When my husband and I sold our New York City apartment last year, every broker we interviewed refused to represent it for anything less than a 5% or 6% commission. Any lesser amount, each one said, would mean other agents would refuse to show the listing to their clients or discourage their clients who came across it on an internet listing service from checking it out themselves.
This method of doing business might soon be a thing of the past.
This shady method of doing business might soon be a thing of the past.
The National Association of Realtors agreed to a deal Friday that would, pending a federal judge’s approval of the deal, put an end to a long-standing policy of not allowing registered real estate agents to list properties for sale in the widely used Multiple Listing Services database unless they included the amount of compensation the buyer’s agent could expect to receive. Listing agents would actually be banned from including that number in the posting. The policy changes, which would take effect in July, are part of a $418 million settlement of several ongoing class-action lawsuits that accused the Realtors association of wielding a monopoly-like power over America’s home sellers.
The NAR denied any wrongdoing in a Friday statement.
“NAR has worked hard for years to resolve this litigation in a manner that benefits our members and American consumers,” said Nykia Wright, interim CEO of NAR. “It has always been our goal to preserve consumer choice and protect our members to the greatest extent possible. This settlement achieves both of those goals.”
Despite record-high home prices, American home buyers might have finally caught a financial break. It is widely believed that the changes, if they’re approved by the federal court, will not only significantly decrease the commissions that real estate agents receive, but that they will also bring down the costs associated with buying and selling property. It might, in a best case scenario for buyers, reduce home sales prices.
Here in the United States, a 5-6% commission paid by the seller on the final sales price is so standard we rarely question it. We should question it. There are precious few countries where the rate is so high. In the United Kingdom, the Netherlands and Singapore, it’s about 2%. In Spain, Germany and the United Arab Emirates, it’s 3%.
When online listing services first became a thing, there were widespread predictions that listings that could be directly accessed by eager homebuyers would bring real estate prices down in the United States. But no such thing happened. The likely explanation? Letting buyers’ agents know the commission upfront discouraged them from showing homes which offered them less money. Last year, a working paper that parsed Redfin data confirmed that what my husband and I were told last year is all too real: Homes with lower buyer agent commissions not only took longer to sell, but they were also less likely to find a buyer at all.
When online listing services first became a thing, there were widespread predictions that listings that could be directly accessed by eager homebuyers would bring real estate prices down. There’s another issue, too. The current system incentivizes not only the sellers agent, but also the buyer’s agent to get the highest price for a property. In other words, they make more money if encourage their clients to overpay for a home. It also incentives them to push for a sale regardless of whether it is a good deal for the purchaser. It’s not simply the higher the price, the higher the commission in dollars. It’s that minus a successful sale, the agent representing the buyer will not get paid at all. This isn’t simply a misaligned incentive. It presents a gigantic conflict of interest, one that goes all but unacknowledged by the real estate industry. Buyers were already paying to compensate their agents via higher home prices. They just didn’t know it. Now they will. As a result, it seems almost certain, buyers will seek out ways to reduce their costs. They might well decide against using a broker altogether, by finding homes by perusing listings themselves, and then using a lawyer to help complete the sale. Real estate lawyers are generally either paid by the hour or via a flat fee. In either case, their bill is highly unlikely to total 3% of the purchase price. A brief published by two economists with the Federal Reserve Bank of Richmond this month argued that a method where consumers paid for a la cart services — such as brokers accompanying them to home showings — could save them as much as $30 billion annually, with most of that sum coming straight out of agents’ pockets. It’s little wonder, then, that real estate professionals are scrambling for reasons to decry the new rules, making claims that the new rules are penny wise and pound foolish. Au contraire. As the saying goes, if you aren’t paying for the product, you are the product. This settlement forces that reality out into the open and, by doing so, might well make the process of buying a home simpler, more transparent and perhaps cheaper. That will benefit all home buyers: from the richest to the poorest.
Helaine Olen
Helaine Olen is a managing editor at the American Economic Liberties Project. She is the author of "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry" and a co-author of "The Index Card: Why Personal Finance Doesn't Have to Be Complicated." She has been a columnist for The Washington Post and Slate, and her work has also appeared in numerous other publications, including The New York Times and The Atlantic. 
