Study finds typical fee structure harms clients, experienced agents

Real estate agents have long relied on the 3% normative fee split. Recent years have seen this challenged on various fronts, including attempts at flat fee and reduced fee brokerages, at both the local and national level (see: Redfin).

A recent study out of the Massachusetts Institute of Technology (MIT) highlights the inefficiencies inherent in the traditional fee split model.

Here in California, the typical fee is around 2%-3% of the purchase price for each broker on the transaction. How much of this the agent receives depends on their fee split agreement with the broker. [See RPI Form 505]

This base 2%-3% rate can vary 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— for example, 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.

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How real estate agents are compensated

While the MIT study uses data on agents in the greater Boston area, it’s still applicable to agents here in California. It identifies the inefficiencies caused by the rigid fee structure present in the vast majority of brokerages. It finds this rigid fee split:

• decreases production, or houses-sold-per-agent;
• inflates the number of agents in the profession; and
• decreases the effort of agents, or hours-worked-per-transaction.

When each agent charges the same rate, it’s hard for clients to discern between a great agent and one with less acumen and experience. Of course, this difference is present at the brokerage fee-split level, where a broker will grant an agent a higher fee split in exchange for their years of experience and high sales volume. But this is a level inaccessible and above the heads of most buyers and sellers.

Attempts at disruption

Any attempts to disrupt the typical fee split structure are met with resistance from industry insiders. But the inefficiencies of the traditional fee split don’t just impact clients — there are reasons why even insiders should be concerned.

In particular, the current,  structure of pre-set fee rates encourages a steady flow of newbie agents into the profession. The brokers who employ these newcomers are rewarded for their inexperience by receiving the same 2%-3% fee split that their more experienced agents receive — except these brokers receive a bigger cut due to the new agents’ lower fee split, an interesting paradigm. Once the new agent’s list of contacts is bled dry, these agents have the choice to either exit the profession or persist and become one of those more experienced agents.

It can go either way for new agents, but for those who lack the organization and stamina to continue in the real estate industry, these newbies are merely interfering with sales which would have been handled (more expertly) by career real estate agents.

We’re not trying to knock new real estate agents — every career agent started somewhere. But there is a big difference in the level of service and expertise from an agent who is in it to sell a few houses before moving on to the next opportunity, and an agent who is eager to learn and grow in this tricky profession. Introducing variable fee splits for these situations would have a positive impact in differentiating between these two types of agents, helpful for clients and other real estate professionals.

Editor’s note — While the term “commission” is commonly used across the real estate profession, first tuesday feels the term “fee” is more representative of the care, professionalism and fiduciary duty behind a broker’s earnings.

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Editorial: Do real estate agents receive commissions or fees?