Real estate commissions are inflated by as much as $50 billion per year due to the lack of price competition created by having listing brokers set co-op fees for buyer brokers, according to the report in the Berkeley Business Law Journal.

Real estate commissions are inflated by as much as $50 billion per year due to the lack of price competition created by having listing brokers set co-op fees for buyer brokers, according to an article in the Berkeley Business Law Journal published this month.

The article, called “Obstacles to Price Competition in the Residential Real Estate Brokerage Market,” is authored by Mark Nadel, an attorney and policy advisor for the Federal Communications Commission (FCC) since 1990. In a footnote, Nadel stresses that the article represents solely his personal views, however. Nadel wrote a similar paper back in 2006 in which he criticized the real estate industry’s commission structure and said commissions were inflated by $30 billion.

In the same footnote, Nadel thanks discount real estate brokerage REX Real Estate “for financially supporting this update and refocus of arguments for reform made in an earlier article.” REX does not offer typical co-op fees to buyer brokers.

REX contacted Nadel about updating the paper last year, Nadel told Inman via email. REX has made waves by working with the U.S. Department of Justice (DOJ) in its lawsuit against the National Association of Realtors (NAR), suing the state of Oregon over its law prohibiting brokerages from offering consumers rebates, catching Houston agents steering buyers away from listings offering smaller commissions, and, this week, suing NAR and Zillow for NAR rules that require Zillow to segregate non-MLS listings from MLS listings on its website.

“REX paid me as a consultant, and gave me feedback on earlier drafts, but I retained full editorial control,” Nadel said. “I believe that REX contacted me because I share many of its views about obstacles to competition in the industry, but I did not attempt to craft the article to support any positions to please REX.”

REX did not respond to emailed requests for comment for this story.

The updated article argues that allowing listing agents to set and collect co-op fees for buyer brokers has no benefits for the public. Rather, the paper argues the practice hinders competition by maintaining commissions higher that they otherwise would be, setting up a conflict of interest by incentivizing buyer’s agents to encourage their clients to make higher bids, discouraging buyers from negotiating with their agents or even realizing that buyer’s agents are an avoidable cost, encouraging listing agents in a cold market to offer a bigger co-op commission rather than benefit the buyer by cutting the list price, and rewarding agents the same regardless of their experience, skill level, the complexity of the transaction or how much money they save for their client.

The practice also encourages agents to violate their fiduciary duty to act in the best interests of their client by incentivizing buyer’s agents to steer their clients away from listings from non-traditional brokers offering lower commissions and spurring listing agents to try to double-end commissions by limiting how much they market listings, according to Nadel.

“Agents have a strong incentive to favor cooperation over price competition that could threaten the current business model, which produces around $90 billion/year in commissions,” he wrote.

“A review of real estate agent commissions around the world suggests that if competition were to drive prices down to agent costs, commissions could fall by 50 percent or more. As of 2015, agent commission rates were between 1 and 2 percent in Australia, Ireland, Netherlands, Norway, Singapore, and the United Kingdom; and 3 percent or less in Belgium, Canada (usually), China, and Finland.

“Since real estate brokers in comparable Western nations are making a profit at those rates, their costs must be even less, and one would think that brokers in the United States could also be profitable at those rates.”

Nadel argues that because the industry is structured to require cooperation between peers to complete transactions, “innovative entrants offering to compete on price have been stymied by traditional real estate brokers acting as an informal cartel.” Traditional broker and agent incumbents use industry rules and practices “to protect their elevated fees, despite the cost to consumers and society,” according to Nadel.

One such rule is the “Buyer Broker Commission Rule,” which is the subject of multiple antitrust lawsuits against the National Association of Realtors and requires listing brokers to make a blanket, unilateral offer of compensation to buyer brokers that is either a percentage of the gross sale price of the home or a definite dollar figure when entering a home in a Realtor-affiliated MLS.

