Real Estate Collusion Revealed! Misaligned Commission Incentives

As a real estate investor since 2003, I’ve been disappointed by the real estate buying and selling process for a long time. While transaction costs have declined to zero or near zero for every industry due to technology, real estate commissions have remained stubbornly high, partly due to collusion.

After I sold a rental property in 2017 and paid a 4.5% commission, I swore I would never sell another property again until commission rates came down. 

Paying over $120,000 in total commissions to sell my home already felt bad. But as the home seller, having to pay the buyer’s real estate agent a commission felt even worse!

The Real Estate Commission Is Negotiable 

Originally, my listing agent wanted to charge me 5.5%, but I negotiated the commission rate down to 4.5%. Please know that the commission rate is negotiable, but many home sellers don’t seem to realize this. Or maybe home sellers know, but are too timid to negotiate. 

When my real estate agent finally accepted 4.5%, she made it seem like she was doing me a favor by saying, “I had to really negotiate with my brokerage to lower the rate. They never do so. I’m only going to earn a 2% commission while I pay the buyer’s real estate agent a 2.5% commission.”

The buyer’s real estate agent earning a higher commission rate than the selling agent who has to prep and market the property didn’t seem fair. So I responded, “Then how about paying the buyer’s real estate agent 2% or less so I can save money?”

The agent then responded, “It will be much harder to get buyers if we pay the buyer’s real estate agent less than a 2.5% commission. In the past, they earned a 3% commission, so they are already accepting less.”

This sounded like real estate collusion to me, but I couldn’t prove it.

A Buyer’s Real Estate Agent Should Show Their Clients A Property Regardless Of The Commission Rate

How absurd is it that a buyer’s real estate agent wouldn’t be willing to show a property to their client because the commission isn’t at least 2.5%? If this happens, the buyer’s real estate agent isn’t acting in the best interest of their client, especially if the house or condo is exactly what their client is looking for. 

The home seller paying the buyer’s real estate agent a commission creates a misaligned incentive structure. The more the selling agent is willing to pay the buying agent, the more the buying agent is willing to convince their buyer to buy the home. 

On the flip side, a home seller paying a higher commission rate to the buyer’s real estate agent might increase the chances of getting a higher price for the home. This is what multiple listing agents said to pitch me to list my home with them. 

I wasn’t buying it because I don’t think buyers are stupid. Thanks to technology, buyers can easily see what comparable properties have recently sold for. In addition, I wasn’t selling a starter home marketed to first-time homebuyers. Finally, I wasn’t willing to pay tens of thousands more in commission. 

The Experience That Made Me Realize Paying The Buyer’s Agent Commission Is Wrong

Once I got into contract to sell my home, the buyer put in financing and inspection contingencies. I didn’t initially mind because I wasn’t in a rush to sell my home. I also wasn’t quite sure I wanted to sell my home. If the buyer wanted to do some inspections so I could get a free report on what I should do to fix my home, that was fine. 

But ten days after the deadline to remove financing contingencies, I began to get a little frustrated. While the buyer was waiting for the bank to grant him a loan, the buyer’s agent informed my agent the back windows needed to be replaced. They were leaking.

The total cost to replace all the windows and fix the wood in the back would supposedly cost $35,000. As a result, the buyer’s agent argued for a $35,000 credit. 

I said “no,” so they stalled for another week. The buyer’s agent kept pressuring us to give a credit given they had raised their offer price by $150,000 after we countered their original offer. 

After more time passed, I finally offered them a $10,000 credit to fix the windows and close the deal. They ultimately accepted. 

Here’s the thing. I felt like a FOOL to be paying the buyer’s real estate agent a $68,500 commission (2.5% of $2,740,000) when he was trying to hammer me down on the selling price! It made no sense!

The buyer’s real estate agent has a fiduciary duty to their client to get the best deal possible. Therefore, a home seller paying the commission of the buyer’s real estate agent is illogical. 

