A move toward clarity on real estate commissions paid by buyers and sellers

Ask a recent homebuyer how much they paid in real estate commissions and they'll say "nothing." Ask a recent home seller how much they paid in commissions and they'll likely quote a dollar amount or a percentage of their home price.

Greater transparency about commissions is being introduced in some areas of the country and among some real estate brokerages that could change the conversation about how agents are compensated.

Traditionally, the commissions for sellers' and buyers' agents are paid by the sellers out of their profits from the sale of the home. So sellers are the ones who decide how much to offer to the buyer's agent.

Now a few markets are opening the information to buyers, giving them an opportunity to make the compensation for their agents' work part of the negotiations.

In the largely experimental move, buyers can ask their agent to take a lower commission to reduce the overall price of the property or they can ask their agent to provide them with a rebate of some of their commission. But on rare occasions, some brokers say, opening up the commission could result in buyers having to directly pay part of their agents' commission.

Since October, the Northwest Multiple Listing Service (NWMLS) in Seattle has allowed real estate brokerages to publish the amount of the commission being offered to the buyers' agent. The NWMLS policy also removed the requirement that a seller offer a commission to the buyers' agent.

If no commission is offered, the buyers and their brokers can negotiate the compensation. In other MLS systems, such as Bright MLS in the Mid-Atlantic region, some buyers' agent compensation must be offered with the listing, although only agents can see that proposed commission.

Since last summer, Redfin real estate brokerage publishes the buyers' agent commission on its website for all of its listings. The company isn't allowed to publish buyers' agent commissions offered by other brokerages on their website, except in Seattle.

"Publishing fees will make sellers more aware that they're paying the buyers' agent," says Glenn Kelman, CEO of Redfin. "At the same time, this will liberate sellers to pay different amounts to the buyers' agent depending on market conditions and the property they're selling."

Of course, the impact of the coronavirus pandemic is upending market dynamics in most of the country. Buyers and sellers can always ask their agents for a reduced commission. In a market like this one, with fewer homes for sale and fewer transactions happening, agents may be more willing than usual to negotiate.

"During this time of economic uncertainty and social distancing, our sellers' primary concern is using all of the virtual technology and marketing tools available to find a buyer and get their home sold quickly and safely," says Michael Alderfer, a real estate agent with Redfin in Washington, D.C. "Sellers are less concerned about how much commission to offer the buyers' agent right now than they are in a more normal market, but fees are always part of the conversation."

Dawn McKenna of the Dawn McKenna Group with Coldwell Banker Realty in the Chicago area and Naples, Florida, says that between March 15 and May 10 she and her agents have sold more than $115 million in properties without any clients asking for a reduction in commissions because of the pandemic.

"We're getting more creative and sophisticated than ever before to find the right buyer for the right home," says McKenna. "This includes leveraging our network, all the marketing resources we have, and all the data and new technology available."

Discussion about real estate commissions can provoke strong emotions among today's buyers and sellers because much of the traditional legwork of finding a home can be done online. Real estate agents say their value lies in their advisory role, their market knowledge and their experience with contracts and negotiations.

"In any industry there are discount options and consumers know there are other options besides a full-service model in real estate," says Jenn Smira, a real estate agent with Compass real estate brokerage in Washington, D.C. "In our business, you get what you pay for, so the conversation is about what each agent brings to the table rather than who may reduce their fee by a half percent."

Many consumers are unaware of their ability to negotiate with real estate agents about their compensation. Most don't know that the combined commissions to real estate agents in any transaction typically totals 5 to 6% of the sale price of a property, according to recent research by the Consumer Federation of America.

In addition, the research found that most traditional real estate agents (73%) would not negotiate their portion of the real estate commission. Buyers who ask about the commission their agent earns are typically told that the sellers pay the commissions, so buyers drop the issue, according to CFA's research.

In reality, while home sellers pay commissions out of the profit from the sale of their home, there wouldn't be any profit or sale without the buyer's money.

"Buyers have always paid the commissions for the real estate agents on both sides of the transaction, they just didn't know it," says Matt Van Winkle, a broker-owner and attorney with Re/Max Northwest in Seattle. "If buyers don't like the price of a house, they can negotiate that, but the commission portion of the sale is out of their hands."

- - -

Buyers are sometimes confused about how their agent gets paid, says Christine Richardson, a real estate agent with Weichert Realtors in Great Falls, Virginia, and 2019 president of the Northern Virginia Association of Realtors.

