How Should Real-Estate Agents Be Paid? – The Wall Street Journal

Still, home sellers rarely negotiate a sales commission. And home buyers often are unaware of the amount their real-estate agents are being paid by the seller.

Some researchers believe the commission structure not only increases transaction costs, but also reduces market innovation. While digital technologies have driven down the total cost of booking a flight, trading stocks or buying auto insurance, they have yet to make a meaningful dent in the cost of selling a home. The 3% commission that real-estate agents charge has stayed roughly the same over the past 20 years.

The federal government is investigating the compensation issue. In November 2020, the Justice Department filed a lawsuit in Washington, D.C., federal court accusing the National Association of Realtors of maintaining anticompetitive rules that created an environment that provided little visibility for home buyers about the commissions a buyer’s agent would earn. The Justice Department filed a concurrent settlement—with the NAR accepting new transparency rules but admitting no wrongdoing—but last summer, the Justice Department’s antitrust division withdrew from the settlement.

The NAR filed a petition in protest, but the Justice Department filed one of its own, saying that it had the right to continue investigating payment and marketing practices.

The association says that its members provide “the most transparent, accessible and accurate source of housing information available to consumers.” The current method of sellers paying buyer’s brokers, the association says, “gives first-time, low/middle-income and all home buyers a better shot at affording a home and professional representation.”

So, what are the alternatives? The Wall Street Journal hosted a conversation with

Panle Jia Barwick,
a professor at Cornell University and a co-author of a Brookings Institution report on real-estate competition;

Sonia Gilbukh,
an assistant professor of real estate at the Zicklin School of Business at the City University of New York’s Baruch College; and

Benjamin Keys,
a professor of real estate and finance at the University of Pennsylvania’s Wharton School. Here are edited excerpts of the conversation.

Changing the system

WSJ: What is the single most important change that could be made to the current commission arrangement?

PROF. KEYS: Allowing buyers and sellers to negotiate Realtors’ fees separately would reshape the market. Because the price for the buyer’s agent is rolled into the price for the seller’s agent, the 3% commission is not a function of the buyer agent’s experience, effort or the hours they worked. And in a market where everyone has access to
Zillow,
and can do a lot of house-hunting work themselves, it’s a pretty incredible price tag.

PROF. BARWICK: I agree. There are unintended consequences of the current payment arrangement. First, buyers’ agents have incentives to steer their clients toward properties that offer higher commissions. Also, it reduces the incentive for buyers to find ways to save, since they don’t pay for their Realtor’s services.

In the U.K., where buyers and sellers pay for services separately, there is a much higher proliferation of different compensation models. Commissions paid to sellers’ agents tend to be between 1% and 2%, and about 33% of sellers opt for a flat fee. In general, buyers do not use brokers, and very few transactions involve a buyer’s agent. In a study from England of the sellers who paid a flat fee, most [73%] paid £2,000 [about $2,700] or less. So, if we allow payment models to be more flexible, which is friendlier to competitive forces, we may be able to reduce costs.

Our research found it is actually becoming much more expensive to buy/sell properties these days in the U.S. Using data from the Boston area, the average commission paid to the buying agent for buying one house was $9,400 [in 2018 dollars] in 2000, and $14,500 in 2018, a 54% increase after adjusting for inflation.

PROF. GILBUKH: But right now, the buyer’s-agent commission is folded into a mortgage. That is absolutely something that has to stay if we decouple commissions. If that’s not the case, financially constrained buyers might not be able to afford to pay upfront fees. It’s a challenge that may be easy to get around, but needs to be well thought out.

WSJ: Could buyers and sellers pay real-estate agents a la carte for specific services—say, showing a certain number of homes or listing a house for a set price?

PROF. KEYS: Thinking about compensation as an a la carte menu is really useful because it shows real-estate agents provide value, and the question is how to price that value: Negotiating the terms of an agreement costs Y, drawing paperwork costs Z. By breaking down components, there is a sense of where the value is added from real-estate agents and where buyers and sellers overpay. Once Realtor services are converted into those units, it’s possible to think about ways to automate, substitute and compete on each of those different elements.

PROF. GILBUKH: It might be hard for buyers and sellers to weigh their options, and making the wrong decision could actually be pretty costly. What if a seller pays a Realtor by the hour, not contingent on a sale, and then has trouble selling and owes a lot of money that they didn’t expect? Certainly, that’s a benefit of the current system.

Other platforms

WSJ: Are there additional ways real-estate agents could be compensated?

PROF. BARWICK: Sellers and the listing agents could agree on a target price. Any price exceeding that threshold could be split between them. That aligns the seller’s and the listing agent’s interest much more. Currently, if the transaction price increases by $10,000, which is a big gain for the seller, the agent earns $300, which isn’t that much.

PROF. KEYS: A two-tiered pricing arrangement is a great direction, and it would be interesting to see some experimentation. The challenge is determining the agreed-upon price. Agents have more local market information than sellers. Most sellers only make a few real-estate transactions in their lifetimes.

Here’s another idea: A company called Houwzer lists properties for a flat fee [$5,000]. Their agents are hired as salaried employees, so they don’t get a commission for their work. The buyer’s broker gets a 2.5% commission. An $800,000 home listing on Houwzer could save the seller $20,000.

PROF. BARWICK: If you look at the combined market of discount brokerage firms, like Houwzer, it’s very low. Dominant players, which can make up 60% to 70% of a local market, are much less likely to buy from discount brokerage firms or buy properties with below-standard commission rates.

[Houwzer says that most of the dominant real-estate players have no issue showing any house, as long as the broker offers a buyer’s agent fee, as Houwzer does. Historically, traditional agents would not show a home listed as “for sale by owner” or by a brokerage that did not offer a fee, the company says. In addition, the company says that it is not a discount brokerage by way of the service it provides its clients and the cooperating buyer broker fee it offers the agent. It adds that next-generation brokerages like Houwzer and others continue to grow.]

WSJ: Could new digital platforms change real-estate agent compensation?

PROF. KEYS: The local multiple listing service [which real-estate agents use exclusively] has the power to exclude, deciding who posts listings and searches for properties on their local network. The MLS has more information than public-facing websites, including information about commissions in many markets. Democratizing information was one of the potential promises of a company like Zillow, which has made an incredible amount of data accessible about homes, but it hasn’t made the transaction costs, like the commission structure, more apparent.

[Zillow says that it displays buyer’s-agent commissions in markets where the MLS makes the information available for public display, and it will continue to do so in additional markets as the information becomes available.]

PROF. BARWICK: But Zillow doesn’t generate the housing information. It has an agreement with MLS to post the information on their website and is actually quite vulnerable to being excluded. But who owns the housing information? Is it the seller, MLS, the Realtor? I think this is a question we should actively debate. 

A radical idea would be an entry of a platform similar to Zillow, with enough buyers and sellers participating on this platform using lower commission fees. This would upset the industry and set a new trend for the commission fees.

PROF. GILBUKH: Other countries often don’t have a centralized depository of listings. I do think the control and access to this information needs to be more democratic. But at the same time, I do worry about having a separate platform controlling how information is displayed, like which listings are first, and really influencing the market. It could pose new regulatory challenges.

Ms. Ward is a writer in Vermont. You can reach her at reports@wsj.com