Real Estate Agents After Fixed Commissions

Image Caption: Real estate agents arrive at a brokers tour. (Photo by Justin Sullivan/Getty Images) GETTY IMAGES

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Real estate agents have been slapped with a court ruling that their commission practices violate antitrust laws. CNN reported, “… the verdict handed down in a Missouri court on Tuesday that found NAR and two brokerage firms, Homeservices of America and Keller Williams Realty, were liable for $1.8 billion in damages for conspiring to keep commissions artificially high, may mark the beginning of the end of how homes are bought and sold.”

The decision will be appealed, the defendants said, so not much will change for a while. But if the ruling is sustained, commissions will fall, low-earning agents will find other work, and successful agents will spend more time doing deals and less time trolling for clients.

Technology has brought many transactions costs down, and also reduced the numbers of workers in some sectors. Bid-ask spreads in stock market trading fell substantially in recent decades. Travel agents are now rare, with airline commission savings mostly passed on to consumers, who usually book online without tying up human time. But residential real estate has avoided this price compression. The lawsuit’s plaintiffs alleged that was due to illegal collusion among real estate agents.

Commission Rates To Fall

If the first court ruling us upheld and enforced, expect average commission income to fall. Some people will shun real estate brokers altogether, paying small fees for listings and then using escrow agents (frequently title insurance companies) to close the deal. Mortgage brokers may also help at closing. In this competitive environment, not only will fewer transactions result in commissions, but competition will lower commission rates. There will likely be agents who test using a fixed fee per transaction rather than a percentage of the sales price.

Some Real Estate Agents Will Leave The Business

After commissions fall, some agents will leave the business, either finding another occupation or retiring. These will be those not earning high incomes, but getting by on the occasional deal that offered a good payout. Here’s how the math often works out, but each transaction could be different. Six percent commission is common, usually split evenly between the buyer’s broker and the seller’s broker. But there are two parties on each side: the buyers agent works for a broker, and the seller’s agent works for a broker. The brokers have the legal responsibility for the deal and maintain the office, with the agent doing the legwork. A 50-50 split between agent and broker is common, but with many variations. Experienced, successful agents often earn a higher share of the deal.

Let’s see some numbers. The median price of an existing home was about $400,000, according to the National Association of Realtors. If the commission was six percent, with 50-50 split between buyer’s broker and seller’s broker, and a further 50-50 split between broker and agent, then each agent earns 1.5% of $400,000, or $6,000. One deal a month generates $72,000, which is about the annual median family income for the U.S. ($75,580).

The actual hours spent on a single deal is much less than full-time work for a month. Agents spend a great deal of time trying to get the deal: networking to meet prospective clients and holding open houses not just to sell a listing but to find prospective buyers they can represent to purchase a different house. As commission rates drop and more transactions occur without any broker involved, agents will drop out of the business.

More Time Spent On Deals, Less Marketing

Finding new clients will be less lucrative, so the successful agents who are left will spend more time working on actual deals and less time trolling for prospective customers.

Real estate brokers and agents will continue to exist, as they provide valuable services. Most people do fewer real estate transactions in a lifetime than a good agent does in a year. The agents’ knowledge and the brokers’ oversight help people with large, complex transactions. But many clients will opt for lesser services, and others will simply pay less in a more competitive environment. The top producers will retain their jobs, though probably with lower incomes. And the marginal producers will work elsewhere.


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