Even as agent incomes soared in 2021 alongside record-breaking home prices, the actual fee rate or commission charged declined.
Editor’s note — while the term “commission” is commonly used across the real estate profession, firsttuesday feels the term “fee” is more representative of the care, professionalism and fiduciary duty behind a broker’s earnings. Learn more about how real estate agents are compensated.
The average fee paid by the seller to the buyer’s broker fell to 2.63% in November 2021, down from 2.69% a year earlier. Agent fee rates have trended down in recent years, from the average 6% (3%-3% split) of the 1990s to today’s low rate, according to Redfin.
As home prices have soared and inventory plunged, sellers have become more emboldened to demand lower fee rates of their agents.
Here in California, home prices average 18% above a year earlier in the low tier and 23% above a year earlier in the high tier, as of December 2021. Meanwhile, the number of homes listed on the multiple listing service (MLS) inventory is 22% below a year earlier and 42% below pre-pandemic levels nationwide, as of January 2022.
Thanks to years of insufficient residential construction and buyer enthusiasm fueled by the pandemic doldrums and low interest rates, inventory continues to decline across California’s largest metros. Compared to a year earlier, inventory is:
- 37% lower in San Jose;
- 34% lower in Los Angeles;
- 29% lower in San Diego;
- 26% lower in San Francisco;
- 19% lower in Bakersfield;
- 9% lower in Sacramento; and
- 8% lower in Riverside, according to Zillow.
With fewer listings to go around — and higher prices to count on to boost their incomes — agents feel comfortable accepting lower fee rates to ensure they reap the benefits of an exclusive listing.
But what about after today’s high momentum market is over? Will sellers be willing to go back to the old 3%-3% fee rate?
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Not all real estate agents are created equal — so why pay them that way?
It’s a fact that once consumers get used to expecting a certain price for a good or service, they will not want to pay more. Sellers who paid their last agent a 5% fee will not be willing to pay a 6% fee for their next home sale.
The agent’s base 2%-3% rate typically varies based on a number of factors, including:
- the price of the home — higher-priced homes typically demand lower fee rates than lower-priced homes;
- the customs of the region where the sale takes place — for example, rates in the Inland Empire are closer to 2% than 3%;
- the type of property — brokers may charge a higher fee rate or a flat rate for lower-priced property like mobile homes; and
- the personal relationship of the client with the broker — for example, a broker may extend a low fee rate to a friend or frequent client.
However, the rigid fee structure present in the vast majority of brokerages:
- decreases production, or houses-sold-per-agent;
- inflates the number of agents in the profession, thereby reducing income potential for individual agents; and
- decreases the number of hours-worked-per-transaction (agent effort), according to a Massachusetts Institute of Technology (MIT) study.
When each agent charges the same rate, it’s hard for clients to discern between an experienced agent and a greenhorn. Of course, this difference is present at the brokerage fee-split level, where a broker will grant a higher fee split to agents with experience and higher sales volume. But this knowledge is inaccessible and above the heads of most buyers and sellers.
While attempts at disrupting the agent fee model have abounded in recent years (see: Redfin’s salary-based model), the typical fee split still covers the vast majority of transactions.
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Brokers who want to stay ahead and retain the highest number of clients will find alternative ways to ensure agent incomes remain high. This may mean paying lower fees, but capturing more listings, resulting in more transactions per agent. Or, brokers can consider charging:
- hourly fees — especially helpful when hours of agent work do not ultimately result in a sale, helping avoid time wasters;
- flat fees — particularly for lower-priced transactions, like land sales or mobilehome sales; and
- smaller fee rates, plus a base salary for their agents (Redfin’s model).
There are challenges involved in each of these strategies. For instance, setting up salaries requires a lot of cash reserves. And the paperwork involved in tracking hours is daunting. [See RPI Form 520]
But the reward potential is high. When sellers see the opportunity to pay lower fees while still receiving the same high level of service from quality agents, there will be more transactions to go around.
