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Watchdog Calls For Ban On Sellers Offering Buyer Agent Commissions

Homesellers should be legally prohibited from offering buyer agents commissions, the Consumer Federation of America said upon releasing a report finding that the vast majority of commissions are identical or nearly identical in 35 US cities.

The consumer watchdog’s report, “Real Estate Commission Rates in 35 Cities: Uniformity and Variability,” analyzed 17,805 home sales in 35 cities and found that in 24 cities, at least 88 percent of the listings had buyer broker commission rates between 2.5 and 3 percent , in 18 cities, at least 70 percent of the listings had identical commission rates, and in 10 cites at least 87 percent of the listings had identical commission rates.

Stephen Brock

“This rate uniformity is striking evidence of the lack of price competition in the residential real estate industry,” said Stephen Brobeck, a CFA senior fellow and the report’s author, in a statement.

“An industry rule requiring listing agents to set buyer agent rates prevents home buyers from negotiating these rates,” Brobeck added, referring to a National Association of Realtors’ policy that requires listing brokers to offer buyer brokers a commission in order to submit a listing to a Realtor-affiliated multiple listing service.

This policy is currently the subject of multiple antitrust lawsuits against NAR, including one that just won class-action status, as well as an investigation by the US Department of Justice. Realogy, who is also fighting multiple antitrust lawsuits over the policy, has publicly called for NAR to end the requirement.

CFA has previously advocated for the uncoupling of commissions and did so again in this report, but Brobeck also clarified that by uncoupling, he didn’t just mean that NAR should eliminate its commission rule, as Washington-based Northwest MLS did in 2019 with no effect on commissions thus far.

Brobeck told Inman CFA would like to see the courts decide that sellers should be “legally prohibited” from paying buyer agents because doing so constitutes “unfair restraint of trade.”

“Listing agents (and their clients) should have no role in setting the compensation of buyer agents,” he said via email.

Mantil Williams

In an emailed statement, NAR spokesperson Mantill Williams told Inman, “The market decides commission rates. Commissions are — and have always been — negotiable. Consumers have the choice of who they want to pay, how much they want to pay, and how they want to pay them.”

If buyers paid their own agents, that would increase the rate of competition, and on average, lower rates, according to CFA. The watchdog predicted a 20-30 percent decline in commissions with such a change, resulting in annual savings of $20 billion to $30 billion for consumers.

“Discount brokers such as Redfin would be unshackled from the necessity of offering buyer brokers the typical rate paid in the MLS area,” the report said.

“Instead they could offer lower rates to both sellers and buyers, and would likely increase their marketing of lower rates, as would flat-fee brokers.”

Buyers would also be more aware of and more likely to discuss and negotiate commissions paid to their agents and buyer agents and brokers would in turn “feel competitive pressure to be responsive,” according to CFA.

“For the same reasons, so would listing agents,” the report said. “Faced with competitive rate pressures, more of these agents would be willing to negotiate rates.”

Despite industry assertions that commissions are negotiable, many agents and brokers refuse to negotiate, CFA noted.

“In 2019 conversations with 200 listing agents in 20 cities about their willingness to negotiate rates on a specific listed property, CFA found that only 27 percent of the agents were willing to do so.”

According to NAR’s Williams, there is already “unprecedented competition” among agents, “especially when it comes to the service and commission options available to consumers.”

Williams also noted that commissions have failed in recent years, to a new low of 4.94 percent nationwide in 2020, according to Real Trends.

“Fundamentally changing how real estate is sold and forcing buyers to take on the additional out-of-pocket expense would cause added financial hardship and could freeze out many from the market entirely, particularly first-time, and low- and middle-income homebuyers ,” I added.

“That could also force homebuyers to forgo professional help during what is likely the most complex and consequential transaction they’ll make in their lifetime.”

But CFA said that argument is not “credible.”

“There is a general consensus that buyer commissions are added to home sale prices, which can then be financed,” the report said.

“If sellers no longer paid buyer agent commissions, buyers would benefit from lower sale prices.

“Furthermore, it is highly likely that buyers could finance buyer agent commissions in their mortgages. The mortgage lending and Realtor industries have the political clout to remove any related regulatory barriers, and they would likely face no political opposition in doing so.”

