Disrupting Real Estate Agents’ Commissions

Citizen Wealth Financial Justice

New Orleans     If you ever had to sell or buy a house or even just look around in a neighborhood to try and sort out sales’ pitches from real values, you’ve often dealt with real estate agents in their bizarre and curious world. They speak of their commissions and rates as if they were set by divine law and handed down on tablets, although that is far from the case. They ask you to sign documents that there is no conflict of interest when they are sometimes representing both the buyer and the seller, when obviously they are the only winner there in an Alice-in-Wonderland world of make believe. Times may be changing.

The internet is of course one area where there’s action. People self-list on Craigslist, if you want to go there. Zillow ascribes values for houses and rentals based on its own algorithms and offers direct connections to agents where you might have an interest, even though it does little on the transactional side other than adding its cost to the fixed commission. Nonetheless, there’s more information in the market which helps consumers.

Looking at commission rates in other countries for residential properties might make you feel like an even bigger sucker. Only Russia and China once had higher rates than the USA, but their nearly 8% bite in 2002, according to The Economist, by 2015 had been pushed back to 2% in China and 4% in Russia, leaving the USA as the big dog here where its 6% average only dropped a hair to about 5.5% in the same time span. Britain and Singapore are less than 2%, Hong Kong, Finland, and Australia are at 2% with China. Canada is about 2.5%. Germany joins Russia at 4%. Spain is at 5%, the only close competitor to the US.

Competitors who want to disrupt this practice and do the job for 2% claim the resistance lies in the monopolistic, anti-competitive practice of the Multiple Listing Service (MLS) where “nearly every broker in America lists and searches for homes and the National Association of Realtors (NAR), a trade association with 1.3 million broker members in America, which regulates it.” If this were a labor union, the government would already have stepped in, and lawsuits would have already alleged restraint of trade for price fixing!

It turns out that there are some class action suits on the court dockets now challenging this dominance and some of these good-ol-boy practices and commission splitting arrangements, especially on the front end. The Justice Department has also begun to look at whether or not agents are steering buyers towards homes with the highest commission payoffs to them rather than objectively, if there’s such a thing in the real estate market. The realtors’ association scoffs at all of this, but stocks for some of the publicly listed real estate firms are falling in fear that these inflated commissions won’t last.

It matters to consumers. $1.5 trillion in homes changes hands every year. Tack on an extra percent or two, much less almost four, and you are talking about ripping off homebuyers and sellers by up to $4 billion. The house the real estate brokers association has built on consumers’ backs should not be left standing.