Revolutions in Realtor Earnings
I'm a Realtor and I work on commission. You may have heard that Realtor commissions are coming under fire right now. While that is true I believe most consumers don't quite understand how real estate commissions work and why the current system, however flawed, benefits them. Please allow me this opportunity to explain why real estate commissions work the way they do. I am not here to defend a position or ideology, only to enlighten and offer perspective.
Realtors Are Paid Too Much
This is something I have heard throughout my career. Let me respond to this idea with some facts about what Realtors actually get paid. According to the 2023 National Association of Realtors Member Profile, the median agent income nationwide was $56,400 in 2022, not including median business expenses of $8,210. Now, there are a lot of part-time agents out there who are dragging this number down. Not to mention, California has some of the highest home prices and corresponding commissions in the country, so let's try and localize this a bit.
According to salary.com, the average income for a Realtor in the Sacramento area is $63,504. This still does not give much perspective, as there's so much opportunity to earn much more in real estate sales. Here is another perspective: In the tri-county region, the median home price today is $580,000. An experienced, full-time, productive agent should sell at least 12 homes per year. This would place them in the top 25% of all agents by sales volume. Based on average commission rates, they would generate about $160,000 in gross commission income.
Now, before you sign up for real estate school, there is more math to finish. This commission is shared with the agent's broker. It's also typical that many of the agent's leads come from a source that also gets a piece of the pie. Don't forget that a real estate agent is basically a small business. This means the agent has significant expenses like advertising, marketing, staging, accounting, transportation, and other professional fees to support their business. Altogether, that should leave about $80,000 in the bank before taxes.
The great thing about paying someone on commission is that you are only paying if they are successful. It's not uncommon for a listing agent to have a property on the market for months and not sell. If the seller gets impatient, they may pull the listing, and the agent is left with dozens of hours in the deal and thousands spent on media and marketing expenses with no income to show for it. Now, I'm not asking you to feel sorry for this person. It's all part of the gig and why, when agents are successful and do get paid, it can seem like a lot. The same goes for buyers' agents. They can work with a client literally for a year with dozens of showings and multiple offers written, all without a successful transaction in the end. This is another reason why the fallout rate for agents is high.
Many people get enamored with the seemingly high income real estate can generate, along with the idea of walking through beautiful houses all day:) The reality, of course, like most things in life, is that success is just plain hard.
I Heard That Realtor Commissions Are Going Away
No, they are not going away, but it looks like they will be changing. Let me explain. Today in any real estate transaction, there are typically two agents: one representing the seller and one the buyer. This is arguably the best scenario to obtain the best possible outcome for both buyer and seller. If only the seller's interests are being represented by a professional Realtor and the buyer is just being advised on how to do the paperwork, more times than not, the buyer will end up overpaying or accepting too much unforeseen liability. We need a professional protecting and guiding each side individually, so it's a fair fight and a balance of risk and reward at the closing table.
Of course, now we have two professionals that need to be paid for their services. The way it's done now is that the seller funds the commission for both agents using part of the equity they have in their home. One reason for this is that buyers are typically stretched financially to get into the home they want and are using all of their cash for the down payment, closing costs, and repairs. Writing a check for the Realtors' commission at closing can be a big ask. If we didn't have cooperative commission sharing, more times than not, the buyer might end up not being represented and likely getting the short end of the stick.
In a recent class action lawsuit, Sitzer vs. National Association of Realtors (NAR) tried in the 8th circuit court in Saint Louis, Missouri, the NAR and some affiliated Brokers were found guilty of conspiring to keep commissions high. The verdict was rooted in the nationwide practice of cooperating commission offered by the listing broker to the buyer's broker. The main issue comes down to the fact that the buyer, while ultimately paying the cost of representation as it's built into the purchase price, was not getting a say in how much they would pay or the opportunity to negotiate directly with the agent who was representing them. Sure, this expense is legally disclosed to the buyer, but the way the buying process flows, there is never a specific moment where the opportunity to negotiate a fee presents itself.
Actually, we are not sure yet. As of this writing, there are seven other pending lawsuits filed in other states. It will likely be a year or two before the dust settles, but we do have a pretty good idea of some changes that are around the corner, and one that is already in place.
1. Cooperating commission is no longer a requirement - This change has already been adopted. Historically, to be part of your local MLS and have the ability to share and sell any of the active listings in your market, you were required as a listing agent to offer some sort of compensation to the buyer's broker. While we were never told how much it had to be, most agents by default were able to convince their sellers to offer the industry standard. PRO - Buyers effortlessly found high-quality representation to ensure they were protected and getting a fair deal. CON - This perpetuated a commission rate paid ultimately by the buyer without negotiations between the parties involved.
2. No disclosure of commission offered to buyers' broker - Today a buyers' agent can look up a house their buyer is interested in and see how much they will get paid if they sell it. The problem has been that if the seller/listing broker was offering less than normal compensation, the agent would be “unmotivated” to show this house to their buyer, maybe even to the point of fabricating a reason why they should not look at it. This is clearly unethical behavior and is a violation of the legally binding code of ethics pledge a Realtor has to take. Nevertheless, we expect published compensation to end, making cooperating commission something directly negotiated between the seller and buyers' broker.
3. The rise of buyer representation and compensation agreements - Because of our current system, buyers and their agents typically never sign any formal agreement to work together. This is because the buyer does not have to agree to pay their agent any specific fee. This, in my opinion, is the best change that will likely come out of the lawsuits. Expect on your next home purchase to have your agent take some time to explain exactly how commissions work and how much they would like to be paid. This should end in a formal agreement signed between you and your agent before they write an offer for you. This is a great thing in many ways. Not only is the agent compelled to explain their value proposition and why they are worth the commission they are asking for, but it will also start weeding out those lesser agents who simply cannot hold up to the scrutiny. This raises the standard and most likely offers you, the consumer, a better agent to work with.
I do have some concerns about what changes will eventually come out of the lawsuits and for good reason. While America does have one of the most expensive real estate systems on the planet, there is no question for me that it's the best. Take the UK, for example, their fees/commissions are only about one-third the cost of ours. But, buyers are not represented, lawyers are involved in every deal, good agents are not well compensated (so there are not many good agents), and there is no MLS, so instead of thousands of agents trying to sell your house, there are just a handful.
My hope and expectation is that we can maintain the fundamental strengths of our system like full buyer representation and keeping the MLS intact while injecting it with some added competition, transparency, and greater value for consumers. If any country can do it, the USA can! God bless America and go buy some real estate!