CFA’s study is a continuation of a study the nonprofit released in November finding that buyer agent commission rates are largely the same across 21 cities across the eastern half of the US At the time, CFA promised to conduct a similar study for western cities. The current study combines data for the 21 eastern cities and 14 cities west of the Mississippi River.

The commission data comes from brokers with access to MLS data in 33 of those cities as well as the commission offers posted on Redfin for listings in Portland and Seattle.

Less than one percent of listings offered a dollar amount, not a rate, as buyer agent compensation and a few listings included a buyer rate of zero. CFA excluded these listings from the analysis, noting that many such listings involve double-dipping, where one agent worked with both buyer and seller and collected the entire commission.

In 13 of the 14 western cities, the CFA found that at least 49 percent of commission rates were identical, in eight cities more than 88 percent of the rates ranged between 2.5 and 3 percent, and in five cities –Albuquerque, Boise, Dallas, Houston, and Oakland — more than 82 percent of the rates were identical.

Source: CFA

According to CFA, if buyer agent commission rates were competitive, they would vary considerably according to the type of representation offered, agent qualifications and skills, the amount of work completed, the time it took to do the work, buyer comparison shopping and buyer negotiation .

“[I]na price-competitive marketplace, it would be very unusual for more than half of all service providers to be charging the same rate for their services,” the report said.

“It would be even more unusual if this rate were tied directly to the price of the product sold, yielding extreme differences in agent compensation.”

A more competitive marketplace would likely lower costs for consumers and increase industry efficiency, according to the report.

“Today there appears to be little relationship between rates charged and quality of service,” the report said.

“Regardless of the quality of service they provide, buyer agents tend to receive the same commission rates. And when agents do not, there is little evidence that this rate variation bears any relation to quality of service.”

According to CFA, buyer broker commission rates are largely the same across the country because NAR’s commission rule allows Realtors to informally set rate norms that keep rates high and maintain the possibility of “big paydays.”

“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 $500,000 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.”

These powerful norms are established through conversations that experienced brokers and agents have with new agents, new agents’ awareness of the typical five to six percent rate, and brokerage policies that reinforce that rate, according to CFA.

“Research has shown that many firms communicate acceptable commission rate(s) through policy manuals issued to their agents,” the report said.

“These manuals often require agents who wish to charge non-standard rates to obtain agency approval.”

Moreover, the report noted something that is readily observable at any industry conference: there is a strong taboo in the industry in regards to talking about commissions, often in an attempt to avoid collusion charges.

“[T]he industry tries to avoid public and consumer scrutiny and criticism of commissions by never talking about them except to say they are negotiable,” the report said.

“CFA research has shown that residential real estate firms and their agents very rarely bring up brokerage costs and agent compensation.

“A few discounters, who do not fully accept industry norms, advertise lower rates, yet these brokers are still constrained by these norms (eg, many discounters like Redfin feel compelled to pay buyer agents typical rates) and have very small market shares.”

That agents and brokers can see buy-side rates on MLSs “not only reinforces the legitimacy of the standard area rate or rates; it also helps discipline agents who are tempted to charge a non-standard rate. All agents can see, and have the opportunity to avoid recommending, listed properties with low buy-side rates,” the report said.

The report added that peer pressure works the other way as well — few listing agents offer more than 3 percent, even if that would theoretically mean a quicker sale.

“It is noteworthy that of all 17,805 home sales CFA examined, 7,126 carried a rate of three percent yet only 72 carried a rate above this percentage,” the report said.

“In the western cities in particular, few sales carried a rate above three percent. In Boise, for example, 443 (of 500) homes sold carried a three percent rate but none carried a rate above this percentage.”

While many homesellers ask their listing agents to offer lower buy-side rates, those agents inform them that doing so could jeopardize the sale of their property, according to the report.

“Convincing research has shown that at least some buyer agents steer their clients away from low-commission properties,” the report said.

Moreover, buyers rarely get rebates themselves. Several states prohibit them. Even in states that don’t, according to a March 2022 Ipsos poll commissioned by CFA of 1,040 homebuyers who purchased a home with an agent in the past five years, 29 percent said they had asked for a rebate and only six percent said they had gotten one.

CFA’s report recommended that buyers ask for rebates. While “a few agents advertise their willingness to do so, other agents will do so if asked, and the more home buyers request rebates the more willing the entire industry will be to provide them,” the report said.

Email Andrea V. Brambila.

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