A Home Buyer Should Pay Their Agent A Commission

Given we can all agree that a buyer’s real estate agent represents the buyer and the listing real estate agent represents the seller, commissions should be paid according to representation. 

A home buyer should pay their agent a commission if their agent finds them a home and successfully closes. It is the logical thing to do. 

The value in a buyer’s real estate agent is in identifying suitable properties, submitting an offer, negotiating terms, navigating the escrow period, protecting the buyer from costly surprises, and introducing helpful people such as a handyman. 

Personally, I’d be willing to pay a buyer’s agent up to $10,000 if they can find and negotiate a great off market deal. But I wouldn’t pay more because I’m an experienced buyer and negotiator.

I’m confident enough with my abilities that I’ve purchased the last three homes via dual agency. In essence, I acted as my own real estate agent in order to lower the commission the seller has to pay and lower my purchase price.

So why isn’t an aligned real estate commission system in place? Real estate collusion!

Listing agents prefer to pay the buyer’s agent their commission in order to make as many commission dollars as possible. If you control who gets paid, then you have better control over outcomes. 

Remember, listing agents are also buyer’s agents too. 

Legal Verdict Shows Collusion In The Real Estate Industry 

After 11 days of testimony, an eight-person jury in Missouri found the National Association of Realtors, HomeServices of America, and Keller Williams guilty of collusion to maintain high commission rates. The jury took just a little over two hours to decide its verdict in the Sitzer/Burnett Commission lawsuit trial. 

Two hours to deliberate indicates an easy decision. It was clear the real estate industry colluded to keep commission rates high to the detriment of home sellers and home buyers. Collusion is the only way they could keep commission rates averaging above five percent when commission rates in all other industries have declined to zero or near zero over the past 20 years. 

The National Association of Realtors and the HomeServices of America have been ordered to pay damages of $1.78 billion. While subsequent damages could rise to over $5 billion! Obviously, the defendants will appeal and the final penalty payment will likely be two years from now.

But WOW! That is a huge sum of money! After all these years about railing against the high cost to buy and sell a home, I finally feel vindicated. I couldn’t prove there was any real estate collusion in my past deals. Now I don’t have to.

Why The Plaintiffs Brought The Lawsuit Forward

A group of home sellers in Missouri represented by class action attorneys filed a lawsuit alleging excessive real estate commissions. The plaintiffs sold their homes through an agent who listed the properties on one of four Multiple Listing Services (MLSs) in Missouri. They claim the commissions paid by home sellers are inflated due to the way listing brokers compensate buyer brokers. 

The lawsuit centers on the typical practice of listing brokers offering a portion of their commission to agents representing potential buyers. This incentivizes buyer brokers to show homes on their MLS platform. The plaintiffs argue this arrangement harms consumers by enabling higher total commission rates. The case aims to challenge the long-standing MLS compensation model and the commissions earned by both listing and buyer agents.

One of the plaintiffs, Hollee Ellis, a former high school English teacher, had paid a 6% commission on her home sale. The buyer’s agent’s share of the commission amounted to 21% of her “net equity,” effectively consuming 40% of the equity she had accrued in the property. During the trial, which lasted two weeks, Ellis reportedly said: “It was a hard pill to swallow that we would walk away with so little.” 

In Ellis’ view, she should not have been forced to pay for both the seller and buyer’s agent, reportedly telling the court that: “The buyer who chose them and who they’re working for should pay them.”

Situations like this really make me sad. Paying a 6% commission today is outrageous. 

What’s Next For Realtors And The Real Estate Industry?

After the verdict was announced, publicly-listed real estate brokerage firms declined by 5% – 10%. Clearly, the verdict is a net negative for the profitability of these companies. 

This lawsuit could significantly disrupt traditional real estate commission structures if the plaintiffs prevail. In the worst-case scenario for the defendants, Judge Bough could impose a nationwide ban on multiple listing services allowing listing agents to set predetermined commission rates offered to buyer’s agents. This practice of cooperative compensation is at the crux of the lawsuit. 

