Real estate commissions fall to new lows as homes exit the market

Forget 6%, once the rate is in effect for real estate commissions. Average brokerage fees in the United States fell to an all-time low in 2020, remaining below 5%.

Actual trends, a Colorado-based research firm that publishes a widely cited survey on the subject, says the average commission fell to 4.94% in 2020, from 4.96% in 2019 and 5.03% in 2018. Commissions typically decline in strong seller markets like 2020, a year when homes sold quickly and many sellers were inundated with multiple offers above the list price.

Realogy Corp., the largest brokerage in the country, reports a different trend. Realogy – which owns the Coldwell Banker, Century 21, ERA, and Sotheby’s International Realty brands – says the average commission rate in its company-owned transactions rose to 2.43% per ‘trade side’ in 2020, from 2 , 41% in 2019. If listing agent and buyer’s agent split the catch equally, which suggests an average commission of 4.86% last year.

For consumers and real estate agents, billions are at stake. Americans spent an estimated $ 86 billion on real estate commissions last year, according to Real Trends. On a sale of $ 400,000, a 6% commission would add $ 24,000 to the cost of the transaction, while a 5% commission would cost $ 20,000.

Commission trends seem to indicate that consumers have the option of negotiating with their real estate agents, a market reality that only intensified during the sellers’ market of 2020. Most homes are selling quickly and for more than the asking price, sellers may be able to negotiate more difficult. .

Commission rates have been falling steadily for decades, although they briefly rebounded during the Great Recession before resuming their long slide. It may sound counterintuitive, but consumers have shown themselves willing to pay agents a higher commission rate in tough markets.

For real estate agents, lower commission rates have been offset by higher home prices. They get a smaller slice of the pie, but the pie gets bigger.

In 2009, for example, Realogy said, half the commission was worth 2.51%. The average selling price of the company’s homes was $ 390,688 that year, and the typical Realogy agent earned $ 10,519 for representing part of the deal, the company told the Securities and Exchange. Commission.

By 2020, Realogy’s average selling price had climbed to $ 553,081. So even though the typical take for half the commission had fallen to 2.43%, the typical fee for representing the buyer or seller fell to $ 13,990.

Meanwhile, Realogy’s franchise operations commissions fell from 2.47% per side to 2.48% in 2020 in 2019.

A quick primer on how commissions are set: The seller negotiates a fee with the listing agent, typically 2% to 3% of the selling price of the house. The seller also decides how much to pay to a buying agent who brings a buyer to the property; this number usually appears in the multiple listings service data about the property.

The National Association of Realtors, which has long feared allegations of antitrust violations, points out that rates are set by individual agents and their clients. Real estate agents are quick to point out that they only get paid when a deal is made. All the work they do on property tours, open houses and home inspections is done for free, in anticipation of a payday at the closing table.

Commissions are dropping, in part because consumers have been conditioned to ask for better deals on everything.

“The continued decline in commission rates appears to reflect both rising house prices, especially in high-income urban areas, and an increase in consumers’ willingness to ask questions about these rates,” Stephen said. Brobeck, Principal Investigator at Consumers Federation of America.

The large number of real estate agents vying for a small number of offers also encourages real estate agents to compete by lowering their fees.

“It’s supply and demand – there are a lot of real estate agents,” said Mike DelPrete, residential real estate researcher at the University of Colorado-Boulder.

Indeed, the National Association of Realtors has 1.4 million members. In 2019, NAR counted 5.6 million home sales, leaving just four deals per real estate agent.

Another factor affects the supply of real estate agents: obtaining a real estate license remains a notoriously easy exercise. Some states require more class time for hairdressers than for real estate agents.

“The barriers to entry to becoming a real estate agent are low,” said DelPrete.

Meanwhile, a host of discount real estate agents have played on consumer resentment over brokerage fees.

A leading Seattle-based discounter Red tuna, presented itself as a cheaper alternative to traditional brokers. Redfin had touted a registration fee of just 1%, although it focused on a 1.5% registration fee.

In many metropolitan areas, Redfin’s competitors are mimicking its business model.

“There is a whole host of Redfin juniors who are offering to sell at a low rate or low fixed cost,” DelPrete said.

Despite this, the traditional real estate model has proven remarkably resilient and some discounters have gone bankrupt. A booming upstart, London-based Purplebricks, pulled out of the United States in 2019 after trying to woo American sellers with a lump sum of $ 3,200.

During the real estate boom from 2005 to 2007, commissions fell sharply. Then, during the Great Recession, they rebounded.

With less demand for housing, sellers were more willing to pay listing agents for their work. Plus, home prices fell during the downturn, leaving real estate agents less willing to accept discounts. And many agents left the industry, making the supply and demand equation more favorable for those who stayed.

Traditional agents, for their part, point out that sellers get what they pay for. A reduced commission is unnecessary if the discount agent sells your home for less than what you would get using a full price agent, says Elias Papadopoulos, owner of RE / MAX Unlimited in Brookline, Mass.

“A lot of salespeople understand that the lowest commission isn’t always the best,” says Papadopoulos. “It’s still the net the seller should be looking at.”

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