• Tue. Nov 28th, 2023

    The Future of Real Estate Commissions: Unbundling and Disruption

    BySharna Bass

    Nov 14, 2023
    The Future of Real Estate Commissions: Unbundling and Disruption

    Years ago, a stockbroker expressed his belief in the “sacred” 6% commission in real estate, prompting me to reflect on its significance. Recently, a federal jury found that the National Association of Realtors (NAR) and major real estate brokerages had conspired to artificially inflate commissions, resulting in a $1.8 billion damages verdict. This ruling could potentially dismantle the long-standing 6% commission tradition.

    Traditionally, only sellers have been responsible for paying broker fees, which typically amount to 5-6% of the home’s purchase price. As the median existing home sells for nearly $400,000, this equates to a significant $24,000 deduction from the seller’s proceeds. This compensation structure, however, may be in need of change.

    The prevailing compensation structure discourages alternative payment models, as homes that opt for a different arrangement are often excluded from multiple listing services (MLS). This limitation hampers the ability of these properties to attract attention from potential buyers and their agents.

    However, recent legal actions, including the Missouri verdict, have sparked discussions about potential changes to the industry. One possible outcome is the unbundling of commissions, allowing sellers to opt out of paying the buyer’s agent while still retaining access to MLS. Consequently, buyers may need to bear their own representation costs.

    While it is unlikely that buyers would choose to pay 3% of the purchase price out of pocket, alternative compensation models may emerge. Options could include flat or hourly fees, or potentially financing the agent’s cost within the overall mortgage financing.

    Moreover, some buyers may opt to navigate the process alone, eschewing the assistance of an agent. This practice is common in other parts of the world, and in such cases, buyers may rely more heavily on real estate attorneys during negotiations.

    Undoubtedly, these potential changes could have substantial implications for real estate brokerages. Analysts project a potential 30% reduction in the $100 billion Americans pay in real estate commissions annually, potentially prompting a significant number of the 1.6 million agents currently in the industry to exit. The resulting competition could leave the remaining agents with increased value to their organizations.

    Furthermore, this shift may create opportunities for real estate startups that were previously impeded by the established commission structure and the control exerted by industry players over MLS access. Ultimately, consumers are likely to benefit from increased choices and potentially more affordable pricing options. In short, the longstanding sanctity of the 6% commission is facing extinction.

    Frequently Asked Questions (FAQ)

    What is the current commission structure in the real estate industry?

    The current commission structure entails sellers paying broker fees, typically amounting to 5-6% of the purchase price, which is split between the buyer’s agent and the seller’s listing agent.

    How could commissions be unbundled?

    Unbundling commissions would allow sellers to opt out of paying the buyer’s agent while still being included in multiple listing services (MLS), ensuring greater exposure to potential buyers.

    What are the potential changes to compensation models for buyers?

    Buyers could have the option to pay flat or hourly fees for agent representation or potentially finance the agent’s cost within their overall mortgage financing.

    How could these changes impact real estate agents?

    If the projected reduction in real estate commissions occurs, it could lead to a significant number of agents leaving the industry. This may result in increased competition among the remaining agents and potentially enhance their value to their organizations.

    What opportunities could arise for real estate startups?

    The shifts in the commission structure could create opportunities for real estate startups that were previously impeded by the traditional model. These startups could offer different and potentially more affordable pricing options, providing consumers with increased choices.