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Real estate commissions paid by buyers aren’t competitive, study shows

Home-with Fore Sale Sign g97c2c7acb_640An analysis of real estate buyer agent commission rates on 17,805 home sales in several dozen cities throughout the United States found a high degree of uniformity among these rates.

A new report – “Real Estate Commission Rates in 35 Cities: Uniformity and Variation” –released by the Consumer Federation of America or CFA showed that:

  • In 10 cities, at least 87 percent of the home sales had identical commission rates.
  • In 18 cities, at least 70 percent of the sales had identical commission rates.
  • In 24 cities, at least 88 percent of the sales had commission rates between 2.5 and 3 percent.

“This rate uniformity is striking evidence of the lack of price competition in the residential real estate industry,” said Stephen Brobeck, a senior fellow at the CFA and the report’s author. “An industry rule requiring listing agents to set buyer agent rates prevents home buyers from negotiating these rates.”

While nine states prohibit buyer rebates, in the rest of the country buyers can ask their agents for a rebate of a portion of the buyer agent commission. However, the study also found that few consumers request a rebate and even fewer buyers receive one. 

In a survey, 17 percent of respondents said they had asked for a “rebate,” but only 7 percent said they’d received one. For those who had purchased a home in the past five years, 29 percent said they’d asked a rebate, but only 6 percent said they’d received one.

Real-Estate-Table Buyer Agent Rates in CitiesIn November 2021, the CFA released a report on the uniformity of rates paid by buyers in 21 eastern cities. The new report added 14 western cities to the sample. It showed that buyer rates are lower on the east and west coasts than in the middle part of the country.

Thirteen of 14 coastal cities – including Bakersfield, California, Las Vegas, and Phoenix – had median rates of 2.5 percent or lower – all but Miami. In comparison, 17 of 21 interior cities had rates above 2.5 percent – all but Chicago, New Orleans, Birmingham, Alabama, and McAllen, Texas.

In 33 of the 35 cities, real estate agents made available MLS information on home sales. In Portland, Oregon and Washington state, rates paid by buyers were found on Redfin home listings.

Tips for home buyers

The CFA offers these suggestions when you purchase a home:

  • Pay attention to rates buyers are offered by buyer agents. Now that the industry allows publication of these rates on home listings, they’re increasingly accessible to consumers, most often on Redfin and Zillow website listings. If your agent is reluctant to show you a home, it may be because the offered buyer agent rate is low. If so, press your agent to show you the property, or find an agent who won’t “steer” you away from low-commission rate homes.
  • Ask your agent if they’ll rebate a portion of their commission to you. Nine states – Alabama, Alaska, Iowa, Kansas, Mississippi, Missouri, Oklahoma, Oregon, and Tennessee – prohibit these rebates, and most agents in the remaining 41 states and the District of Columbia aren’t willing to provide rebates. However, a few agents advertise their willingness to offer rebates, and some agents will do it if asked. The more home buyers that request rebates, the more willing the industry will be to provide them.

Industry norms and an MLS rule help explain rate uniformity

The MLS rule requiring sellers to set buyer agent rates allows realtors to informally establish rate norms, which keeps rates high and preserves the possibility of big paydays, according to the CFA report.

“To a large extent prices are uniform because realtors want to preserve $50,000 commissions on the sale of million dollar homes and $25,000 paydays on the sale of $500 thousand dollar ones,” Brobeck said. “It is not at all clear why the work of a realtor, especially if they double-dip, should cost more than the price of a car or an expensive medical procedure.”

The report found that those cities with the highest rates had the most uniform rates.

“The association of high rates with high-rate uniformity suggests that industry norms are stronger in some cities than in others,” he said.

The report also had more evidence that, in some cities, commission rates paid by buyers are dropping from 3 to 2.5 percent.

“Sellers know their home is a hot commodity and will likely attract multiple offers no matter what, so they’ve started offering the buyer agents a 2% or 2.5% fee instead of 3%,” Brobeck said. “Why would you offer 3% when you know you could offer less and sell your home for the same price?”

Untying listing and buyer agent rates would promote rate competition

In a free-market economy, the residential real estate industry shouldn’t deny home buyers the ability to negotiate commissions paid to buyer agents, he said.

This denial had led to a class action lawsuit, an investigation by the U.S. Department of Justice, and complaints from industry critics.  These challenges want to see the untying of commission rates, so that buyer commission rates aren’t set by sellers and their listing agents, but by buyer agents who negotiate with their clients. 

“Untying rates not only would eventually reduce commissions by an estimated 20 to 30 billion dollars a year but would also much more closely align agent service with agent compensation,” said Brobeck. “Today, it is difficult to see much of a relationship between agent quality of service and agent compensation.”

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