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Boston real estate commissions. How with technology it will change dramatically
The ongoing commission battle has a recent report calling for some major changes in how commission rates are determined, but is that the right choice?
How much commission agents earn for selling a home has been a hot topic for some time now. Some say it’s not right that homebuyers end up paying toward these commissions as part of the purchase price and that there’s no room to negotiate since the agent’s commission is generally set by the sellers.
Calling real estate commission rates just “one step below fixed,” a Consumer Federation of America report recently called for some changes. Among them is the uncoupling of both seller and buyer agent compensation, something the report says will help spur price competition, reduce the commissions consumers are paying and align agent compensation to a much greater extent with agent service.
The report recommends federal agencies and courts prohibit the tying of listing agent and buyer agent commissions, so buyers can negotiate buyer agent compensation rather than having it set and paid for by listing agents and sellers.
But the National Association of Realtors says the uncoupling of both agent buyer and seller compensation could be detrimental to first-time, low- and middle-income buyers. NAR officials told Boston Agent magazine that many consumers may not be in a position to pay the extra funds that would result from uncoupling broker commissions.
“Uncoupling broker compensation would require buyers to come out of pocket to pay real estate broker commissions, and that could freeze out many from the homebuying process,” Mantill Williams, NAR’s VP of communications, told Boston Agent. “Or could lead to those going into the homebuying market without representation.”
This isn’t the first time the issue of commissions has raised its head. The Justice Department was involved, investigating commissions, and President Biden in July signed an executive order asking the Federal Trade Commission to adopt new rules to address unfair or exclusionary practices.
“The American real estate system is set up to create a win-win for both buyers and sellers,” Williams said. “The buyer benefits because they do not come out of pocket for real estate services, and the seller benefits because the proceeds from the sale — which comes from the buyer — pays for the seller’s representation.”
Williams added that the current system creates more competition because it allows all types of buyers (first-time, low- and middle-income buyers) the opportunity to participate in the homebuying process. “And in addition, that would result in the largest pool of buyers for the sellers,” he said.
Last November, the National Association of Realtors, took steps to ensure transparency for buyers by approving several MLS recommendations including listing the broker’s compensation on each active listing on consumer-facing websites and in MLS data feeds.
NAR President Leslie Rouda Smith told Boston Agent the NAR believes the guidance regarding cooperative compensation that appears in the organization’s Handbook on Multiple Listing Policy serves the best interests of both consumers and brokers. She says it gives consumers and listing brokers the freedom to choose how much commission to offer the buyer broker, including as little as one penny.
“This broker cooperation keeps local marketplaces from fracturing, which would be paralyzing to consumers and small businesses,” she said. “It also encourages buyer and seller brokers to share their information in their local, independent broker data hub, enabling maximum options for consumers and allowing even the smallest brokerages to compete with the largest brokerages.”
Because of this policy, Smith said the result is the largest, most accessible and most accurate source of housing information available to consumers. “Without it, the lack of complete, transparent and accessible data for all would mean smaller brokerages have to piecemeal information and couldn’t offer as many options to sellers and buyers,” she said.
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If you’ve followed the real estate industry for any amount of time, you’ve probably been involved in the perennial debate about the high agent commissions in the U.S. The issue reached a fevered pitch last year when a lawsuit was brought against the National Association of Realtors, calling commissions the results of collusion.
A common argument for lowering them claims U.S. commissions are among the highest in the world, but technology means agents don’t find homes for buyers anymore. They just unlock the door and fill out paperwork, and lots of agents don’t even do this full-time.
Some brokerages have pursued different business models to try to bring down commissions.
Great agents work incredibly hard. They build their brands, market themselves and lead teams. They are business people dedicated to their client’s success while being master negotiators and knowledgeable advisors. Making their jobs even more challenging is the fluctuations of the business that requires amortizing their commissions, and spreading them out over slowdowns and low seasons.
Many real estate practices clung to by brokerages were antiquated even before Covid-19. Fancy office space is totally unnecessary in most markets. Social media, podcasts, webinars and online platforms have made traditional brokerage marketing attempts to drive their own brand through print ads, billboards and bus stops of limited value.
The bottom line is Americans shouldn’t pay the highest commissions in the world, but the hard work of real estate agents shouldn’t be devalued to solve this. The answer lies in brokerages evolving and making their own businesses more efficient in order to charge better splits, or better yet a flat fee per transaction, thus allowing agents to bring these savings back to consumers. The support provided by the brokerage for a $1 million listing versus a $400,000 one is likely similar, yet the commission splits model ensures the brokerage pockets substantially more for an expensive listing.
There are a few ways brokerages can become more financially efficient — and thus impact the high commissions:
1. Reevaluate the need for physical space. Companies big and small have adapted to working from home. The camaraderie among agents can be established in a Facebook group or Slack. Agents can meet their clients at a coffee shop or in conference rooms at spaces like Regus and WeWork.
2. Offer a lower commission split or a flat fee to agents for the core benefits they receive, and offer add-on optional services such as virtual 3D walkthroughs or custom social media support for a separate fee.
3. Build an online brand for lead generation and agent recruitment through organic social media and virtual events instead of relying on paid channels.
In the mid-2000s, online real estate companies like Zillow, Trulia and Redfin were the first big wave of disruption to shake up the industry. The next wave of innovation is here. In order to survive and succeed, brokerages must take steps to stay relevant and embrace these new technologies and approaches. This includes driving change on the commission issue — before others do it for them.
