For decades, the process of selling a home has involved a standard practice where the seller pays a commission to their real estate broker, who then splits it with the buyer's broker. This commission typically ranges between 5% and 6% of the sale price, translating into tens of thousands of dollars deducted from the seller's proceeds.
However, this cost is often indirectly passed on to the buyer, as it influences the listing price of the home. But how did this become the norm, and is it likely to continue? Recent developments suggest that the established commission structure in real estate may be facing significant changes.
Legal Challenges and Emerging Alternatives
A pivotal moment came with a $1.8 billion judgment by a Kansas City jury in October, ruling that commissions had been artificially inflated through a collusion among brokerages and industry groups.
This landmark antitrust case, along with similar lawsuits, could disrupt the standard 6% commission rate and alter who bears this cost. The potential shift could empower home buyers and sellers to negotiate commission rates and decide who pays them – the buyer or the seller.
New York City is already moving in this direction, with a change in fee structure set for January 1. Despite the advent of the internet, which many predicted would reduce the traditional 6% commission, the share paid by home sellers remains high, especially compared to other countries.
This resilience is partly attributed to the influence of the National Association of Realtors (NAR), a powerful lobbying group representing 1.5 million real estate agents. While the NAR is appealing the recent decision and maintains that commissions are negotiable, there's growing evidence of shifts in the real estate market.
Beyond the traditional model, alternatives such as flat-fee or discount brokers are becoming more prevalent. However, industry structures like the multiple listing service (MLS) often maintain the status quo by limiting listings that offer lower commissions to buyer’s agents.
The impact of these traditional practices is significant, particularly for sellers who feel compelled to offer standard rates due to concerns about their property being less attractive to agents. As Jordan Barry, a law professor at the University of Southern California, notes, “For most homeowners, their house is by far their largest asset. Giving up 6% of the sale price in commissions is a real burden”.