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Published: Apr 08, 2022 16 min read
A couple is walking away from a house that is made up of real estate agents business cards.
Matt Chase for Money

The ink on her Yale diploma was barely dry when Panle Jia Barwick drove from New Haven, Connecticut, to Boston to look at houses. A newly minted economics Ph.D., she was starting an assistant professorship at MIT and needed to secure a place to live — fast. A colleague introduced her to a real estate agent, and in a single day she toured a handful of properties with him.

Soon after, she made an offer, ultimately paying $430,000 for the house. It was more than she wanted to spend, but for the most part Barwick didn’t lie awake wondering if she got a raw deal. Instead, the question that dogged her was this: Why didn’t her real estate agent ask for a penny?

"As economists, we believe there is no free lunch,” she says, reflecting on the experience 16 years later. Barwick is now a professor at Cornell University and has published numerous academic papers on the real estate industry. “Obviously, I learned that the commission is not free.”

That’s an understatement. Consumers pay an estimated $100 billion in real estate agent commissions each year. The agents involved in a median-priced sale today split approximately $18,000 in commission fees. But many first-time buyers have little clue how the people who showed them houses, crafted their offers and advised on their closings actually make money. This knowledge gap makes negotiating fees difficult for sellers and nearly impossible for buyers.

For her own purchase, Barwick eventually calculated that her agent and the brokerage he worked for earned more than $500 an hour, or about twice what the typical Massachusetts law firm charges today.

While she thought her agent did a good job, the fee seemed excessive for the amount of work he did. It felt like her relatively easy purchase had subsidized customers who took up a lot more time and resources.

Matt Chase for Money

Agents justify these sorts of numbers by noting that they only get paid if they make a deal happen and often take on significant out-of-pocket costs. In today’s competitive market, they point out, most buyers need to bid on multiple homes before getting one, making one-weekend sales rare.

Barwick and others who study the industry believe the lure of big paydays for agents — along with aggressive industry tactics to keep commissions high and hard to understand — distorts home prices and stifles competition. This, they say, hurts everyone who participates in the housing market, from buyers and sellers to real estate agents themselves. Even the United States government seems to agree.

So — these days, what’s a real estate agent really worth?

‘Whose money is it?’

The real estate commission structure in the U.S. can be traced back to 1913, when the National Association of Real Estate Exchanges (a precursor to NAR, a trade group that now represents 1.56 million Realtors) agreed on its first code of ethics.

“A real estate man,” the code declared, “should always be ready and willing to divide the regular commission equally with any member of the board who can produce a buyer for any of his clients.”

Back in 1913, forcing agents to cooperate probably made sense. Before that code established some guardrails, there were no real standards for selling property. In the past, land was often passed from one generation to the next or informally traded among neighbors. But that was beginning to change as telephones, cars and commuter trains became more mainstream. Commission-sharing encouraged agents to bring their buyers to rival listings, giving consumers a lot more options.

Today, 65% of real estate agents are women, according to NAR, and anyone with an internet connection can browse listings — but the century-old rule to divide commissions more or less still applies.

When a seller hires an agent to market a home, they agree to pay a percentage of the eventual sale price in commissions. The total rate is generally between 5% and 6%, depending on local norms.

That payment is split roughly 50/50 between the listing agent and the buyer’s agent. It is then further split between each agent and the brokerage they work for. (Agent-broker splits vary widely, ranging from 40/60 for a brand new agent up to 80/20 or better for top performers.) The result is that in most cases the seller pays both agents, and the buyer rarely writes a check directly to any agent.

Industry insiders say this setup remains pro-consumer.

“We have this chicken or egg question. If a buyer buys a house for $250,000, whose money is it?” asks Ron Phipps, a Realtor from Rhode Island who served as NAR’s president in 2011. “Until it goes to the closing table it is the buyer's money — but then it becomes the seller’s money. In the allocation of the sale, to have the brokerage fee paid from that $250,000 purchase fee creates efficiency of the market.”

Money; Getty Images

Economists, on the other hand, argue that buyers ultimately pay through higher home prices and a lack of quality control.

“Usually, higher quality services deserve a higher payment — you pay for what you get,” says Barwick. “Not here. The payment is determined before you even meet with your potential buyer's agent. So the payment does not reflect experience. It does not reflect quality of service or the cost of providing the service.”

‘The primary change has been in speed, not price’

For most of the last century, the primary job of a buyer’s agent was to search for properties. The ways they did this, of course, evolved over time.

In the 1980s, agents would wait around for a truck that would deliver a book of listings every week. "It was like Christmas,” says Bill Gassett, an early real estate blogger and an agent at RE/MAX outside of Boston. “You didn’t know what had come on the market without the book.”

By the mid-1990s, agents with NAR membership got access to digital Multiple Listing Service (MLS) databases showing information on homes for sale in their area. This is the era I remember from my childhood. Before embarking on a day of showings, my real estate agent mom would print out pages from the MLS filled with houses she had picked out to show whatever buyer she was carting around that day.

The MLS sites still exist, and many agents still bring printouts to showings. But the role of the MLS started to change in the early 2000s when Zillow began publishing the information publicly for the first time.

Voyeurs were immediately drawn to the site (which crashed on launch day), but it took some time before most people made Zillow or other listing sites a key part of their home search process — and even longer before real estate professionals accepted the change.

