Explaining real estate commissions

Real estate commissions were in the news recently due to a court ruling that resulted in a $1.8 billion verdict in favor of home sellers who accused the National Association of Realtors and two national brokerages, Homeservices of America and Keller Williams Realty, of conspiring to keep commissions artificially high. This ruling has naturally sparked a lot of conversation about commission structure and we thought it timely to bring the topic up as well.

First off, real estate commissions are fully negotiable and there is no set rate; our code of ethics specifically prohibits brokers and agents from discussing commission rates with each other in order to avoid price fixing/collusion. And while there seems to be a general range within which most commission rates end up falling, consumers and the broker they are hiring are the ones who reach an agreement, no one else is involved. This ensures that the ultimate control lies with the consumer (the home seller).

At the heart of the recent lawsuit was the complaint home sellers had about offering a cooperating broker fee to the agent representing the buyer in the purchase of the property. The plaintiffs argued they were compelled to offer a co-broke, which inflated the cost of selling their homes. It has long been common practice for buyer’s agents to get paid by the listing broker, in the form of a percentage of the purchase price. Practically, the expense of the commission is passed on to the buyer as it’s wrapped up in the sale price of the home. Commissions are paid at closing, out of the proceeds of the sale.

The plaintiffs in the case argued that sellers should only pay for the listing broker’s services and that buyers should pay for their agent’s services on their own. Buyers already bear the burden of significant closing expenses (from the downpayment to escrowing taxes, buyers can expect to pay 3-5% of the home’s price for closing costs) so adding a real estate commission onto that will be onerous for many buyers and could result in them opting to forgo representation, to their detriment. Bear in mind, none of the plaintiffs argued that the sale price of their home should have been reduced by the percentage they begrudgingly offered as a co-broke fee, they simply felt they were over charged for the services they engaged their broker to provide.

The recent court ruling was in Mississippi, though the potential ramifications could be felt nationwide. In the Capital Region, we continue to see the vast majority of listing brokers offering a typical cooperating broker fee. We believe that the current practice of offering a co-broke is the most effective way to market our listings to the widest pool of buyers. At McSharry and Associates, we will always talk transparently and honestly with our prospective clients about our commission structure to arrive at a plan that is acceptable to all involved.

Over the next couple of blog posts, we will delve into the services that we offer both our seller and buyer clients and why we strongly believe they are services worth paying for.

Photo credit: iStock.com/malerapaso