Real Estate Brokerage

New Real Estate Research Shows No Consistent Relationship Between Home Prices and Commission Rates

Report Findings Illustrate That Current Broker Compensation Structure is Both Inequitable and Inefficient

Washington, D.C. – This morning, the Consumer Federation of America (CFA) released a new report on residential real estate brokerage that found no consistent relationship between home prices and commission rates.  “The research provides additional evidence that the structure of agent compensation is both inequitable and inefficient,” said Stephen Brobeck, a CFA senior fellow and the report’s author.

The report was based on a comparison of housing prices and buyer broker commission rates in 17,805 recent sales in 35 cities.

  • In ten cities, the rates were so uniform that meaningful comparisons could not be made.
  • In five cities, rates were fairly similar for all housing price categories.
  • In eight cities, higher-priced homes tended to carry higher commission rates than did lower-priced homes.
  • In only eight cities did higher-priced homes tend to carry lower commission rates.

These findings not only differ from research findings of 20-30 years ago – the most recent comparison of prices and rates – but also defy common sense.  “At the same commission rate, brokers selling a million-dollar home receive ten times the compensation of those selling a $100,000 property,” said CFA’s Brobeck.  “One would expect that commissions on expensive homes would be discounted.  Yet that usually is not the case for buy-side commissions.  In some cities, those selling high-priced homes pay higher commission rates,” he added.

Some brokers have argued that selling a high-priced home  takes more time and skill to sell than a modestly-priced one.  The report suggests that this difference may exist for the sale of multi-million dollar homes.  But the report also cites other brokers who say it takes no more effort to sell a $600,000-$800,000 home than a $200,00-$400,000 house.  As one broker put it:  “Generally speaking, an $800,000 house is no more work than a $300,000 house.”

The report explains this inequity largely in terms of historic industry practices perpetuated by anti-competitive industry rules.  Throughout the 20th century, industry leaders worked to establish uniform, fixed-rate commissions.  The U.S. Department Of Justice (DOJ) thwarted industry efforts to establish, first, rate schedules, then, recommended rates.  But as the landmark 1983 Federal Trade Commission report on the industry concluded:  “We have no evidence that efforts at stopping these per se unlawful conspiracies produce significant change in rates.”  In the 1950s, the five-percent commission was nearly uniform across the country.  Today, most commission rates range between five and six percent, with a striking degree of rate uniformity in most cities.

The 1983 FTC report noted that “the brokerage system is, by its very nature, self-enforcing.”  Key to the self-enforcement of rate-related norms has been the requirement that all properties for sale listed on local multiple listings services (MLSs) carry a mandatory offer of buyer broker compensation.  These offers almost always take the form of a percentage commission and are non-negotiable.  Since buyer brokers are ostensibly compensated by sellers, these brokers have no need to even discuss, let alone negotiate their compensation with buyer clients.

Sellers, on the other hand, are cautioned by their agents that lowering the buy-side commission rate risks buyer agents not showing their property.  Research has documented the steering of clients away from low commission properties to higher commission ones.  Many sellers are also told by their agents that their home will be priced to include the buyer agent commission.

The report also suggests reasons that most sellers of million-dollar homes do not negotiate lower rates for the commissions paid to their listing agents.  These factors include:

  • Limited seller information about agent compensation, as documented by consumer surveys and by research on the lack of information on rates provided by agents and firms.
  • Preoccupation of sellers, especially those trying to match the sale of one home with the purchase of another, with sale price and timing.
  • Concern that trying to negotiate a lower commission rate will result in less than optimal agent service.
  • Unwillingness of most listing agents to negotiate lower commissions – about three-quarters of agents in an earlier CFA survey.

“The typical commission on a million-dollar home would purchase not one, but two new cars,” noted CFA’s Brobeck.  “Yet, especially in a housing market with inflated prices, 5-6 percent rates also discourage first-time homeownership since purchasers typically pay about half this rate through higher sale prices,” he added.

The report suggests that uncoupling listing agent and buyer agent commission rates would significantly increase rate competition and eventually lower fees paid by both sellers and buyers.  Uncoupling would also begin to align rates more closely with agent quality of service.  Today, there is little relationship between rates and agent service.

Several class-action antitrust lawsuits are challenging the coupling of listing and buyer agent rates, DOJ is investigating the issue, and both conservative (CATO) and liberal (Brookings) think tanks have published reports critical of coupled rates.

Despite the constraints of the current compensation system, CFA urges sellers and buyers to discuss and negotiate this compensation with their agent.  Sellers can discuss price-rate trade-offs, the feasibility of lowering the buy-side rate, and the willingness of the listing agent to lower their commission.  In those 41 states (and the District of Columbia) that permit agent rebates, buyers can inquire of their agents whether they are willing to rebate a portion of their commission.