Urban Wire More Competition in Real Estate Broker Commission Negotiations Will Lower Costs for All
Laurie Goodman, Ted Tozer, Alexei Alexandrov
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A recent federal jury ruling found that the current process of determining real estate commissions violates antitrust laws, which opens the door for policymakers to design a more transparent and competitive process.

Currently, the seller and their agent agree on the commission fee before the home is listed, typically 5 to 6 percent of the home’s value, and then that amount is split between the seller’s agent and the buyer’s agent once the home is sold. In this process, the seller’s agent cannot afford to offer a lower rate to the buyer’s agent (as the buyer’s agent will be less likely to show the property), and the buyer cannot negotiate the fee with their agent, as they do not have any input. The seller receives the home’s final sales price after deducting the commissions paid to the buyer’s agent and the seller’s agent.

The ruling found that this process inflates the commissions paid to real estate agents, and now policymakers have an opportunity to create a new path forward where buyers and sellers can separately negotiate their broker commissions and mix of desired services. Some sellers may want fewer services or may want to negotiate hourly rates for specific tasks. Rough early estimates suggest that commissions could decrease by 30 percent in a competitive environment, more than a $6,000 decrease on a $400,000 home purchase.

Policymakers could uncouple the commission fees—that is, the buyer and the seller would each pay their own broker—but this solution could create a major affordability barrier to homebuying. If the commission cannot be rolled into the mortgage, the buyer would need extra cash at closing, which most first-time homebuyers do not have. Even if the buyer could increase their loan amount to cover the agent’s commission, the home’s sales price would be the value the buyer’s bid, increasing the mortgage’s loan-to-value ratio and preventing some buyers from qualifying or requiring them to pay higher interest rates.

To best foster competition in real estate commissions, the buyer and seller could each negotiate a commission with their own broker at the beginning of the relationship, meaning both buyer and seller would determine the level of service they want for what price. Both commissions would be paid out of the sales price, as is the case now. A buyer’s offer would include the normal terms, such as the price to be paid by the buyer, contingencies, and costs the seller would pay at closing. But under this plan, the offer would also include the prenegotiated commissions for the buyer’s agent and the seller’s agent. The seller could compare multiple offers with a clear understanding of all the additional costs and determine which one best fits their needs or could present a counteroffer on the terms as they do now.

An example makes this process clearer. Let’s say one buyer offers $400,000, with the buyer’s agent and the seller’s agent each receiving 2.5 percent of the final sale. Here, the seller would net $380,000. If another buyer offers $396,000, with a 1 percent buyer’s agent fee and the same 2.5 percent seller’s agent fee, the seller would net about $382,000. In this scenario, the seller would likely take the second offer, as it nets more money. But the seller could also renegotiate the first offer for better terms. Even with only one offer, the seller can still counter, knowing they may lose the sale.

By having each party negotiate their own broker commissions, downward pressure is put on commissions. And if the commissions become an impediment to a final sales agreement, the brokers will have to decide whether they want to decrease their fees to close the sale or have the transaction fall through.

More competition would lower costs for everyone

Under the current compensation structure, real estate agents have incentives to prioritize more expensive properties and less labor-intensive buyers. We believe this issue is lessened under our proposal.

First, research suggests that there are too many real estate agents, potentially driven by the industry’s compensation structure. Under our proposal, the buyer’s agent and the seller’s agent will charge a fee commensurate with the service provided. Fees may decline for all properties but are more likely to decline more for higher-end properties. Second, relative to other countries, the US is an outlier in the size of the real estate agent’s compensation, and other countries still have functioning real estate markets.

Although we recognize the court ruling will most likely be appealed, delaying the implementation of any new process, we believe our proposal can set a strong foundation to decrease costs to homebuyers, with minimal disruption to the current process. Because the court found that brokers’ commissions, as currently structured, violate antitrust laws, any new process will need to inject more competition. But if buyers must pay their agent out of their own pocket, it will negatively affect first-time and less affluent homebuyers. Our proposal allows competition to be achieved with the buyer negotiating their agents’ commission and could make it more affordable for less affluent and first-time buyers to purchase a home.


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Research Areas Housing finance
Tags Federal housing programs and policies Homeownership Housing affordability Housing finance reform
Policy Centers Housing Finance Policy Center
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