Today, 95% of buyers search for homes online, according to NAR. Much of the search and discovery process is now handled by consumers themselves. Buyers often contact agents with specific houses in mind. "When I first started out, so much of the role of working with buyers was related to helping them with the search. In some cities and towns, you weren’t allowed to have signs, so literally having the MLS book was the key to access to the property,” says Phipps, who joined his mother’s real estate business in 1980.

“I no longer need to do the search; what I need to do is help the consumer figure out what the variables are in the search and determine what information is important,” he says, noting that practically every other step in the home sale process, from staging to financing, has gotten more complicated and needs more agent involvement than before.

Perhaps that is why the internet has not been the fatal blow to real estate agents that it was to travel agents or Tower Records. According to NAR, 87% of homebuyers and 90% of home sellers still hire agents. The share of homebuyers using agents is actually up from 69% in 2001.

In fact, some agents have thrived by being extremely online, building their businesses first as bloggers, then as Instagram and now TikTok influencers. For many others, however, technology has been part blessing and part curse.

It’s common to see social media posts describing real estate agents as “professional scammers” or real estate commissions as “highway robbery.” Agents say they are constantly fighting the perception that they get paid handsomely to do little more than unlock doors.

At the same time, posts from some agents hyping high pay and flexible hours surely encouraged some of the 156,000 people who got their real estate licenses in 2020 and 2021 — 60% more than in the two years prior. (A low barrier to entry and the pandemic trend toward career changes helped, too.)

As of March 2022, there were about twice as many real estate agents as homes for sale. This means experienced agents are competing with newcomers for a severely limited number of listings.

For many, however, the biggest change has been speed. Customers oftentimes choose to work with whoever responds first, says Phipps, turning real estate into a 24/7 gig.

“The primary change has been in speed, not price,” agrees Glenn Kelman, CEO of brokerage Redfin.

“We talk about how crazy the market is and how fast homes are selling as if that is purely a cyclical phenomenon, an indication of how low inventory is,” he says. “But I would say part of it is a secular change. Inventory turns over much faster because people have iPhones.”

‘The price cartel is eroding’

Kelman has long been one of the industry’s most vocal critics despite running one of the country's best known brokerages. In a 2007 interview with 60 Minutes, he declared, "Real estate, by far, is the most screwed-up industry in America."

Early on, Redfin thought it “could automate the agent completely out of existence,” reflects Kelman. “But I’ve been here for 17 years, and for 16 of those years we’ve acknowledged people are going to want to call someone.” Buyers want guidance on how much to offer; sellers want help deciding what improvements to make before listing.

Today, Redfin employs 3,000 agents. Its agents charge a total commission of about 4% (a 1.3% listing fee on average plus the standard 2.5-to-3% buyer agent commission) and give buyers a rebate worth around $2,200 after closing.

Startups are following this example. For instance, Clever Real Estate matches sellers with agents from traditional firms who are willing to accept a 1% listing fee and offers buyers rebates worth 0.5% of the sale. Yoreevo, a brokerage in New York City, gives up to a 2% rebate to buyers.

While these tech-driven discount brokerages are helping some consumers save — and, by some accounts, are putting price pressure on other firms — their market share remains relatively small.

Money; Getty Images

“The price cartel is eroding around the edges,” says Stephen Brobeck, who has studied the real estate industry since the 1980s, currently as a senior fellow at the Consumer Federation of America. But he says for substantive change to agent pay to happen, something external will need to force it.

Enter the Department of Justice.

In November 2020, the Trump DOJ announced an antitrust lawsuit against NAR. As part of a settlement agreement announced the same day, NAR agreed to allow listing sites to publish offered commissions and to prohibit buyer brokers from describing their services as free.

The government has had its eye on real estate commissions for decades. Usually, NAR (which has spent $715 million on lobbying since 1998, making it among the largest lobbying groups in the country) agrees to some nice-sounding but relatively small fixes, and the government allows things to carry on largely as before.

At first, it looked like the latest dust-up would be more of the same. Then, in July 2021, the Justice Department abruptly withdrew the settlement. Now under the Biden administration, the department said the agreement would “not adequately protect the department’s rights to investigate other conduct by NAR.”

NAR is waiting for a ruling on its petition arguing DOJ's withdrawal was not legal. The DOJ did not respond to a request for comment, and it’s not entirely clear what comes next. However, based on Biden’s broader antitrust agenda, observers believe the DOJ could go for the nuclear option of untying buyer and seller commissions. In other words, buyers and sellers would each pay their agents directly.

The thinking is that untying, or decoupling, commissions would allow for more negotiation on both sides of a deal, leading to more price competition and a better alignment of skill, time and pay.

NAR is vehemently opposed to this outcome. The organization is circulating an infographic that declares, “The current way brokerage services are paid prevents a greater cost burden that would be especially devastating for first-time and low-income homebuyers.”

And: “If buyers had to pay real estate broker commissions directly, it would add thousands of dollars to an already costly transaction.”

NAR is not entirely wrong. Surveys consistently show that the biggest hurdle to buying a home is coming up with the down payment and closing costs. Lenders would likely need to allow borrowers to roll commissions into their mortgages like they sometimes do for closing costs, but that may require regulatory changes.

Many, including NAR, also believe needing to pay directly would lead to fewer buyers hiring agents. This might be fine when everything goes smoothly but might not be so appealing in a fiercely competitive market like we’re in right now. It would, of course, also hurt the economics of the industry.

“Every day I go out, I am unemployed,” says Phipps. “So I have to engage buyers and sellers each day to say, 'Here is the range of skills, experience and opportunities I bring to you. Do you value them?'”

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