Momentum to Increase Commission Transparency

Blog, Real Estate

Momentum to Increase Commission Transparency

The Consumer Federation of American (CFA) has released a report, which estimates only 32% of Americans know a typical commission for a real estate agent. The CFA is an association of non-profit consumer organizations aiming to advance consumer interests through research, advocacy and education. The CFA report studied 263 agent/broker websites in four cities, included conversations with 200 agents in 20 cities, a national survey of 2000 Americans and a review of published material on the subject. The report concluded that traditional firms and agents typically do not advertise their commissions or include information about commissions on websites and only 27% of listing agents interviewed said they would be willing to negotiate their rates.

Beyond the commission percentages, brokerages may assess flat fees to compensate for overhead and administrative costs. The level of disclosure of these flat fees varies from brokerage to brokerage. Some disclosures are buried in lengthy contracts. Other brokerages disclose the amount of the flat fee alone and nothing more. Still, others add an additional disclosure that a portion of the flat fee will be credited to the individual agent at closing. Coupled with the commission percentages, consumers may be left confused about what fees they paid to whom in a transaction.

Still, more confusion can come from who is actually paying the commission, which has become the subject of several class-action lawsuits. One such lawsuit pending in Illinois alleges that collusion between large brokerages and the National Association of Realtors has kept commissions artificially high. The Plaintiffs assert that an MLS rule that requires listing agents to disclose cooperative commissions in the service is anticompetitive. They allege by forcing the buyer (and the buyer’s agent) to accept a seller paid commission, the buyer loses the right to negotiate a commission reduction.

For example, a buyer’s agent tells the buyer that his/her services are “free” to the buyer and paid for by the seller in the form of a cooperative commission. The theory is that to offset the expense associated with seller-paid commissions, the seller lists the property 6% higher, to compensate for the 3% listing agent commission and 3% cooperative commission. When the buyer pays the list price, the buyer is essentially paying the 6% in commissions, but doesn’t have the ability to negotiate them because they are “seller paid.” The Plaintiffs argue the result is the loss of the buyer’s ability to negotiate the commission. Instead, the buyer is forced to accept the % the listing agent offered as a cooperative commission.

Offering a cooperative commission in the MLS also has an unintended consequence, inasmuch as buyer’s agents may steer clients away from listings with a low cooperative commission in favor of those where the cooperative commission is higher. Although such would constitute a breach of the agent’s fiduciary duty to his/her, it is nearly impossible to prove that steering occurred.

The lack of transparency surrounding commissions and fees has created an opening for brokerages to offer creative commission structures to their listing clients. These brokerages are seizing on consumers looking to reduce their selling costs to either a flat fee or a lower percentage. Brokerages are also listening to their customers by providing more public information about their commission structure and any additional fees assessed. With these changes, the class action lawsuits will continue to grind through the courts. If the Illinois lawsuit is successful, the practice of real estate will fundamentally change. Buyers may obtain the ability to negotiate the commission they pay to their agent but will also then have the obligated to pay. Until then, at a minimum, all can agree that greater transparency on fees and commissions is good for consumers.

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