Americans pay about twice as much commission to real estate agents as their counterparts elsewhere in the world – why?
High-profile recent lawsuits have brought the question of how much real estate brokers should be paid to center stage, causing agents to argue the system is fair and sellers to claim otherwise.
DailyMail.com spoke to real estate experts to understand how fees in the US vary from other countries and why Americans are expected to pay much more for what appears to be the same service.
The answer lies in the controversial ‘bundled’ commission system that has been used across the US by Realtors since 1913.
The precursor to the powerful National Association of Realtors trade association stipulated that the agent representing a home seller ‘always be ready and willing to divide the regular commission equally with any member of the Association who can produce a buyer for any client.’
Americans pay about twice as much commission to real estate agents as their counterparts elsewhere in the world, according to a report by investment bank Keefe, Bruyette & Woods
Rob Hahn, a real estate consultant and founder of Las Vegas-based 7DS Associates, predicts a revised system will see buyer’s and seller’s agents paid separately
For each sale, the buyer’s and seller’s agents take equal commission – which is paid for by the seller and is usually between 5 and 6 percent. Since the agents are paid from the same pot, it is in both their interests for the fees the seller pays to be large.
‘The way that it’s worked in practice is the listing agent will go to the seller and say, “Listen, I’m going to charge you 3 percent, but if you don’t offer 3 percent to the buyer’s agent, no one’s going to show your house,”‘ said Rob Hahn, a real estate consultant and founder of Las Vegas-based 7DS Associates.
‘The argument is that it kept commission in the US at 6 percent as opposed to the rest of the developed world, like in the UK, where it’s closer to 1.5 percent.’
A recent report by investment bank Keefe, Bruyette & Woods (KBW) argued that because the agents are bundled in the US almost all buyers are represented by an agent.
In the UK and less than 5 percent of home buyers have an agent, according to the report.
Hahn recounted a conversation he had with a hedge fund manager from the UK who had bought four houses without agent representation.
And a recent survey by consulting firm 1000watt found that the majority of home buyers in the US would likely forego a buyer’s agent if that was an option.
Some 71 percent thought it made more sense to have one instead of two agents involved in a property transaction.
The National Association of Realtors is the largest trade association in the US and mandates that the buyer’s and seller’s agents share their commission
In countries where the buyer’s and seller’s agents are ‘unbundled’, use of buyer’s agents was significantly lower according to the KBW report
Not only does the bundled system create artificially high buyer’s agent usage, the report claims, it also reduces the incentive for buyers to negotiate a lower price for their services in the event they actually want them.
‘In countries where buyer’s agents are common, those where buyers compensate their agents directly, have roughly 30 to 35 percent lower commission rates on average than those countries where sellers typically compensate buyers’ agents,’ read the report.
‘Under a new system where buyers pay their own agents directly, they and their agents would be forced to discuss and negotiate commissions at the outset of the process.’
After a jury in October found that the NAR had enabled agents to collude to keep their commissions artificially high, an upcoming order by the judge is expected to forever change how the system in the US works.
Hahn predicted buyers will start paying for agents themselves and their use will decline, likely leaving many Realtors without a job.
‘I think buyer agents will eventually move towards being paid directly by the buyer on an hourly rate basis, upfront,’ said Hahn.
‘And the secondary consequence of that is a lot of buyers will just buy houses without using an agent.’