The 6% commission, a standard in home purchase transactions, is no more.
In a sweeping move expected to reduce the cost of buying and selling a home, the National Association of Realtors announced Friday a settlement with groups of homesellers, agreeing to end landmark antitrust lawsuits by paying $418 million in damages and eliminating rules on commissions.
The NAR, which represents more than 1 million Realtors, also agreed to put in place a set of new rules. One prevents sellers’ brokers from setting buyers’ agents’ compensation, which critics say led brokers to push more expensive properties on customers. Another ends requirements that brokers subscribe to multiple listing services — many of which are owned by NAR subsidiaries — where homes are given a wide viewing in a local market. Another new rule will require buyers’ brokers to enter into written agreements with their buyers.
The agreement effectively will destroy the current homebuying and selling business model, in which sellers pay both their broker and a buyer’s broker, which critics say have driven housing prices artificially higher.
My take is that having a percentage fee of the total sale price for the realtor makes little sense. The realtor might be able to get a more-favorable price, sure. But the effort and return there aren’t linear in the price of a house. If one wants incentive to reflect what the realtor’s involvement actually does, I’d expect to do something more like have a commission based on how far the price differs from an appraisal or something.
Sure, there are different issues with gameability there, but let me put it a different way. Say you are selling or buying a ~$500k piece of property. Say the price can go up or down $50k based on what your agent does. Do you want to have the realtor mostly incentivized to get that swing in your favor, or incentivized to get more throughout? As things stand on our hypothetical sale, there’s a percentage of that that goes to both the buyer’s agent and seller’s agent.
As things stand in our hypothetical example, 80% of the seller agent’s incentive is to just close the sale. If they have to put in double the amount of work to get the best possible price rather than the worst possible price, it makes no sense for them to do so – they’d rather focus on doing another sale.
I remember thinking “it’d probably be a good idea to outright offer something like a 50% split on sale above some fixed level to the agent, if you’re selling real estate, even in addition to the existing commission, because as a seller, you want them focused on driving that number up, and the current system doesn’t much do that”.
As the existing structure has it, the real sales job that the seller’s agent is incentivized to do isn’t getting a favorable price for the seller, but rather selling the seller on having them, rather than a different realtor, represent them.
On the side of the buyer’s agent, the existing incentive is even more curious, because they get rewarded by having a higher price, not a lower price, which to the degree that they respond to incentives to have a different price, aligns their interests with the seller, not the buyer that they are hypothetically working for.
That being said, I understand that percentage commissions aren’t uncommon in the sales world. Just that usually, a salesman isn’t selling a fixed amount of product for the party that they are working for – you’re trying to incentivize them to sell a larger amount. And while I don’t know how procurement agents are typically compensated, I doubt that it’s normally tied to having a higher price. Any system is going to have its own degree of gameability, but the current set of incentives seems to me really removed from one that makes sense for the buyers and sellers involved.