Harney: Real estate commission rate drops to 5% range
By Kenneth Harney
Published: January 16, 2017, 6:00am
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The average commission rate paid on American home sale transactions continues to decline and could dip below 5 percent within the next few years.
That’s the conclusion of Real Trends Consulting Inc., a research and advisory company that monitors hundreds of realty brokerage firms and compiles data on sales and commission rates of 450,000 sales agents across the country. Though you may have assumed that the “standard” commission rate is 6 percent — and it is indeed the preferred rate at many full-service, traditional brokerages — the actual national average was 5.26 percent in 2015. Based on preliminary data, it’s likely to decline further when the final numbers are tallied for 2016.
Steve Murray, Real Trends president, told me that “we are headed for [a] sub-5 percent overall rate within the next few years.” In 2010 and 2012, the average rate was 5.4 percent and in 2013, 5.36 percent. During the 1980s and early 1990s, the standard sometimes was 7 percent, depending on the local market.
What’s been causing the drop in fees? Likely multiple factors:
• Rising numbers of agents are now working for brokerages that allow them flexibility to negotiate lower commission rates, with no set minimum. Murray says 2016 appears to be the first year when the percentage of all agents working for brokerages that do not impose some type of floor on minimum commissions exceeds the percentage of agents working for firms who do.
• Tech-savvy discount rate competitors such as Redfin, which is now active in 83 markets, are offering their lower charges — a 1 percent listing fee in Washington D.C., Chicago, Denver and Seattle and 1.5 percent elsewhere — putting pressure on competing firms’ agents to be more flexible on fees. Redfin also offers refunds to shoppers who buy through one of their agents.
• During 2015 and 2016, some major markets saw severe shortages of homes available for sale, making traditional agents more willing to negotiate lower fees in order to obtain listings.
Commissions in real estate are always negotiable. Typical transactions involve “splits” among the brokers and agents involved. If the total commission in the listing contract is 6 percent, normally that gets split in half between the listing agent’s brokerage and the brokerage that brought in the buyer. Each of the slices then gets further split between the brokerage firm and the agent. If the listing fee gets negotiated down to 2.5 percent and the fee to the buyer’s agent is 3 percent, the listing brokerage and agent only get to split the 2.5 percent.
Discount firms offer a variety of alternative models. Denver-based Trelora LLC charges a flat $2,500 to list a house regardless of price and offers a flat $2,500 to the buyer’s agent. Though controversial among commission-based realty firms in the area, Trelora’s sales volume soared by 30 percent in 2016, according to CEO Joshua Hunt. Some limited-service “alternative” firms offer to put listings on the internet for anywhere from $49 up but don’t do much beyond that.
Traditional brokers argue that by skimping on fees working with discounters, sellers often end up with poor marketing efforts, inadequate photography, newbie agents with minimal experience, and the risk of losing more money on the final sale price than they save in fees. Traditional brokers also question how much of an impact lower-fee competitors are having on their business. David Howell, executive vice president at McEnearney Associates, a northern Virginia brokerage firm, cited survey data from the National Association of Realtors indicating that 83 percent of recent buyers and sellers “chose full-service brokers” for their transactions, while just 17 percent “chose brokers who offered some form of limited service.”
Bottom line: If you plan to sell in 2017, explore all your fee options and the pros and cons each involves. Talk to multiple competing agents about what services they provide, what they charge and how it gets split. Most important, be aware that there is no standard fee in real estate, and that average charges nationwide have been declining.
Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.
