The real estate agent rip-off

The current fee system set up for real estate agents and brokers is a bad deal for all involved.

Let us explain.

Upon closing a transaction, brokers receive a dollar amount equal to an agreed-to percentage of the sale. The broker then passes a portion of this amount on to their agent who handled the transaction — the fee split.

Here in California, the average fee paid by the seller is 4.9% of the selling price, according to Bankrate.

California’s average fee is slightly lower than the U.S. average, which is closer to 6%. This is due to the Golden State’s higher home prices, fast-moving market, and price-fixing awareness, which allows sellers greater room for negotiating.

Editor’s note — While it’s common parlance for real estate brokers and their clients to refer to the agreed-to fee earned as part of a sale as “commission,” firsttuesday has long argued for the use of the word fee instead. This term better represents the level of duty and care exercised by a broker in representing their client’s best interests (and avoids the many negative connotations associated with the word “commission”).

Related article:

Agents: used car salesmen or fiduciaries?

This 5%-6% fee has become normalized and accepted across the industry, and in the past was actually enforced by the National Association of Realtors (NAR). While the term price fixing comes quickly to mind, that practice was outlawed (officially) in 1981 as a violation of anti-trust laws. [People v. National Association of Realtors (1981) 120 CA3d 465]

The practice was outlawed yet again in 2003, when local AORs attempted to sidestep the rules by banning brokerages offering fee discounts from participating in the multiple listing service (MLS). [Freeman v. San Diego Association of Realtors (9^th Cir. 2003) 322 F3d 1133]

While the actual rate may vary by price tier and region, the “fixed rate” for each of these variables persists. In other words, while it can no longer be prohibited, advertising a lower fee to increase a broker’s competitiveness is majorly frowned upon, and a broker has their reputation with other brokers and agents to consider.

Further, it’s difficult for career agents to justify negotiating a lower fee since they:

• do not receive a base salary; and
• complete a limited number of transactions each year.

For example, the average number of transactions completed per agent each year can be extremely low, depending on where in the state the agent is practicing. An agent in a coastal extreme-priced community needs to close only a handful of transactions annually to make a living.

2022 regional sales versus agents

*Sources: California Department of Real Estate (DRE), Redfin

When in a community of low- or mid-tier pricing with a low number of transactions available per licensee, agent and broker incomes suffer dramatically.

In contrast, in places where agents are completing dozens of transactions a year, the loss of a few home sales doesn’t make a big difference over the course of a year. But for an agent who expects to complete only a handful of sales in a year, any sale that falls through is financially devastating.

The fact is, here in the U.S. — especially in California — the agent-to-transaction ratio is imbalanced.

Agents fight tooth and nail for their handful of seller clients each year, and in order to make a living, demand a high fee — this makes logical sense. Some agents are suited to this drive and even enjoy the real estate market’s high risk/high reward environment.

But for most, it’s simply unsustainable.

Disruptors meet varied success

The U.S. agent fee system is fairly unique among other developed countries.

For example, real estate agents in the United Kingdom are paid a small base salary and complete a higher volume of transactions that U.S. agents. As a result, they are able to charge a much lower 1%-2% fee.

Some companies have tried to duplicate this model here in the U.S., with limited success.

One of the big players is Redfin, a national brokerage. Unlike traditional brokerages whose agents operate on an independent contractor basis, Redfin agents are direct employees.

Agents employed by Redfin accept a smaller fee in return for a number of benefits not offered by traditional brokerages. Redfin:

• refers clients directly to agents, so there’s no need for the agent to spend time or money on marketing to grow their network;
• pays a base salary, plus bonuses for good reviews;
• arranges appointments around the agent’s schedule, sends the agent client information and assists the agent with paperwork;
• provides health benefits, including dental and vision, life insurance, 401(k) plan, sick leave and vacation days; and
• covers all real estate fees and dues.

The brokerage attracts clients by offering an enticing 1%-2% listing fee, and cash back for homebuyers, decreasing their closing costs. In return, sellers and homebuyers are expected to do more of the legwork of selling and buying.

Initially, Redfin’s model ran into problems. Namely, clients wanted more out of their agents — not less. Clients demand a lot from their real estate agents, and the feedback Redfin received from their clients was that they were fully willing to pay more money in order to get more services.

Related article:

Other brokerages similar to Redfin have cropped up over the past decade, including UpNest, Clever Real Estate and Ideal Agent. Still other brokerages offer flat fees, such as Houwzer, which charges the same fee no matter the sales price.

While these low-fee and fixed-fee brokerages have not taken over the market by any means, it’s likely you’ve run into them in your practice. Moreover, you’ve likely left with a bad taste in your mouth — we’ve heard the stories.

Plenty of anecdotes exist about agents from low-fee brokerages placing the burden of work on the other party’s agent, since they themselves are overworked. They might also be inexperienced, since buyers and sellers who seek out low-fee brokerages are usually more interested in cost savings than quality services. Or, the team-nature of low-fee brokerages makes contacting the assigned agent next to impossible, sometimes even delaying the transaction.

We aren’t suggesting these low-fee brokerages are perfect. But the dynamics of capitalism suggests there will always be a need for variance beyond the traditional fee rate — prohibiting a free-market fee rate would simply be un-American.

Related article:

Options for fee restructuring

Offering your clients more fee options without sacrificing service helps brokerages stand out from the crowd — a necessity as we slog through the housing market recession which began in 2022 and continues in 2023.

The three main alternatives to the traditional 2%-3% listing fee model are:

1. Hourly fee. Charging an hourly fee is a sound way to ensure agents get paid even for work they do for buyers and sellers who ultimately never close. You will run into reluctance from clients who do not wish to agree to pay when they never buy or when their listing expires. But clients who are not serious about their real estate goals are best avoided anyway. Asking your buyer or seller client to sign an agreement for hourly payment — when they do not end up closing — will weed out the looky-loos and ensure your time is valued. [See RPI Form 520]
2. Flat fee.  Flat fees are most common on “hot deals” when the property sold is too cheap to justify a full fee, or when the fee is not intended to be split with another agent.
3. Smaller fee, base salary. Brokers handling large transaction volumes and a large number of agents can consider the “Redfin model,” which charges clients lower fees and pays its agents a base salary, supplemented by bonuses for good customer feedback. This has been tried by different brokerages with success in many U.S. cities, proving there is a market for this type of service.

Real estate agents: What has been your experience with low-fee brokerages? Are you ever asked to negotiate your fee, and what is your response? Share your experiences with other readers in the comments below.

Related article: