Real Estate Commissions’ Effect on Housing Prices

I’ve found a few more articles on the relationship of real estate commissions to housing prices.  Folks, your house is probably your biggest asset.  If something is driving up the cost of your ability to own this asset, you need to know all about it.

In How Counterfeit Buyer Agents Inflated the Housing Bubble, Bill Wendel muses about how “traditional” agents posing as buyers agents may actually contribute to higher prices paid by the average home buyer.  

Mark Nadel’s resarch paper for the Cornell Real Estate Review about real estate brokerage commissions.   It’s long but worth the read.  Here are some buyer-related excerpts:

Residential real estate brokers and salespersons (agents of brokers) have long quoted their fees as a straight percentage of a home’s sale price. This traditional formula, however, ill serves the interests of both home buyers and sellers, and is a primary reason why such fees may be inflated by $30 billion annually.

According to the FTC’s report, Competition in the Real Estate Brokerage Industry,  real estate brokerage commissions have dropped over the last ten years in percentage points (from 6.1% total in 1991 to 5.02% in 2005). BUT, the actual median commission has risen (from $9,389 in 1991 in 2006 dollars to $11,549 in 2005, again in 2006 dollars). 

Regarding how buyer agents are paid:

The practice of remunerating the buyer’s broker from seller’s proceeds can harm consumers in three ways:

Agents May Fail to Show Buyers Some Attractive Options. Leaving the payment of buyer brokers to sellers or their brokers can lead agents with buyers to withhold options from buyers, despite fiduciary duties, if 1) the co-op fee offered to the buyer’s broker for a home is too low, 2) the seller appears to expect free assistance from the buyer’s broker, or 3) the agent wants to discourage price competition.

Most home buyers appear unaware that, like most salespeople, agents aiding buyers areapt to make a greater effort to sell those listings that offer them the highest fee. Recognizing this, many discount brokers representing sellers offer to pay buyer brokers the going rate in the market, limiting discounting to reductions in their own share of the commission.

Buyers could attempt to correct for the pressures leading agents to fail to show them attractive options by offering to make up the difference between the fee a seller offered and the going rate; yet most buyers appear unaware of the current fee mechanism.

This does happen – not to my clients, though.  My buyer clients see FSBOs, I contact home owners who don’t have a house on the market if it might suit my buyers and I will show clients properties with commissions far below what I am normally paid. 

Reduc(es) Buyers’ Incentive to Negotiate. By encouraging buyers to believe that it costs them nothing to use a broker, the current fee arrangement deters most buyers from negotiating over their agent’s broker’s fee. Hence, there is little pressure to reduce the fee paid to buyer brokers from half of the “going rate,” e.g., half of six percent. Thus, most MLS listings offer buyers’ brokers half the standard commission charged.

I don’t entirely believe that most agents give half the commission to the buyer’s agent.  In many of my classes through the local realtor associations, several instructors have encouraged an unequal sharing of the commission in favor of the listing agent who is always believed to incur the most expenses.  Um, have you seen my expenses for gas, selling agents, while I’m driving around my buyers to your listings???  And let’s not fool all those sellers into thinking that all the advertising you are doing in the paper with your pretty picture is actually working to sell their house.  Sorry..back to the reading material.

Unnecessary Fees (are) Allocated to Pay Buyer Brokers. Those who buy homes without a broker’s help usually ask sellers to reduce the sale price by the amount that would have been paid to the buyer’s broker. Sellers may desire to comply, but listing agreements usually give the listing broker the right to keep the full fee.

Translation – you think you’ll save money by going directly with the listing agent.  Maybe…but do you know how much the house you’re buying is really worth.  The list price is not the value – it’s what the seller thinks it’s worth and maybe the listing agent agrees but not always and not even most of the time.  A real buyer’s agent will actually show you the prices of homes that have sold in the area and will help you determine a price to pay for it.