissions indicates that the industry is ready for a change. During the recent boom in the real estate industry that last from 2005 to 2007, the commissions fell beyond expectation. They then bounced back during the Great Recession.
Here are some of the factors that drove the fall:
- Reduced demand for homes
- The increased willingness of sellers to pay listing agents for their work
These factors characterized the Great Recession and were responsible for the increase:
- Listing agents were less willing to accept discounts
- Many realtors left the industry
- The demand-and-supply equation became highly favorable for practicing realtors
The Future of the Real Estate Commissions?
From the above analysis, we can see that the supply-and-demand market forces will eventually determine the future of the real estate commissions.
Here are some of the ways the real estate industry is working hard to bring down the costs in the coming days:
- Reevaluating the need for physical space: Real estate companies and realtors shift from working in physical areas to the home. They rent small physical rooms for meeting a few clients.
- Offering lower commission split or flat fee to realtors: This strategy makes the service more affordable.
- Building online brands for agent recruitment and lead generation: The companies rely on advanced SEO strategies to attract qualified buyers and sellers and real estate agents from a wide geographical area in minutes at a lower cost.
We can see that the court cases and the market forces in the real estate industry are likely to continue bringing down the commissions. Unlike in the past, when companies and realtors argued based on the high cost of service, they can now take advantage of technology to cut down the operation costs, reduce the commissions and continue making decent profits.