How often do you hear the term “fee” (as opposed to commission) to refer to a real estate agent's earnings on a lease, sale or mortgage transaction?

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Specific fees earned as a part of real estate transactions will soon become public knowledge.

In 2019, a Redfin survey found an astonishing 61% of homebuyers and 44% of clients who both bought and sold in the past year weren’t sure how their agents were paid or the amount they received.

Without transparency about how fees are earned, clients are unaware that the buyer’s agent’s fee is typically paid out of the home sale proceeds. For sellers ignorant of the fees paid to their agent, this means the final amount received from the sale is a mystery up until closing. For buyers, this gives a false sense of their agent’s role in the transaction.

In other words, the buyer’s agent is in fact paid from the sale proceeds, and thus, they have a monetary interest in a higher home sale amount. Unaware of this dynamic, homebuyers can end up paying higher prices.

The National Association of Realtors® (NAR) knows this, and they believe that transparency will lead to a reduction in fees for their members.

Also well aware of the issue is the U.S. Department of Justice (DOJ), which recently reached a settlement with NAR over the issue of real estate broker and agent fee transparency. Now, the DOJ prohibits NAR policies that:

  • limit the disclosure of commission percentages (fee amounts) on the multiple listing service (MLS);
  • allow buyer’s agents to misrepresent to buyers that their services are free;
  • assist buyer’s agents in filtering and excluding MLS listings based on the fee amount they stand to make; and
  • limit lockbox access to agents affiliated with the MLS, which is controlled by the local Association of Realtors (AOR).

In other words, NAR sets and controls the fee amounts at every point in the transaction and makes it extremely difficult for agents to make a living without abiding by NAR’s rules. Since the vast majority of home sales are reliant on the MLS, these rules make it nigh on impossible for agents seeking to be more competitive by offering lower fees to participate. These antitrust rules violate the Sherman Act, which prohibits monopolies and similar practices that reduce competition, harming consumers.

Related article:

National Association of Realtors settles U.S. Department of Justice antitrust lawsuit

Competition in real estate

While price fixing was outlawed officially in 1981, the national norm for real estate fees is a 6% fee arrangement — 3% of the home sale going to the seller’s broker and 3% to the buyer’s broker. Then, the brokers each pay their agent based on their agreed-to fee split. [People v. National Association of Realtors (1981) 120 CA3d 465]

However, this fee split is often negotiated and can be lowered, especially in high-tier markets. Still, this practice is very hush-hush, kind of like a used car salesman giving their buyers a “special deal, just between you and me.”

When homebuyers and sellers have information about how much similar homeowners are paying their agents, they feel more comfortable asking for more competitive rates. Further, when sellers pay lower fee shares, their sale proceeds are greater, meaning they are able to sell more often. More home sales will increase inventory and turnover, ultimately boosting potential transaction volume for agents.

But agents are scared to offer lower fees, fearing being ostracized by other agents and blowback from their AOR, with the potential to limit their access to listings.

Many real estate brokers incorrectly believe they need to be a member of the California Association of Realtors® (CAR) or the local AOR in order to access or post listings to the local MLS. However, licensed brokers may simply pay to be an MLS subscriber or participant, skipping the trade association membership fees and bureaucracy of membership. [Marin County Board of Realtors, Inc. v. Palsson (1976) 16 C3d 920]

firsttuesday has long advocated for greater transparency and ease of access to all real estate forms and data, including agent and broker transaction fees. At the same time, NAR has continually been hit with antitrust lawsuits in recent years as consumers become more aware of the tight fist NAR has on the housing market. Watch for this development to unfold in the coming months as consumers become more aware of how their agents are paid.

Related article:

Letter to the Editor: Association membership and MLS access