Are Real Estate Commissions at the Root of NAR Problems?

Is there a common thread among all of the problems confronting - directly or obliquely - the National Association of Realtors?

NAR's strongest supporters say yes, and that single thread is real estate commissions. These supporters charge that there is a perception that agents are making an unseemly amount of money in their real estate careers and should, perhaps, be reined in. Some supporters of the status quo even attach more sinister motives to those who are attacking the industry, but more about that later.

Congressmen Oxley and Frank and the Department of Justice have cloaked their questions and lawsuits in terms such as anti-competitiveness, restraint of trade, and violation of the Sherman Act (pretty much the same thing) and we will allow them, for the moment, to freely use those explanations. Their charges, as presented, may ultimately result in constraints that will prevent real estate agents from maintaining (or, if you are not a supporter, fixing) commissions at current levels. But the current questions, complaints, and suits do not mention or clearly target the commission aspect of the industry. The Department of Justice has brought suit against the State of Kentucky which has laws prohibiting commission rebates to consumers such as those offered through employers and commercial enterprises like Costco which seems to be the most direct if not the only formal assault on commissions.

But other attacks are more direct.

Regular Newsweek contributor Jane Bryant Quinn started her July 18 column in the magazine by referring to "the real estate cartel." She stated that while "home prices have risen 40 percent in the past five years" most real estate brokers still quote sales commissions at about 6 percent. "The industry is using its political clout to hold down price cutting" and they (brokers) "trade with each other politely, at the cartel price."

Ms. Quinn then goes on to address many of the tactics being used by some agents and consumers to reduce the cost of selling (and maybe, only maybe*,) buying a home. These include the creation of discount real estate or fee for service firms; paying fees for unbundled services; referrals and rebates - i.e. "affinity" programs; and, of course, being a or buying from a FSBO (For Sale By Owner.)

(Note*: The reason for the parenthetical reference above is that buyers often assume that they will save money if they can buy a house where the seller is not paying a "traditional" commission. It is unclear if sellers, often or even ever, pass their savings from using discount buyers or being a FSBO through to their buyers. It is a fact that buyers and sellers both collect rebates from affinity memberships, but these are unilateral - i.e., a seller listing through an affinity program collects, as does a buyer who purchases through one - they don't share their savings, but each is playing on a level field..)

The airwaves, especially on Sunday are filled with attacks on real estate commissions, likewise the Internet sites, mainly from those who are offering cut-rate services. There is nothing wrong with that. If someone is willing to perform the same service for $2,000 for which another will charge $15,000, that is usually called Capitalism.

But it is amazing that real estate commissions, be they four, five, or six percent, arouse such a reaction from, well seemingly from everyone. We have spoken to this before; questioning why someone, who would never blink at a decorators fee of $10,000 for planning a new living room or question a charge of $450 per hour from their attorney chokes when confronted with a bill for five percent of the sales price for rapidly and efficiently selling their home, perhaps even at a much higher price than the seller or a flat rate agent might have achieved.

It all seems so like too much ado. In my previous community houses had a median price of $400,000 and commissions were rapidly sinking from a norm of 5 percent to 4 percent: 20 years ago the fees were uniformly 6 percent. As prices have gone up, commission percentages have gone down. Sellers are not stupid and agents aren't either.

In my present locality the commission structure is high; seven percent seems to be the norm. But houses sell for an average of $160,000 with many listing at $60,000 or $70,000. At the lower range this is a commission of $4,550, split between the buyer and seller agent, and with a large portion (25 to 55 percent) going to the "house" i.e. the office owner; a final paycheck of $2,275 at the very best the agent can expect. If she sold the house in a weekend it is a nice payoff; if she put in 21 consecutive open house weekends it is damn poor remuneration. And that is one thing that the critics are overlooking. Any commission job requires a lot of dead-end hours for every minute that results in a profit. Perhaps this speaks to the need to revamp the basis on which agents are paid.