What Is The Future Of Real Estate Commissions?

Is the future of real estate commissions at risk?

Who decided that Realtors make 5-6% commission? It’s not technically set in stone, but it has become the norm in today’s society.

Do Realtors make too much? How come someone who sells luxury properties makes more just because of the price point of the homes?

These are questions I’ve often wondered myself. Most of my clients purchase homes under $400,000 yet the work that goes into the transaction is essentially the same across all price ranges. So should commissions be based on percentages? Or should they be a flat fee?

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Why Are Realtors Paid 6% commission?

I recently had a listing appointment with a man from Britain. We discussed everything from my marketing plan to his garden but as soon as I told him my commission his mouth dropped. He told me that in England they charge 1.5% tops. In fact, the “average commission paid to realty agents in places such as the United Kingdom, Australia and Belgium ranges from 1 to 3 percent.”

So why does America tend to charge 5-6%?

Did you know that there are no “official” commission prices? Realtors can’t legally discuss their commissions amongst each other and we cannot say what Realtors in the area are charging. This is because we cannot be involved in price fixing. We have to allow proper competition to occur and the market to determine our commissions. So why do so many Realtors charge 5-6%? Is it written in our guidebooks somewhere?

Not anymore, but at one point it actually was! Back in the 1940s, the National Association of Realtors insisted on a 6% commission structure for each Realtor. Thirty years later they were actually sued for price fixing, but enough time had passed that 6% became ingrained in people’s minds.

This 6% has become an unspoken standard encouraged by many brokers and brokerages. But, with the influx of technology and online brokerages I think the real estate world is about to be shaken up.

Where Does A Realtor’s Commission Go?

Before you start gaping at the average 6% pay structure, I want to share where that money goes. The 6% is usually split with the buyers agent. After that it has to get split for taxes, fees, gas, and marketing.

Below is a helpful pie chart that will help you better visualize the breakdown of the commission:

Will you save money if you don’t use a buyer’s agent?

Many people think that if they do not use a buyer’s agent, they are entitled to that commission. That is not the case. The seller and listing agent decide on the commission at the beginning of the listing. They sign a listing agreement that states what they will owe the agent upon closing. If there is no buyer’s agent in the transaction, then technically the listing agent is representing the buyer as well as the seller and is owed the full commission.

But, sometimes this is not the case. Listing agreements vary by state, and the seller might have an agreement worked out with the listing agent that states if a buyer’s agent is not involved then they are owed less commission. But, again, that does not mean that the buyer will be entitled to the remaining commission.

So, with the way real estate is set up now, there is no reason not to use an agent. They are paid for by the sellers and they will help handle the transaction for you.

If you’re a home seller, then that is another story.

Do you really need a listing agent to sell your home?

Short answer is no. When you first see your net profits dwindled by commissions it can be difficult to justify the need for a Realtor. You will most likely start toying with the ideas of selling on your own, or hiring a discount brokerage (one that charges less than “standard” commissions).

Like personal finance, everyone’s home buying and home selling journeys are different. Some might see the value in hiring a Realtor, whereas others prefer doing things all on their own. In fact, I’ve written a whole blog post about pros and cons of selling your home without a Realtor that you should check out.

Future Of Real Estate Commissions

With the onslaught of technology, and online brokerages, commissions are going to continue to decline (in my opinion). Check out this graph from Real Trends: