Why Are Real Estate Commissions So High?

29 Replies

In a competitive market, you would expect real estate commissions to get competed down between brokers.   For reasons I don't understand, commissions stay high across all brokers at around 5% to 6% per deal.   Can someone help me understand why that happens?

Looking at a comparable process, consider selling a $3M business.   In this kind of deal, lawyers on both sides end up getting something like $30K to $50K.   So your closing costs are something between 2% ($60K) and 3.3% ($100K), but split between buyer and seller (each side pays their own lawyer costs).    What do you get for that $50K of legal services? Assuming lawyers are $300/hour, you are getting about 166 hours of service, which is enough to review the three inch thick document that a large buyer might create for such a deal.   

Looking at selling a $3M home, the seller is losing 5% to 6%, which $150K to $180K.   What is the seller getting for that fee?   Are the agents involved spending even 40 hours on the deal?   And does that 40 hours involve even a fraction of the skill and training required to negotiate and wordsmith a legal contract?    At the $150K commission level, assuming buyer and seller agents together spent 80 hours of time, the rate per hour is $1,875.   That might get split between the broker and the firm that hires him, but it is still many multiples of the closing cost when selling a business.

How did such a high fee system develop, and really the bigger question is why don't brokers compete amongst each other to bring these fees down.   There must be some sort of structural impediment within the system that prevents competition and maintains these high fee structures?   

Is there a point Will E. ??

You have your profile hidden with no information.

People that are going to make statements like this at least do not need to hide behind a curtain anonymously.

You could argue why anyone is worth anything for  a particular job or function.

You feel by your statement brokers/agents are overpaid. If you own property it is simple go with a discount person just do not complain about the results after words  as that is hypocritical.

@Will E.

Comparing selling a business using attorneys and not a broker is the same as a FSBO. Business Brokers earn around 10%, which is less than realtors. A selling agent and the buyers agent have to split the 5-6% and then pay their respective brokers and marketing and other expenses. I don't see where their fees are out of line.

Originally posted by @Matthew Paul :

Its called a monopoly 

Can you explain that in detail? There is more than one brokerage firm, and there appear to be small barriers to entry in that area. Anyone can add a listing to the MLS service. So where is the monopoly?

I agree with you that the high broker fee suggests some kind of lack of competition, but I just do not see where that it.

@Will E.

  its only been the last 25 years or so that the bay area ( I was raised in Cupertino and my parents paid 32k for their home). were price's sky rocketed ... It started about middle to early 80's from mid 80's to 89 price's tripled in many instances going from 100k to 300k plus... I bought my first home for instance in Milpitas in 1979 for 89k  a brand new Shappel home.

However you are seeing commission reductions in these areas.. I don't think many are paying the full 6% any more 4 to 5 is more customary..

there is a company in Denver right now ( ulta hot market like bay area) that is charging something like a 3500 flat fee both sides... Now the RE community is up in arms of course. Because even with discount brokers they usually put 2 to 2.5% BAC ( what they pay the other broker who brings buyer). So if they are discount say at 1% that's 3 to 3.5% for full service.  Not sure if this model will stick.

But there is a lot of work that goes into selling homes.. Its not just 10 hours and your done.

The market will have to decide commission rates. But suffice it to say FSBO's have a hard time putting deals together other wise you would not even need a RE business at all.

Help you sell was one of the first discount brokers and they did OK.. but there are many now. your just not going to get those discounts from the big players like Intero or Alien Peniel etc.

At the end of the day we all have to get paid. We may not like paying brokerage fees but the facts remain is a reality. I try to structure deals outside the conventional broker/brokerage agreements. If you network with people you can find other people in the business looking to buy or sell, that way avoiding brokerage fees altogether.

There is a business model for everyone. People that want to use discounters they can go for it.

There are people these days who want service and are willing to pay for it. I work the commercial side. I do not give discounters the time of day. I do not need to.

As a broker/agent I would say become an expert at your craft and create deep networks for properties. This way you will not be in the herd of the "how low can you go" club scratching by and being used.

Originally posted by @Joel Owens :

Is there a point Will E. ??

You have your profile hidden with no information.

People that are going to make statements like this at least do not need to hide behind a curtain anonymously.

You could argue why anyone is worth anything for  a particular job or function.

You feel by your statement brokers/agents are overpaid. If you own property it is simple go with a discount person just do not complain about the results after words  as that is hypocritical.

I asked the question why are fees held so high.  That is a question not a point, so why are you asking for a point to be made?   

I gave an example where a comparable sized transaction that involves far higher complexity and far higher skill levels (merger and acquisition lawyers) is priced at about one sixth the price per hour.   I guess that part was a point:  brokers are paid enormously higher amounts for less service delivered, and I am trying to understand why.

I'm not complaining about those high fees.  I am asking what are the structural impediments within the system that prevent these rates from being competed down?   I'm asking a question about industry structures.

You are implying brokers are worth those rates, but that statement misunderstands the nature of my question.   In any competitive business, capitalism doesn't really care about your worth.   If firms compete on price, the price is bargained down over time to a place where every firm just covers its cost with a small profit.   The fact that rates are held high implies a lack of competition, and I just do not understand why that is the case.

Originally posted by @Jay Hinrichs :

@Will E.

However you are seeing commission reductions in these areas.. I don't think many are paying the full 6% any more 4 to 5 is more customary..

But there is a lot of work that goes into selling homes.. Its not just 10 hours and your done.

The market will have to decide commission rates. But suffice it to say FSBO's have a hard time putting deals together other wise you would not even need a RE business at all.

You think the large Bay Area brokers will negotiate down to a flat 4% to cover both buyer and seller agents?

I never suggested FSBO is a better approach. You want the distribution network brokers offer. My question was why do brokers fails to compete these rates down.

@Will E.

  and my answer to you is that they DO... some shops will not but there are plenty of discount brokers just not the big players.

If I ever wanted to move back to the homeland.. I would hang my shingle out I am a RE broker and can join MLS for a few bucks.. and with average price in Cupertino at what 1.3 to 1.5 and Palo Alto were I Lived for 8 years being closer to 2 mil.. I would have a little office and be happy to list for 1 point all day long.. take 10 to 20 listings a year and call it a nice retirement realty business.. let others do the selling I just .. list put on MLS and negotiate the 50 offers we get in 3 hours on one house :)

Originally posted by @Jay Hinrichs :

@Will E.

  and my answer to you is that they DO... some shops will not but there are plenty of discount brokers just not the big players.

If I ever wanted to move back to the homeland.. I would hang my shingle out I am a RE broker and can join MLS for a few bucks.. and with average price in Cupertino at what 1.3 to 1.5 and Palo Alto were I Lived for 8 years being closer to 2 mil.. I would have a little office and be happy to list for 1 point all day long.. take 10 to 20 listings a year and call it a nice retirement realty business.. let others do the selling I just .. list put on MLS and negotiate the 50 offers we get in 3 hours on one house :)

What you describe is exactly what should happen in a competitive market.   Where would you look for discount brokers?   I guess they do not advertise much.

As a seller in the Bay Area, I think what you describe is correct.   Every property quickly gets multiple offers.  In fact, Bay Area feels like it is moving into a mode similar to 2004 to 2005.   Pricing is rapidly escalating, and in Cupertino average price is moving close to $2M.

Originally posted by @Will E. :
My question was why do brokers fails to compete these rates down.

Because this is the cost of doing business.  AND it is an easy entry business.  If a large firm entered and drove rates down brokerages would leave the business.  But the cut rate prices could not continue so when the big firm rsises the rate then brokers will flood in and things are back to normal.

@Will E. Like the others have mentioned above there are agents who charge less. I live the the Bay Area and know the prices here an a commission of 6% seems high for the prices.  It may not seem so right now in the Bay area but usually 3 mil range properties generally take time to sell and more investment in marketing and staging .

 I think you can find a really good agent for the 4 to 4.5% range. 

If you want to do less than that you may be able to find for 3.5 % or so. Redfin actually does take a lot less commission and I know friends who have used their agent to buy properties.

Good luck!

Originally posted by @Joel Owens :

Hey Will,

I am not going to waste time trying to convince someone why broker/agent rates are justified.

You opinion is fees are too high yet everyday consumers feel the rates are fair and transact business and are happy with the results whether it is residential or commercial.

I have seen over decades the discount model go out of business over and over again. Are you trying to start a discount company?? It seems you are just creating noise with no purpose with this topic.

In any profession there are individuals who are so exceptional that they get a premium price for their service.  I am not talking about those exceptions.

I am asking why very bad brokers who do not perform or add any value also manage to get 5% commissions (split buyer and seller agents).  There appears to be something structural that prevents competition.

I'm trying to understand the industry structure, and you keep trying to justify your personal worth.  You are answering questions I never asked, and you are not contributing to answering the questions I do ask.

@Will E.

  not to be off topic to much.. but that Rancho Rinconada 1.5 million dollar 3 and 1  900 sq ft... built post war.. would sell in most mid west cities for 60 to 90k  max.. so commission at 6% are wholly reasonable.

And in fact in the 80's I used to charge 10 to 20% commission when I was selling bare land in Northern CA... it took years sometimes to sell them.. a showing was all day.. IE some were 1 to 2 hours one way back into the National forest on logging roads... So you needed the higher commission if you wanted them sold and that's what I did I sold them... Of course this was the very start of the Pot growing and a lot of my buyers had sacks full of cash !!!

Multiple offers suck for the salesman.  Only one of the salesmen gets paid out of maybe 25 people that worked the sale.

Good for the listing agent but in a market like that every auntie that has an inactive liscense jumps back into the business and takes listings away from full time agents.

@Will E.

  there is no justification necessary... its commission income so you only get paid for success... just ask anyone who has done this for years. and has had sale fails at the very end of the transaction.. they get squat bubkis nothing... so it kind of all averages out.

Also think of the legal profession

I can hire an attorney in Mississippi for 225 and hour  topflight.. top flight attornies in Portland are 425 to 600... and I assume bay area the same... how do they justify it.. the market justify's it.

So if people wanted to revolt and not list for the higher commissions its certainly there prerogative...

@Bob Bowling

  precisely.   big money in CA listings  and easy to get license.

when I speak at RIA's the first thing I ask is show of hands of who are realtors... 60 to 70% raise their hands... probably 10 to 15% are actually active. 

Next question is how many of you are private lenders ... half the audience raises their hands :)

There was a state a while back that said 1 in 10 CA residents have a license's that's a pretty staggering figure and I believe it.  I mean I have one and have not lived there in 14 years.. But I keep it for the one or two referrals I make each year for those looking for ranch's and vineyard lands in N.. CA.

Originally posted by @Radhika M. :

@Will E. Like the others have mentioned above there are agents who charge less. I live the the Bay Area and know the prices here an a commission of 6% seems high for the prices.  It may not seem so right now in the Bay area but usually 3 mil range properties generally take time to sell and more investment in marketing and staging .

 I think you can find a really good agent for the 4 to 4.5% range. 

If you want to do less than that you may be able to find for 3.5 % or so. Redfin actually does take a lot less commission and I know friends who have used their agent to buy properties.

What are the pros and cons of Redfin?    I would guess the agents there might get less involved with a seller deal, and the quality of agents might be lower?

Why would the buyer care about cutting down the buyer's agent fee, since that is paid by the seller?   

@Will E.

 The buyers get a percentage of the commission back from redfin.   If a buyer buys a 1 million property they get 10,000 + back. Actually Redfin used to show how much commission you would get back if you went with their agent. 

In regards what are negatives of Redfin I think they miss some of the personal touch than some of the good agents. I also remember reading that their agents worked on salary so they make less than regular agents and a lot of the good agents will not work in this way so you end up working with the newer agents. I am not expert here but this what I have read and was told by a few people who worked with redfin.

As someone who bought recently in the highly competitive Bay Area I can tell you that its a little mafia. You have to have the right realtor to have a shot as a successful bid. In Berkeley where we bought, there is no chance a Redfin agent could successfully close a deal unless you just bid a ridiculous amount with all cash. Short of that its all about your realtor knowing the selling agent and giving you the right input on the all the offer conditions, including price, timing , contingencies etc.  In our case our realtor and the selling realtor were part of the same brokerage and sat next to each other in the office. Of course there were no laws broken and we had no special info on other bids but it certainly didnt hurt I think to have that relationship. Its like that with lawyers and judges too. 

5% to 6% percent is low for a commission. So many people that are not agents or never did the job seem to think it's not a lot of work involved. Another think big brokerages are already in the business and it's expensive. The commission is split between the selling 3%and buying agent 3%. Out of that, money is taken out for all the marketing and working being done to get the home sold. Know one says that the FBSO are too high.  If we don't get the house sold, you pay nothing but with a For Sale Buy Owner you pay so they make money either way, then the average end up contacting a realtor. Instead of looking at what it cost, look at what you would loose if you don't use a Realtor. I see this same topic all over but I never see the one where people complain about the lawyer fees at closing or the county and state fee.  A Realtor works hard and long hours for the seller.

@Will E. this has been touched on a bit but you could buy and sell a $3M home using just lawyers, like you did your business, and your agent fees would be zero (just like for your business). Your lawyer fees would be a lot less as well. The "service" an agent provides is different than that of the lawyer. Lawyers are paid by the hour and with or without success. Agents are paid for the successful completion of the deal. Many RE deals never happen. Agents spend hours showing people houses then they never buy. Some listings never sell as well (not so much in this market but just 8-9 years ago there was a different tune). Agent compensation is based on putting the deal together.

Generally I would say this, A good agent will more than save their client their fee. For example what if you miss price a property by 5%. There goes the money saved by a discount broker. Sure you might get bids that run up the price but what if it had been right priced to begin with. Would the final price have been higher? You don't really know if you would have found a better buyer had the listing got more exposure. That said, it's pretty much given that over priced homes end up selling for less. 

Now there is no differentiation in the market between good agents and ok agents so you end up paying the same price for a so so agent vs one that works their butt off and "makes" you money with their skills. That to me is the travesty but also occurs in other fields as well. 

@Bill S. has a good point. 

Part of the reason the real estate agent fee might be perceived as higher is that the agent takes the risk.  The agent/brokerage spends their money, time, and resources on marketing your property based solely on their confidence that they can sell the home.  

Would you rather pay your agent a base fee (marketing/advertising) plus an hourly rate?  You might be able to get ahead, but you might lose.  The risk shifts back to you.

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