Other such rules include minimum service bundles that agents and brokers are required by law to provide in some states, which hinders the offering of a la carte services, and anti-rebate laws such as the one REX is challenging in Oregon.

Nadel is not arguing that agents are overpaid given the time they spend on their job. Rather, he says the current industry business model “attracts an oversupply of agents who spend much, if not most, of their time and effort prospecting for clients, with little benefit to consumers.” This excess of agents does benefit one big institution, however, according to Nadel: NAR, which takes in about $200 million per year in agent dues.

“Using [researchers’] estimate that a competitive marketplace could reduce commissions by more than 50 percent, consumers could expect to save as much as $50 billion/year, reducing real estate agent income by that same amount,” Nadel said.

“This could easily lead half of the current active agents to leave the business, cutting annual NAR membership fees in half. Clearly, brokers, agents, and the NAR have a lot at stake in protecting and preserving the status quo.”

He recommends four main policy changes:

1. Prohibit listing agents from setting the fees for buyers’ brokers (this would also moot the need for any states to repeal their prohibitions on rebates).

2. Take actions to deter traditional agents from steering clients away from transactions involving non-traditional brokers.

3. Permit brokers to offer real estate services on an unbundled, à la carte basis.

4. Ensure the widest dissemination of seller listings and related information consistent with the interests of the seller.

“With these in place, one would expect much lower, cost-based real estate agent fees and less time wasted by part-time agents prospecting for clients,” Nadel wrote.

In an emailed statement, Mantill Williams, NAR’s vice president of communications, told Inman that the cooperative broker MLS system levels the playing field so that smaller brokerages can compete with larger ones.

“By having all properties listed in one location, even the smallest of brokers have access to the same listings, information and pool of buyer brokers as the largest brokers,” Williams said. “Without the collaborative incentive of the existing MLS, brokers would create their own separate systems of cooperation, fragmenting rather than consolidating property information.

“Rex is trying to take benefits of the MLS system without contributing to it.”

Williams said the broker cooperation that the MLS system incentivizes provides “the best and greatest number of options for buyers as efficiently and transparently as possible” and gives sellers ‘access to the largest possible pool of buyers within a market because their listing broker will cooperate with all the buyers’ brokers to achieve the best offer.”

Moreover, he added, “The buyer’s broker is free to negotiate the amount of the commission with the seller’s broker. Sellers also can negotiate the amount of commission they pay to their own listing broker.”

But Nadel argues that the problem with a seller signing a standard listing agreement that gives a specific commission to the listing broker with the idea that the listing broker will share the commission with the buyer broker is that the seller cannot, if they want to, refund the buyer’s agent co-op fee to a buyer who does not want to use a buyer’s agent.

“MLS rules actually prohibit listing brokers from adjusting co-op fees after the buyer has made a bid, even if the seller asks that the arrangement reflect the buyer’s situation and preferences concerning a broker,” Nadel wrote.

“By effectively forcing buyers to pay the cost of a buyer’s broker — whether they use one or not — it should be no surprise that even those who find the home they will buy on their own still use real estate brokers.”

Williams pointed out that all kinds of brokers are welcome to participate in MLSs. “In fact, because of MLSs, we’re at a point in the market where we’re seeing unprecedented benefits to consumers and competition among brokers, especially when it comes to service and commission options,” he said. “All this gives consumers many different choices including which customer service approach, which broker and which commission model they prefer.”

Nadel argues that traditional agents have a vested interest in preventing disrupters from succeeding and undermining the traditional business model and, in practice, try to dissuade buyers and sellers from using lower-priced rivals by disparaging them, saying “you get what you pay for.”

” Traditional agents imply that brokers with lower prices must be skimping on quality and/or services compared to the ‘full service’ offered by traditional brokers, although they conveniently fail to define full service,” Nadel wrote.

