This article was originally posted on Forbes.com
by Aly J. Yale
A new study shows that most real estate agents (and the brokerages who employ them) are less-than-forthcoming about their commission fees—a practice that researchers say has reduced price competition and stalled negotiating power for American consumers.
The analysis, recently conducted by the advocacy group Consumer Federation of America, looks at more than 260 agent and brokerage websites, as well as published research on the subject. A national survey of 2,000 consumers and conversations with 200 agents across 20 cities were also factored in.
What emerged was a picture of secrecy and mystery. As the report reads, “For most major consumer services, consumers can easily access information about prices … That is not the case with real estate commissions.”
According to the study, the majority of large brokerage firms don’t publish commission fees on their websites. In fact, out of the 263 sites analyzed, only 11 disclosed any sort of information about fees. What’s worse: Even contacting the firms and agents directly didn’t produce results, the report shows.
“General phone inquiries to real estate firms usually do not elicit information about commission levels during those calls,” the study reports. “When asked directly by a home seller about the commission charged, many agents are reluctant to discuss these costs.”
According to Daryl Fairweather, chief economist at real estate brokerage Redfin, this lack of pricing transparency only hurts the consumer.
“Anytime that there’s less transparency around prices, consumers don’t have the ability to shop around and that leads to less competition,” she said. “With less transparency, then agents have the ability to keep fees high because no one is really asking about them. When there’s more transparency, it will encourage more agents to set prices that are competitive—maybe start offering refunds or start lowering their listing fees.”
To be clear, most listing agents charge a 6% commission—a portion of which goes to the buyer’s agent. The practice has come under fire recently, with multiple class-action suits pegging the practice as anti-competitive and even a violation of the Sherman Antitrust Act.
Legal proceedings aside, the CFA study found that these “commission-splits” can lead to steering—agents pushing their buyers toward higher-commission listings and away from those that might mean less cash.
Of course, not every agent does this—or even a large share of them. But the temptation is there nonetheless. As Fairweather explains, “I think most agents are acting in their client’s best interest—but it doesn’t mean that they all are. It’s just not set up for agents to be completely forthcoming.”
Redfin recently made moves to increase transparency around commissions by publishing all buy-side commission splits on its website. REX Real Estate is another brokerage that’s crystal-clear about its fees. In fact, its agents are paid with an annual salary—not commissions as is standard in the industry.
Jonathan Friedland, REX’s senior vice president of communication and policy, calls current agent commission fees “outrageous.”
“They’re totally out of line with the value provided on most occasions by Realtors,” he said. “Even though you have sites like Zillow and Trulia, which have made it much easier for the consumer to find the property—and that, in turn, has meant that the labor input from the broker has gone down over time—they’ve managed to keep their fees as high as they were 50 years ago. They’ve also done so even though the appreciation of houses has been so much. So, 6% of an average house now is hell a lot more than it was 20 years ago.”
In most countries, real estate commissions are significantly lower than the 6% average in America. In the U.K., commissions typically fall between 1 and 2%. In Australia, they’re slightly higher at 2 to 3%.
Doug Miller, executive director at Consumer Advocates in American Real Estate, argues that U.S. fees could mirror these if commission splits went away.
“Most buyers find the property they want to buy on their own, on the internet and without a Realtor, but are forced to pay for one anyway,” Miller said. “If buyers got to pay their own brokers directly, most wouldn’t get one, many would use an attorney instead, and commissions would drop to the levels we see in the U.K.”
With the commission-related class-action suits currently ongoing—not to mention the Department of Justice’s interest in the claims—there’s a chance we could see just that, notes Stephen Brobeck, a senior fellow at CFA and the study’s lead researcher.
“The industry is beginning to feel more pressure from litigators and regulators to increase price competition,” Brobeck says. “We believe that more visible pricing would not only lower costs for consumers but also increase consumer confidence in agents who play a critical role in most home sales.”
Until that happens, though, there are steps consumers can take to take back the power—including negotiating with their agents. According to the CFA study, about a quarter of interviewed agents were open to negotiating their fees or at least reducing them in certain scenarios.
Education can also help buyers and sellers better protect themselves. A survey by CFA shows that most Americans are unclear about agent commissions. Of those who had bought or sold a home in the last five years, only 44% knew how much their agent was paid. A Redfin study earlier this year saw similar results, with just 38% of recent homebuyers saying they “had some idea” of how much their agent was paid and where the money came from.
If you’re working with an agent, Fairweather says to ask questions, get a breakdown of the commission structure from the get-go, and don’t be afraid to ask for a rebate or refund.
At the end of the day, the more you know, the better. As Friedland puts it, “It’s caveat emptor. Know what you’re paying for, know how much you’re paying for it, and know who’s paying for it.”