In recent years, technology has made a host of consumer transactions cheaper—from booking a vacation to buying stocks—but commission rates for selling a home haven’t really budged. That could soon change.
When I started working for real in the 1980’s, brokerage houses charged a minimum fee of $35 to buy or sell stocks. For small purchases, that was a big commission. Now, it’s virtually free to buy or sell. That opened the stock market to almost anyone.
Since dad worked for American Airlines, we didn’t book flights, but flew stand-by. That was ludicrously cheap. As I recall, we only paid the excise tax. A flight to LAX might be $8. For business trips at Caterpillar, we had an in-house American Express travel agent. She was a dirty bird, but that’s not relevant. Travel was handled by travel agents who received incentives from airlines, hotels and other rental car companies. People could book travel directly, but they paid full fare. Some travel agents remain, but they exist for their expertise in destination travel.
Home buyers rarely pay their agents. Instead, sellers pay their own agents, who in turn share their commissions with the buyer’s representative. In the typical transaction, total agent commissions are 5% to 6% of the sale price. For a $400,000 home purchase, that is roughly $20,000, split two ways.
For decades, it wasn’t clear what value realtors added to earn their 7% commission on the first $100k. Both homes I’ve purchased were through realtors because I didn’t pay the commission. Twenty years ago, I sold my home myself to save the commission. It wasn’t difficult, and paying the commission would have eaten up any appreciation of the property.
The plaintiffs in the class actions, who are home sellers in different regions of the country, say the longstanding industry rules amount to a conspiracy to keep costs high in violation of U.S. antitrust law. Buyers, they say, have little incentive to negotiate with their agents because they don’t pay them directly, while sellers are loath to experiment with a lower commission rate for fear that agents will steer clients away from their home.
When selling a home, it makes more sense to pay someone to help stage the house, a small amount to add the home to the MLS, an hourly rate to show the home and if necessary, a commission to negotiate the deal.
When buying a home, it doesn’t make sense to have both agents paid by the seller. Both agents only want to close the deal, with little regard for the interests of the buyer or seller. Getting any deal is better for them than getting the best deal. As a buyer, I don’t need a realtor for anything. I can search the MLS, look at houses and negotiate my own deal. Buyers that want an agent for some aspects of the process can pay for the services that are needed.
The realty market has been a protection racket for a long time. It will confuse some people to see it change, but that is long overdue.
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