Real estate commissions have survived the rise of the Internet and decades of attacks by nuisance-minded discounters. But the barrage of legal challenges facing the current mediation model poses a new threat to the status quo.
An industry-shaking lawsuit making its way through the federal court system could upend the established method of paying commissions — specifically, typically home sellers footing the bill for both their agent and the buyer. This is typically 5% to 6% of the home's sales price, taking away a significant portion of the seller's proceeds. In October 2023, a federal jury in Missouri found that the National Association of Realtors (NAR), along with several major brokerage firms, conspired to inflate brokers' commissions.
How can real estate commissions change?
It's unclear exactly how and when this ruling will affect commissions, but the cost of the case alone — $1.8 billion in damages, with potentially billions more — is roiling the industry. Some predict big changes: One possibility is that home sellers will no longer pay both a listing agent and a buyer's agent, so homebuyers who want representation may have to pay their agents separately.
“The ruling in Missouri and other court cases could lead to revolution in our industry, not just reform,” Glenn Kellman, CEO of brokerage Redfin, told investors on a recent earnings call.
“The fortress is crumbling,” said Brad Case, a housing economist at Middleburg Communities, who has also worked for mortgage giant Fannie Mae and the Federal Reserve. “Landlords have managed to maintain this situation for 100 years, but it is untenable in the long term.”
Some see the federal ruling as a sign that the real estate industry will eventually have to give in to pressure for cuts. Others say it will take years before the ruling translates into savings for homebuyers or sellers. Stephen Brubeck, a senior fellow at the Consumer Federation of America, expects commissions will eventually fall below 4%, perhaps even 3%. But he doesn't see that happening anytime soon.
“Any change will happen slowly,” Brobeck said. “The old guard will try to maintain the old prices.”
How much do commissions cost?
If a homeowner sells a property for $400,000, which is about the average for homes in the United States, a 5% commission works out to $20,000. This amount is then split between the seller's agent and the buyer's agent (which doesn't matter to the seller, who still has to pay the full amount regardless).
For a long time, 6% has been the going rate for real estate commissions; 3% per agent. But after decades of competition and regulatory scrutiny, the typical commission is now just under 5%, according to data from Anywhere Real Estate, the parent company of Coldwell Banker, Century 21 and other major real estate brands. In its filings with securities regulators, publicly traded Anywhere reported that its average commission “side” — half the commission — is currently about 2.4%.
While commissions rose briefly during the Great Recession and again in 2023, overall rates have been falling steadily for decades. For realtors, this decline in commission rates has been offset by higher home prices: they get a smaller piece of the pie in terms of percentage-based fees, but the pie has gotten larger.
About the NAR lawsuit
In the case that went to trial in 2023, Missouri home sellers alleged antitrust violations by NAR and four major brokerage firms: Keller Williams, Anywhere, RE/MAX and HomeServices of America. Anywhere and RE/MAX settled before trial, paying $83.5 million and $55 million in damages, respectively, while the other defendants chose to take their chances in the courtroom.
The jury ruled against the industry, and the judge ordered NAR and the two remaining brokerage firms to pay $1.8 billion in damages to home sellers. This number may eventually rise to $5 billion.
Keller Williams has also since settled for $70 million, while NAR and the remaining defendant have appealed. But if a judgment is issued, it could mean that the home seller will no longer be required to pay the agent representing the buyer.
Keep in mind: If the ruling stands, home sellers may not be required to pay agents who represent buyers.
The success of the Missouri lawsuit, brought on behalf of hundreds of thousands of home sellers in that state, has led to similar legal complaints in Texas, Florida, Pennsylvania and elsewhere. However, it may be years before these lawsuits are settled and their ramifications come into focus.
Other plays
NAR also faces other headwinds in addition to antitrust litigation and related issues. The sexual harassment scandal led to the resignation of the organization's then-president in 2023, and the organization's next president and longtime CEO have also resigned since then.
