Buying a home is expensive these days, but not just because of sky-high prices and burdensome mortgage rates—costly commissions for real estate agents are eating into homebuyers’ bottom lines too. In fact, Americans pay roughly $100 billion in real estate commissions annually, according to a 2023 Keefe, Bruyette & Woods analyst report. But the good news, at least for anyone who isn’t a real estate agent, is a new working paper titled Real Estate Commissions and Homebuying suggests that roughly $30 billion of U.S. real estate agents’ commissions could be slashed by using a new compensation model.
In the paper, Richmond Federal Reserve Bank senior economist Borys Grochulski and vice president of research Zhu Wang argue that the U.S. model for real estate commissions is “puzzling” and an “anomaly” when compared with other systems abroad. The pair note that home sellers in the U.K., Ireland, the Netherlands, Singapore, Sweden, and Norway pay less than 2% in commission to their real estate agents on average, compared to 5.5% in the U.S, according to a 2015 study.
As for buyers, a large portion in many countries, including Australia, Canada, and Denmark, purchase properties without agent representation, while 87% of homebuyers use an agent in the U.S, according to National Association of Realtors data. That’s a huge percentage of Americans choosing to use buy-side agents considering half of all buyers find their own homes online anyway.
All of these issues with real estate agents’ current compensation model contributes to “elevated home prices, overused agent services, and prolonged home searches,” according to Wang and Grochulski. In order to correct the problem, the economists proposed a new “à la carte” model for buy-side real estate agents that could reduce buyers’ commissions by roughly $30 billion.
“The results suggest that switching to a cost-based commission model…may increase U.S. homebuyers’ welfare by more than $30 billion a year,” Wang and Grochulski write, noting that “most of the consumer welfare gains would come from the redistribution of buyer agents’ profits.”
The à la carte compensation model would require both homebuyers and sellers to pay their own agents separately—and independent of the final home price in the transaction—in order to prevent something called “steering,” where agents tend to direct their clients away from properties that have low commissions.
The model would also force homebuyers, but not sellers, to pay for each task that their agent undertakes individually, whether it’s searching for a home, helping with negotiations, or showing properties—hence the à la carte name. The economists argue that this would enable consumers to shop around for individual buyer-agent services, and even haggle for a better price. “Under such a system, competition among agents would likely align agent compensation with cost, and buyers would not overuse agent services,” they write.
The new paper from the Richmond Fed comes at a difficult moment for real estate agents. The National Association of Realtors and several national brokerage firms are facing multiple lawsuits alleging collusion to inflate real estate agent commissions. This, after a jury in Kansas City sided against NAR last fall in a similar case, leaving the organization with a $1.8 billion judgment (which it plans to appeal).
The pressure on real estate agent commissions has been so intense that it even prompted the noted short-seller Spruce Point Capital to put out a short report on Zillow, the real-estate marketplace that derives a large portion of its revenues from buyer agent commissions, warning that the company’s stock price could drop up to 60%. One of the major issues the short-seller cited was analysis that shows recent lawsuits could change the way buyer-agent commissions are handled, leading the total addressable market of commissions to drop as much as 30%.
Still, in spite of the negative impact of changing the current compensation structure for the real estate industry, Wang and Grochulski believe that a new model for commissions is necessary and their à la carte approach would likely be the best option for the economy as a whole. From eliminating agents’ incentive to “steer” clients away from low-commission homes and increasing “housing search efficiency,” to enabling buyers to use multiple agents throughout the homebuying process (putting agents’ time toward “more productive uses”), the economists lauded their model’s potential benefits. “We propose that policymakers may consider shifting to an à la carte model,” they concluded.
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FAQs
In order to correct the problem, the economists proposed a new “à la carte” model for buy-side real estate agents that could reduce buyers' commissions by roughly $30 billion. “The results suggest that switching to a cost-based commission model…
What was the verdict of the National Association of Realtors? ›
NAR, which boasts 1.5 million members, has agreed to pay $418 million in damages to settle a wide range of lawsuits in courts across the nation, including the shocking $1.8 billion verdict awarded by a Missouri jury last October, which found that NAR and two other real-estate brokerages were conspiring to inflate home- ...