“This is easy to refute by noting that if brokers who charge a 6 percent commission ($18,000 on a $300,000 home) can afford to provide full service, then brokers charging only a 4 percent commission on a $1 million home ($40,000) can, too. There is also empirical data finding that discount brokers do not secure significantly lower prices. Yet when media firms criticize protectionist tactics of traditional brokers or praise new firms, vocal brokers accuse the media of being misinformed and biased.”

Nadel offered an example of steering in which a buyer’s agent called REX about a home his buyer wanted to see and found out that REX was not offering a co-op fee but rather that the seller agreed to add whatever commission the buyer’s agent negotiated with the buyer to the price of the home. “[T]he buyer’s agent said he would not show the home to his client,” Nadel said.

Nadel asserted that, to his knowledge, neither NAR nor any state real estate commissions have ever sanctioned a real estate agent for steering. Asked whether that was accurate, NAR declined to comment.

Given that nearly all properties can be found online, some agents and brokers scoff at the idea that buyer agents can steer their clients away from certain listings based on the buyer broker commission.

“Homebuyers are more informed today about what they want in a home and market availability (thanks largely to portals that use MLS information) and will ask their broker about homes they find online,” Williams said.

“The reality is that brokers who were only to show homes that offer high commissions wouldn’t be in business very long, as buyers would demand to see other options or go to someone else who will show them those properties. It is a brokers’ ethical duty to show those homes in addition to others the broker considers to be a fit for a buyer’s priorities.”

Nadel acknowledged that 95 percent of buyers now use the internet and search for homes themselves, but stressed that when buyers decide to use an agent they are apt to rely on that agent to identify the most suitable choices and an agent can influence their decision by emphasizing or exaggerating a listing’s drawbacks.

“[Buyers] may welcome emails the agent’s software generates when homes that meet their criteria come available, freeing them to focus on their other responsibilities,” Nadel said. “Moreover, even when a buyer discovers some omissions and challenges their agent, skilled buyer agents can always apologize for the oversight or explain it away by listing the property’s flaws.”

Williams and Nadel both highlighted that NAR is in the process of adopting rules that will explicitly prohibit MLS subscribers from filtering listing search results by commission — one of the stipulations of the settlement NAR reached with the DOJ in December.

Nadel said the changes required by the settlement, including the public display of buyer broker commissions, should at least allow buyers to see “the low co-op fees offered for homes that they are attracted to if agents do not identify them.”

Still, Nadel wondered if buyers would be able to take advantage of the information in time.

“[I]t is not clear whether any such disclosures will come in time to allow most buyers to attempt to negotiate a reduced fee,” he wrote.

Nadel addressed one of the main objections agents have voiced about having buyers, rather than sellers, pay the buyer broker: it would add to their closing costs, thus potentially shutting them out of homeownership. But Nadel contends that the buyer broker fee could be amortized as part of the mortgage,

“[A]s long as the fee a buyer pays to a buyer’s broker is legitimate, mortgage lenders should be willing to view the fee as part of the purchase price of the home for the purposes of the mortgage, as it is now,” he wrote.

“Mortgage lenders should not care whether a buyer’s broker is paid directly by the buyer or indirectly by the listing broker, and that should be reflected with a definition of ‘sale price’ — for the purpose of setting the maximum level for a mortgage — that includes the amounts paid to both buyer and seller brokers as listed on the standard closing form.”

For instance, for-sale-by-owner (FSBO) sellers and non-traditional listing brokers like REX allow buyers to include the buyer broker commission in the sale price, according to Nadel.

“To the extent that a traditional listing agent wants to hinder non-traditional buyer agents, they might refuse to bake the buyer agent’s fee into the selling price, but a mortgage broker should still be willing to do so,” he said.

“Any lack of availability of this option today is probably due to a lack of demand. If it became illegal for listing brokers or sellers to pay the buyer’s agent, then one would expect lenders to formally define the sale price to include the buyer’s broker fee, even if it was separate from what was paid to the seller.”

Email Andrea V. Brambila.

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MLS | NAR
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