Hidden Commission amp; Emerging Transparency
Written By: PJ Wade
Tuesday, November 12, 2019
Disruption and transparency are driving forces in many industries, but not when it comes to learning the cost of selling your home or the possibility of negotiating real estate commission, which is based on a percentage of the sale price.nbsp;
Disclosure of fees has become the norm online and off, but not in real estate.nbsp;
Consumers expect to easily, quickly receive personalized online quotes for home and auto insurance and a range of home services, but real estate websites still do not openly post real estate commission percentages or offer self-initiated quotes.
According to the Consumer Federation of America CFA; consumerfed.org, real estate fees are hidden and poorly understood by consumers. CFA is a national organization of more than 250 nonprofit consumer groups, founded in 1968 to advance consumers interests through research, advocacy, and education.
CFA recently >
The secretive nature associated with the annual collection of an estimated more than 100 Billion in commission is compounded in the following ways:
Real estate advice is common on broker and individual real estate sites, but this does not include discussion of brokerage fees, the most significant expense faced by sellers.
Phoning or emailing a brokerage to learn what commission percentage or range they charge, will not automatically result in discovering the cost of doing business with that brokerage.nbsp;
Even though claims of commissions are negotiable are common in the industry, 73 percent of the 200 agents interviewed said they would not negotiate down the commission level they quote.
An online national survey of 2000 representative adult Americans revealed only 32 percent of all respondents and 44 percent of recent home sellers and buyers knew that commissions quoted are almost always 5 or 6 percent.nbsp; On a 400,000 sale that would be a commission of 20,000 or 24,000, respectively.
Sellers typically pay the commission out of the proceeds of the sale. The total commission is split between the listing and selling brokerages, however, details regarding the buyer-side of the commission split is not shared with buyers.nbsp;
Research methodology included the national consumer survey, role-playing interviews with real estate professionals, a review of 263 real estate Google-listed websites, and an in-depth review of existing research on real estate commissions.
CFA attributes consumers lack of commission knowledge with elevated costs for sellers and home buyers, individually and collectively:
Without knowledge of typical commissions in the area, commission splits, and the uniform standard fees, a seller may be charged a higher than necessary commission. Sellers may not investigate area brokerages to locate those offering lower fees because the information is hard to find. Sellers may miss opportunities to negotiate the real estate commission split paid the listing brokerage or the buyer brokerage.
CFA research supports earlier research which revealed buyers can be disadvantaged when some real estate professionals place their commission ahead of the buyers interests. Buyers have been steered away from listed properties offered at lower commission splits.
Price competition is discouraged by the lack of information about commissions, apparently-hidden commission splits, and the charging of uniform real estate fees across large areas. In five of the areas researched, agents quoted the same rates; over the total 20 areas studied, 70 percent of the agents quoted 6 percent rates while 19 quoted 5 percent.
Report author and CFA Senior Fellow Stephen Brobeck offers these Report takeaways: In todays marketplace, we recommend that:
1. Sellers interview several agents making certain to discuss compensation, including whether the rate is negotiable and whether it will be reduced if the listing agent ends up working with both seller and buyer.
2. Buyers discuss compensation with their agents and also independently search portals such as Zillow for properties they might be interested in purchasing. That will minimize the chances for agents steering away from low-commission properties.
Lets take a closer look at a real estate transaction:
The seller is intent on at least netting the price they consider right for their property. That means the significant cost of real estate commission is added to that figure to create the sale price.nbsp;
In actual fact, buyers pay the commission because the sale price they pay for the property includes the real estate commission of 5 or 6 percent. The buyer then finances the sale price through cash down-payment and mortgage. Lower commission would mean less financing for the buyer.nbsp;
According to the Report, lower commission can be achieved by hiring brokers that charge less than area rates or by negotiating commission percentage at the time of listing or before signing the final contract:
Nationally and locally, commission rates tended to be uniform or near-uniform at 5 or 6 percent, although Portland and Baltimore were exceptions. Quoted rates varied somewhat, though buyer-side rates varied less than seller-side rates.
Reportedly, negotiation for lower rates is more successful for high-priced homes.
Sellers may negotiate a 1 or 2 percent drop in commission rate if the listing agent brings the buyer and will also be paid the selling commission. However, seven states have banned this practice of serving two masters or dual agency. Brobeck described dual agency as an oxymoron because you cannot equally represent two people with competing interests. If a real estate professional takes on both sides of a transaction, Brobeck suggests they must become a transactional agent or side with one or the other to the disadvantage of the other.
The Report also revealed that fifteen of the agents surveyed disclosed an application or listing fee that typically was several hundred dollars. Four Baltimore agents charged a fee ranging from 250 to 450; in seven other cities, one or two agents disclosed a fee ranging from 125 to 490. The Report stated it is unclear there is need for this fee in addition to a five to six per cent commission. Always ask if there are additional fees or charges beyond the listing commission percentage and typical closing costs.
With current home prices at historic highs in many areas, sellers and buyers can be so overwhelmed by the amounts involved they lose focus of the true commission cost. Do the math to learn dollar values involved.nbsp;
Keep in mind that uniform real estate commission rates do not reflect differences in the quality of professional services, which include depth of experience, range of services, consistency of results, customization of follow-through, and the unique talents of those delivering listing or buyer services.
Transparency is emerging
On August 29, 2019, technology-based Redfin announced it would be the first brokerage to publish the commission percentage offered to the buyers agent for homes listed with a Redfin agent on Redfin.com. This is intended to help buyers understand costs and incentives in the real estate transaction. A Redfin survey had revealed that 51 percent of recent homebuyers didnt fully understand how the real estate professional they worked with was paid.
As of October 1, 2019, the Northwest Multiple Listing Service NWMLS, which operates across Washingtons Seattle-Tacoma area, added transparency to selling office commissionsthe part of the split that sellers pay to the brokerage representing the buyer. Listings now include the commission percentage that goes to the buyer side of the transaction with the added change that sellers have the choice of how much to pay buyers agents. This is the first of the 600 Multiple Listing Services across the country to allow brokers to publish selling office commissions to support buyers.
Earlier this year, a >
It would help encourage price competition if the commission splits were clearly disclosed to consumers on the property listing. But the real solution would be to decouple commissions, so that sellers were able to price and negotiate the listing agents commission, and buyers were able to price and negotiate the buyers agent commission.
Some have argued that buyers will balk at paying a commission, but that is unlikely to happen if this commission is added to the mortgage, which effectively it currently is. And when both sellers and buyers have greater opportunity to negotiate commissions, these are likely to decline to the benefit of both.
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