All this drama created a state of uneasiness and unrest in the army's ranks. Redfin cut ties with the trading group, asked several brokers and agents to cancel their memberships, and other brokerages followed suit. In addition, two influential real estate agents announced the launch of a competing trade group, known as the American Real Estate Association (AREA).
One of the new group's founders, Jason Haber — a broker/agent at Compass in New York City and an outspoken critic of NAR — described AREA as an alternative, not an alternative. “We're not trying to replace the NAR. They have a 108-year head start,” he said.
A “perfectly competitive” industry?
The residential real estate industry has long presented a divide. On the one hand, it primarily controlled the marketing of properties for sale through a nationwide network of multiple listing services (MLSs). This reality has led to complaints about collusion and price-fixing, along with scrutiny by the US Department of Justice.
Real estate sales, on the other hand, are a relatively easy business, as evidenced by NAR's membership lists of more than 1.5 million agents. To obtain a real estate license, an agent typically needs to take two classes and pass a state exam. A university degree is not required, and admission costs are modest.
Lawrence Yun, the association's chief economist, points to these low barriers to entry as evidence that competition is alive and well: “Real estate is a quite competitive industry,” Yun said during the organization's annual conference in November.
Brubeck, the consumer advocate, disagrees with that assessment. “It's not a free market right now,” he said. “There is intense competition for customers. But there is no competition on price. In a normal market, you compete on marketing, but also on the price you charge.
Meanwhile, the industry mantra has long been that commissions are negotiable, suggesting that buyers and sellers call the shots when it comes to how much they pay agents. In practice, though, consumers only buy or sell a home once every 5 to 10 years, and many of them are not familiar enough with the process to successfully negotiate a price reduction.
“Consumers are at a disadvantage,” Brobeck said. “They buy and sell homes infrequently, and are often concerned about sale price and timing.”
Historically, discounters have not been successful
For decades, critics have predicted the demise of real estate commissions. Those fees would certainly go the same way as stock brokerage commissions and travel agency fees, naysayers said. Instead, the real estate commissions proved stubbornly resilient.
Not for lack of trying. Many disruptors have seen commissions as a problem to solve, but most have failed to reshape the industry.
In the early 2000s, for example, the great discounter known as YourHomeDirect (and later Foxtons) offered 2% commissions in New York and New Jersey. But after advertising heavily and gaining market share, it eventually collapsed.
A decade later, Purplebricks, based in London, forayed into the United States, attracting sellers with a flat fee of $3,200. It also overestimated demand and withdrew from the US market in 2019.
One prominent discounter, Seattle-based Redfin, has achieved greater staying power. It was launched as a cheaper alternative to traditional brokers and has a listing fee of just 1%, although it has since shifted to focusing on the 1.5% listing fee.
How Home Sellers Can Save on Commission
If you're not keen on paying 5% or 6% of your home's sales price, here are some alternative options:
-Do it on your own: Sell your home without an agent in a “for sale by owner” deal. Between July 2022 and June 2023, 7% of home sales were sold by owners without the assistance of an agent, according to NAR data. But selling without professional help is a lot of work to do on your own, and it only saves you one agent's commission — you still have to pay the buyer's agent.
—Negotiating: If you don't want to go it alone, ask agents about their commission rates up front and compare terms with everyone you talk to. If you think the fees are too high, see if they are willing to lower them. If both agents in the transaction are from the same brokerage, you may have greater negotiating leverage.
-Hire a discount agent: A low-commission real estate agent will likely charge much less than a traditional agent — typically 1% to 1.5% of your home's sale price. (However, you may not receive the personal attention you would with a traditional Realtor.) There are also brokers and agents who work on a flat-fee basis, earning a predetermined amount from the sale rather than a percentage of the sale price.
-Selling to a company that buys houses for cash: These companies, which often advertise “We buy houses,” pay cash, close quickly and usually charge no fees. However, if you sell this way, you will likely get a lower price for your home than with a traditional sale.