Online home buyers do much of the work involved in acquiring a house. So why are brokers’ fees still calculated under the old system?
Forty-four percent of new home buyers now begin their home search online as opposed to through referrals, according to the National Association of Realtors. The same organization found that 35 percent of brokers say they are relying on virtual tours to sell homes. And yet, despite technology shifting the power dynamic from brokers to buyers in the real estate industry, real estate commissions — notoriously higher in the United States than in other developed countries — haven’t budged.
A series of lawsuits might change that.
Even as median home prices have climbed in every major market across the United States, and buyers, especially millennials, are doing more of the legwork involved in home searches, commission rates for real estate brokers have held steady. Paid by the home seller, these rates are often as high as 6 percent — 3 percent paid to the seller’s agent and 3 percent to the buyer’s agent.
Across much of Europe and Asia, commission rates are significantly lower — in Singapore and the United Kingdom, for example, agents generally earn 1 to 2 percent on sales.
But over the past two years, seven different lawsuits, brought by private home sellers, an online brokerage and groups of California brokers, and even the U.S. Justice Department, contend that brokers’ practices in charging and collecting commissions violate U.S. antitrust laws and amount to a conspiracy to keep their fees artificially inflated.
One of the most vocal critics on the current state of broker commissions in the United States is Jack Ryan, founder and chief executive of REX, an online brokerage whose fees start at 2 percent. (There are dozens of brokerages that advertise lower than standard commissions; UpNest, Redefy and ListingSpark are a few.)
For example, in a $500,000 home purchase, a seller would typically have to pay $30,000 in brokers’ fees, which would be collected by the seller’s broker, who would then give half or 3 percent to the buyer’s broker. When REX represents a seller, it charges only 2 to 2.5 percent. The seller is on the hook for only $10,000 to $12,500, but may need to separately negotiate a fee for the buyer’s broker. (If the buyer is working without a broker, the seller would have saved the 3 percent fee.)
When REX represents a buyer in a traditional deal and is given a 3 percent fee from the seller’s agent, it will often give the buyer 50 percent of its broker’s commission back as a rebate. So a home buyer purchasing a $500,000 home with REX could receive a rebate of $7,500.
REX filed a lawsuit in December 2020 in the U.S. District Court of Oregon, challenging Oregon’s policy of banning REX and other brokers from refunding commissions back to the buyers — a rebate practice that REX employs and that Oregon says is illegal.
“Rebate bans that cause home buyers to spend thousands more, sometimes $10,000 more, really ought to be challenged,” Mr. Ryan said. “First-time home buyers, home buyers who are trying to move to a new state for better economic opportunity, for better schools for their kids, whatever circumstance a home buyer is in, we support them.”
REX is also exploring potential legal action in Louisiana, Missouri and Tennessee, where similar anti-rebate laws remain on the books, Mr. Ryan said.
But some brokers say that the current commission fee structure exists to protect both buyers and sellers, because each party’s agent comes to a home sale representing the client’s best interests, whether on the buyer’s or seller’s side.
Dawn Pfaff, president of State Listings, Inc., a nationwide multiple listing service and real estate platform, said changes to the status quo would hurt homeowners and home buyers.
“These lawsuits are frivolous,” she said. “It’s the biggest transaction of their life, and homeowners don’t necessarily know how to do it. Our system in America affords them the opportunity to be protected.”
While REX’s case is directed at the state of Oregon, most of the lawsuits have been filed against the National Association of Realtors, the umbrella trade organization of real estate licensees. The association and its local subsidiaries exercise control over the majority of the 600-plus multiple listing services in the U.S., the databases used to connect home buyers to sellers.
In April 2019, the Justice Department began investigating whether or not brokers were steering their buyers to homes that offered them larger commissions, thus cutting out brokers who might be willing to collect less out of the process.
The National Association of Realtors declined multiple requests for comment.
“You’re starting to see a kind of drum beat,” said Mike Toth, REX’s general counsel. “Buyers are doing so much of the work themselves. So why are commissions so high?”
Part of the broader issue, said Ben Keys, a real estate professor at the University of Pennsylvania, is that agents can currently sort listings by how much commission each offers, and steer their clients accordingly.
“You have agents who are incentivized to look for their largest commission, rather than to help their clients find the best house for them,” he said. “Having that information allows the steering to occur.”
In November 2020, the U.S. Department of Justice filed and settled an antitrust case alleging the National Association of Realtors had “established and enforced illegal restraints on competition.” The Justice Department’s antitrust division asked the association to provide more transparency around commissions to buyers and sellers.
The move has created tailwinds: Earlier this month, Redfin announced it will now publish agent commissions on thousands of its public listings.