"Anything we can do to make it less weird to them and to be more transparent is good," says Richardson. "Clarity is always good, and consumers can understand that they can possibly negotiate commissions."

While buyers rarely ask about commissions, sellers must talk about commissions because they need to calculate the numbers of their sale to map out their decisions about moving, says Smira.

"The idea of being transparent and publishing commission information for consumers is meant to start a conversation," says Alderfer. "The heart of the issue is that it's complicated, especially for buyers, to understand who's being compensated and how."

Van Winkle says that in Seattle, buyers and sellers are more likely to ask about the value an agent provides before hiring them now that consumers are more aware of their commission.

Real estate agents have always seen the compensation offered to a buyers' agent. The NWMLS policy makes it possible to share that information with the public, too. So far, NWMLS is the only listing service that has introduced this policy of transparency.

"The National Association of Realtors (NAR) has always said publishing the buyers' agent commission is an option that's up to each local multiple listing service to decide," says Rene Galicia, director of MLS engagement for NAR.

While Galicia says NAR is in favor of transparency, he adds that compensation offers have been kept out of the public eye in the past.

"Some information on the MLS is kept confidential, such as showing information or lockbox information that protects the privacy of sellers and their families," says Galicia. "A commission offer from the listing broker on behalf of the seller to the buyer broker is between the brokers, so that's why it's often confidential. But as consumer understanding of how agents are paid grows, there's no reason to keep that information hidden."

In 2019, an antitrust lawsuit was filed against NAR and four large real estate brokerages that accused the firms of a conspiracy that forces sellers to pay the commission of the agent representing their buyers. The complaint brought to light what some sellers see as an unfair practice that commissions for agents on both sides of the transaction are part of the closing costs assigned to sellers.

- - -

Both buyers and sellers can negotiate when they choose a full-service agent, but they can also choose a flat fee model and negotiate a price for each service. For example, sellers can choose to pay just for an MLS listing. Other real estate businesses offer discounted fees for reduced services.

"It's important for consumers to know that commissions are fully negotiable," says Galicia. "Both buyers and sellers can talk to their agents about how they get compensated and they should do that at the very beginning of the relationship."

When buyers sign a buyer agency agreement, they should discuss how their agent will be compensated, says Galicia.

"Buyers think they're getting their buyers' agent's services for free, but the buyers' agent should explain to them as soon as possible that buyers pay for their services as part of their home purchase," says Galicia.

If there's a gap between what the buyers' agent agreement says about compensation and what the buyers' agent actually receives, it's possible that the buyers would have to make up the difference. However, that's an extremely rare occurrence in residential real estate, says Van Winkle. He says that real estate agents rely heavily on referral business and would be unlikely to press a buyer for payment, particularly for a small difference in compensation.

Buyers can ask their agent if they'll consider working for a lower compensation and they can also ask for a rebate of the agent's compensation, says Alderfer.

Sellers often want to discuss the value of the commission they're offering a buyers' agent, says Alderfer.

"The buyers' agent commission is one of many factors that will impact the speed and sales price of a home, including the condition of the property and the listing price," says Alderfer. "In some markets, sellers might be able to offer a lower commission, but in others, 2 1/2 or 3% is recommended."

Buyers' agent commissions can be part of a comprehensive marketing plan, says Smira.

"Depending on the property and the market, sometimes it makes sense to increase the buyers' agent's commission as an incentive and to get more attention for a property that isn't selling," says Smira. "With one listing recently, the owners were in a hurry and didn't want to lower their price, so they offered a 4% buyer's agent commission. The house sold immediately for top price."

Buyers' agents who diligently represent their clients' best interest shouldn't be swayed by a lower or a higher commission offer.

If an agent is only showing a buyer properties with a 3% commission and none with a lower commission, a buyer could ask the agent if the compensation is limiting what they're being shown. For now, however, that information about how much their agent is offered is only available in the Seattle market and on Redfin listings.

At this point, the long-term implications of making this information public are unknown.

"Full-service, professional agents are delivering value to their clients and clients seem willing to pay for full service," says Van Winkle. "However, part-time and limited-service agents are seeing their effective commission rates reduced proportionate to the service provided. Agents who don't bring sufficient value to the consumer are no longer able to collect the same commission as professional agents and we're already seeing that play out in the market."

It remains to be seen what impact transparency about buyers' agent commissions will have on the broader real estate industry and whether that transparency will become widespread in other markets and brokerages. In the meantime, buyers and sellers have every right to an honest discussion about how their agents gets paid.