The ruling would prohibit listing agents and sellers from defining buyer agent commissions upfront in the MLS. Buyer broker commissions would instead need to be determined independently without advance knowledge of the rate. 

Judge Bough could also bar listing agents from sharing any of their commissioned amounts with buyer agents. This would prevent commission splits between listing and buyer brokers, the standard industry practice. Ultimately, the lawsuit threatens to upend the traditional MLS compensation model between real estate agents representing home buyers and sellers.

Finally, Michael Ketchmark, the lead attorney representing the plaintiffs in the original Missouri lawsuit, has filed a new class action complaint on behalf of three additional home sellers.

The new lawsuit names the National Association of Realtors, Compass, eXp World Holdings, Redfin, Weichert Realtors, United Real Estate, Howard Hanna and Douglas Elliman as defendants. It alleges these real estate companies and trade associations participated in an industry-wide conspiracy to inflate real estate agent commissions.

What Does The Real Estate Lawsuit Mean For Home Sellers And Home Buyers?

Eliminating collusion is almost always good for customers. Excess company profits tend to get redistributed to the consumer. Therefore, I expect the following to happen:

• Real estate commissions should take a step function down.
• Buyer’s agents will be paid by buyers, listing agents will be paid by sellers, creating an aligned incentive structure.
• Short term, at the margin, there will be a decline in housing supply as home sellers hold off to listing their homes to see if they can pay a lower commission rate. Listing agents will initially resist.
• At the margin, due to a short-term structure decline in supply, home prices will get a boost.
• Longer-term, transaction volumes will increase due to lower commission rates and higher supply, thereby creating happier buyers and sellers.
• Home buyers will ultimately get a better deal because the home seller won’t have to pay as large of a commission. Even if the buyer has to pay an agent to represent them, the buyer will save because the fee to the agent should be way lower than 2.5% commission the listing agent would pay the buyers agent in the past.

Hold Onto Your Properties For As Long As Possible

Personally, I’m unwilling to sell my home if the overall commission rate is above 4%. At 4%, I’ll only sell if the listing agent is able to find a buyer at a price above what I perceive to be fair market value. 

Ideally, I prefer a flat fee commission structure. It can be based on the price point of the house, such as $3,000 commission for homes up to $500,000, and $500 more for every $100,000 increase in home price.

It doesn’t take a lot more work to sell a more expensive home. But a flat fee real estate commission structure sounds too fair and logical for the consumer, which means companies won’t go for it. 

Alternatively, a lower commission rate for higher-priced homes can also make sense. For example, a 4% commission on homes up to $1 million and a 0.1% decline in commission for every $100,000 increase. The cost to sell a home is egregiously high, which means fewer people will sell. 

In a way, I’m thankful for high real estate commissions and transfer taxes. If real estate commissions were zero, like commissions are for trading stocks, I probably would have sold at least one other property before the pandemic real estate boom. If I had, I would have missed out on hundreds of thousands of dollars of gains. So hooray for collusion!

To build wealth with real estate, I recommend holding for as long as possible. There will be the usual downturns likely every 7-10 years, but over the long run, owning real estate tends to be a great wealth-building move.

Reader Questions 

Do you think there was/is real estate collusion? Do you think the home seller paying the commission of the buyer’s agent is absurd? Why do consumers accept this type of incentive structure? 

How do you think the real estate industry will change after the landmark verdict against the National Association of Realtors, HomeServices of America and Keller Williams?

Reader Recommendations

To invest in real estate more strategically, take a look at Fundrise. Fundrise primarily invests in residential and industrial properties in the Sunbelt, where valuations are lower and yields are higher. Real estate is currently going through a downturn due to high mortgage rates. As a result, dollar-cost averaging now provides a better entry point for long-term growth. 

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