Is the National Association of Realtors eliminating the 6% Realtor Commission? ›
NEW YORK - The National Association of Realtors has agreed to pay $418M to settle a lawsuit and eliminate the customary 6% commission that sellers have to pay to their brokers. Instead, sellers and buyers will now be able to negotiate commissions.
How many realtors are there in the US? ›
Realtors are members of the National Association of Realtors (NAR), bound by a strict code of ethics and standards. As of the latest available data, there are approximately 1.5 million real estate agents in the United States.
Who sets the amount or rate of real estate commissions? ›
3. Commission rates are set by the market. The free market organically establishes commission costs within local real estate markets based on service, consumer preference and what the market can bear, among other things.
What is the Keller Williams lawsuit? ›
The lawsuit alleges the existence of an anticompetitive agreement that resulted in home sellers paying inflated commissions to real estate brokers or agents in violation of antitrust law.
What happened with the National Association of Realtors? ›
The National Association of Realtors, a powerful organization that has set the guidelines for home sales for decades, has agreed to settle a series of lawsuits by paying $418 million in damages and by eliminating its rules on commissions. Legal counsel for N.A.R.
What percentage do most Realtors charge? ›
What percent commission do most real estate agents charge? The typical commission under the current model has been somewhere between 5 and 6 percent of a home's purchase price, which is then split evenly between the agent representing the buyer and the agent representing the seller.
How does Zillow make money? ›
Zillow makes money primarily by selling advertising and enhanced profiles to real estate professionals. The company also generates revenue through mortgage interest, commissions from agent partners, and various services like Zillow Closing Services and Zillow 360 Bundled Services.
Is the 6% commission gone? ›
Settlement eliminates 6% realtor commission
The National Association of Realtors announced a settlement on Friday that eliminated its rules on sales commissions, which could lead to a drop in home prices in the U.S.
REALTOR® Demographics
The typical REALTOR® is a 55-year-old white female who attended college and is a homeowner. 65% of all REALTORS® are female, and the median age of all REALTORS® is 55. 73% of REALTORS® were very certain they will remain active as a real estate professional for the next two years.
What percentage of real estate agents are millionaires? ›
A total of 10 percent said that their gross commission income was $500,000 to $1 million, while just 5 percent reported earning commission income of $1 million to $2 million. And the big earners? The survey found that only 1 percent of respondents claimed to have earned gross commission income of $2 million or more.
What state has the highest paid REALTORS? ›
The highest-paying states for real estate brokers
According to GlassDoor, the top five states with the highest real estate broker salaries are New York, California, Nevada, Iowa, and Arizona. Commissions can vary based on city, market, property type, sales volume, and experience levels.
Which type of agent is the most common in the real estate business? ›
A general agent is much more common of a role to see amongst professionals within the real estate industry. One of the most common jobs for which a general agent is used is for that of a property manager.
What is a dual agent? ›
A dual agent is an individual who acts as both the buyer's and seller's agent in a transaction. It is easy to confuse dual agents with designated agents. But unlike a dual agent, designated agents are two separate individuals representing the buyer or the seller.
Do buyers pay realtor fees in NY? ›
The Seller Usually Pays Realtor Fees In New York
In New York, like every other U.S. real estate market, the homeowner/seller pays the realtor fees out of the proceeds from the sale of the property. This means that they are paying for their agent as well as the agent of the Buyer.
What is the National REALTOR Association scandal? ›
The National Association of Realtors (NAR) agreed on Friday to pay $418 million over roughly four years to resolve all claims against the group by home sellers related to broker commissions. The agreement must still be approved by a court. Almost 9 in 10 home sales are handled by real estate agents affiliated with NAR.
What was the verdict of the Sitzer lawsuit? ›
Nonetheless, on October 31, 2023 a federal jury found the defendants guilty and awarded approximately $1.785 billion in damages to the plaintiffs, which will be tripled to over $5 billion under antitrust law.
Who gets the 418 million dollars? ›
Under the terms of the agreement announced Friday, the National Association of Realtors also agreed to pay $418 million to help compensate home sellers across the U.S.
What was the verdict of the Missouri jury commission inflation? ›
A Missouri jury found the National Association of Realtors and other industry players guilty of colluding to maintain high brokerage commissions. The jury awarded $1.785 billion in damages in the case, which was the smaller of two lawsuits concerning brokerage commission practices.
