As a home buyer or seller, do you really understand real estate commissions? Do you know how much a real estate agent who lists a house for sale typically gets? Equally important, how much the agent who brings you in as a buyer gets paid — in other words, how the total commission pie gets sliced up?
You may have heard that the "standard" commission is 6%, split between the listing agent and the selling agent who represents the buyer. A portion of the agents' splits then goes to the brokerage under whose banner they work.
But 6% isn't the real number. The average commission rate nationwide on home sale transactions hasn't been 6% since 1992, when it was 6.04%, according to Real Trends, an industry publishing and consulting firm that obtains confidential transaction data from brokerages annually. In 2005, at the height of the housing bubble, it was 5.02% and in 2013 it was 5.38%.
Why bring this up? A controversy over disclosure of commission rates in listing contracts erupted in Denver last month, shedding fresh light on what can be a contentious subject, shrouded from public view. The Denver issue: A discount realty firm that offers flat fees — $2,100 to the listing agent, $3,000 to the agent who brings in the buyer — broke ranks with industry practice by publishing the commission percentages promised to buyer agents in listing agreements.
Key details of listing agreements are available online to realty agents who are members of the local multiple listing service, but not to the general public. In Denver, as in many other areas, MLS rules prohibit disclosure of the commission rates offered to agents working on behalf of buyers.
Joshua Hunt, chief executive of Trelora, the flat-fee brokerage at the center of the controversy, believes that buyers deserve complete transparency upfront regarding the commissions offered to agents on houses they are considering.
Though sellers may pay the commission to both the listing and selling agents, the buyer's dollars typically fund the transaction. Buyers should know in advance how much their agent stands to make and be able to negotiate that amount lower than what is offered in the listing contract, Hunt said. After being threatened by the local MLS with severe penalties, Hunt pulled down the commission data from his website.
The dispute in Denver pits discount-fee brokers — and their advocates — against traditional brokerages.
Stephen Brobeck, executive director of the Consumer Federation of America and a longtime critic of real estate industry practices, says "the lack of disclosure of brokerage fees significantly increases consumers' cost of purchasing a home."
Glenn Kelman, CEO of Redfin, a national realty firm with 54 offices in 29 states and the District of Columbia, charges 1.5% to list a home and rebates money to buyers, and he agrees that greater disclosure upfront is essential for today's Internet-savvy consumers.
More traditional, full-fee brokers, including the major franchises and large independent firms, contend that they not only bring superior skills and service levels to their clients compared with discounters — expensive marketing campaigns, high quality photography, staging, among other things — but that their fees are negotiable and available to clients who ask about them.
Frank B. LLosa, a broker at Frankly Realtors, an independent agency in Falls Church, Va., said in an interview that experienced buyer agents often save their clients thousands of dollars through negotiations with sellers and provide more hands-on help from start to finish in transactions than lower-cost competitors can afford.
Where do you come out in all this? First and foremost, be aware of the wide variety of options available to you as seller or buyer.
Some brokerages charge clients a small fee to list their properties on the local MLS, but offer strictly limited other services. In California markets, for example, MLS Access offers to list houses for six months for a $75 fee. Other firms offer menus of services at flat fees.
At the other end of the spectrum are the full-service brokerages that may quote a "standard" 6% commission but whose agents may be open to negotiating something less.
Check them all out, and ask a lot of questions — who does what and who gets what — if you truly want to negotiate a good deal.