Recently in a complete breach of legal precedent, the Department of Justice backed out of an agreement with the National Association of Realtors meant to more explicitly state pro-consumer information about the Multiple Listing Service (MLS) system and associated real estate commissions. Given this abrupt move by the DOJ, it’s important to remind consumers how the real estate commission system works, how it benefits them, and how competitive it is.
The real estate commission structure is so competitive that brokerages are competing every day on compensation and customer service all to the benefit of both buyers and sellers. It’s important to understand there is no set rate; every sale is unique and can be negotiated at any time. This gives consumers many different choices. In fact, because of the increased competition among brokers, Real Trends, a Colorado-based research firm, cited that the average commission slid to the lowest ever: 4.94 percent in 2020.
The real estate commission structure also ensures greater access for first-time, low-income, and many other home buyers who otherwise couldn’t afford a home purchase and professional representation. In fact, 24% of potential homebuyers in 2020 already had to delay purchasing a home by more than five years because of the potential debt and 31% of those were first-time homebuyers. For many, saving for a down payment is difficult enough, and paying their brokers’ commission would put homeownership out of reach or force them to go through the process on their own.
And given the internet only does so much, being able to work with a real estate agent is critical for those very same buyers as they try to traverse complicated, data-heavy, and voluminous information, details, and decisions. That includes everything from coordinating with lenders and managing attorney and inspection reviews to arranging appraisals and advising on zoning. Without professional representation, you are leaving yourself vulnerable to not getting what you want and making a mistake that can have lasting consequences on your financial health.
The real estate commission structure plays an integral role in the success of the MLS. Together, they foster cooperation between brokers providing the best and greatest number of options for buyers and sellers. MLSs also level the playing field, allowing small business brokerages to compete with large ones by having all properties listed in one location and providing equal access to the same listings, information, and pool of buyer brokers. The MLS model in the United States is unique in how it shares the maximum amount of information about listings in order to expose it to the largest number of potential buyers. In other countries, the market is dominated by a small number of individual brokerages who are not required to publicly share that information, so you end up with a system that is very fragmented and inefficient.
The U.S. real estate commission structure and MLSs work for everyone from first-time homebuyers to small business brokerages. This system has staying power because it’s grounded in consumers’ best interests with a cooperative system that prioritizes and benefits buyers and sellers alike.
How Real Estate Commissions Work
A common question from homebuyers and sellers is “How do real estate agents get paid?” This basic information is important to understand before beginning the homebuying process, and even more critical in today’s highly competitive market, where inventory is extremely low and homes stay on the market for a very limited time. In fact, St. Louis City & County homes spent a median of 22 days on the market.
Real estate commissions depend on several factors, which can include (but are not limited to) market conditions, type of representation, types of services provided, among other things. Currently, we’re seeing unprecedented competition among real estate agents, especially when it comes to service and commission options.
How commissions work for sellers
While there are some real estate agents who will charge a flat fee or varied commission models for their selling services, most charge a percentage of the sales price of the home once the deal is done. Commissions can be negotiated at any point throughout the transaction, including at the outset, after the results of a home inspection and after an offer has been made. There is no set rate; every sale is unique. This gives consumers many different choices including which customer service approach, broker and commission model they prefer.
How commissions work for buyers
Real estate agents representing the buyer are typically paid by cooperative offers of compensation from the seller’s agent as an incentive for finding a buyer. This fosters cooperation between brokers providing the best and greatest number of options for both buyers and sellers. It also ensures greater access for first-time, low-income and many other home buyers because it saves buyers from having to pay an out-of-pocket commission to their agent at the closing, on top of their down payment and other closing costs.
The value of a real estate agent
Buying a home is the single largest and most complex transaction most people will make in their lifetime, with volumes of property, neighborhood, transaction, legal and regulatory details to navigate. Having an expert, local professional to manage the process is more important than ever before. In the process, consumers can count on a real estate agent to look out for their needs and provide critical expert advice. The internet only does so much--real estate agents help people traverse complicated, data-heavy and voluminous information, details, and decisions (which is what their commissions pay for). That includes everything from coordinating with lenders, managing attorney reviews and advising on zoning, arranging appraisals, serving as a professional negotiator in a highly competitive market, and advising on the latest trends in the local housing market.
How commissions work for real estate agents
After this involved process, let’s assume all inspections have been completed, and the appraisal comes in at or above the sales price. Real estate agents have probably spent around 30 or more days working on the transaction without getting a single payment and then on top of that the average closing time on a home is 47 days (national average). Even with all this time and effort, it is not certain the sale will go through. Those months of hard work would be rewarded with $0.
This could be viewed as a negative, however, most real estate agents view this as an incentive to make sure they are continually working in the best interest of their clients. Not being able to rely on a bi-weekly paycheck and instead relying on results drives them to work even harder and ultimately, help more and more people achieve the American dream of homeownership.