Realtors Colluded to Keep Commissions Artificially High.
Realtors Colluded to Keep Commissions Artificially High.
My personal story of Realtor Collusion.
The National Association of Realtors agreed to pay $418 million to settle an antitrust suit that showed that they colluded to inflate commissions, block competition, inflate US housing prices, and harm consumers. The $418 million might seem like a lot, but it’s less that a half percent (.5%) of the $100 billion of real estate commissions that consumers pay every single year!
So why did they settle? Because if they didn’t settle they could have faced a fine close to $6 Billion! They settled, gave up their right to appeal, and they probably got off cheap.
But, it’s still progress.
At issue was a few key points that seem to be clearly anti competitive.
For some background, when you buy a house in the USA, in general there is a 6% real estate commission that is typically shared between the agent representing the buyer and the agent representing the seller.
The entire commission is actually paid by the seller of the house. So if you are selling a house for $1,000,000, $60,000 of your money is split between each realty company.
It’s worth noting that this 6% real estate commission is one of the highest in the world. Most countries it’s around 1-3%! We have been getting screwed and since this fee is fully paid by the seller of the house, it has been artificially inflating the price of houses.
Think about it like this. If you know you know your house is worth $1,000,000 and that’s how much you need in your pocket to leave your house, the sale price needs to be about $1,063,000 for you to be able to pay out the real estate commissions and still end up with $1,000,000. There is no free lunch. That means you will need to inflate the price of the house to $1,063,000.
How did America end up with this system? When you go to list your house, the realtors have a few way of controlling the entire process. It always seemed like illegal collusion to me, and it looks like the courts agreed.
First is, the realtors themselves were basically required to be a part of the Multiple Listing Service (MLS), the system that lists all the houses for sale.
When an agent listed a house, the rules would require the realtor publish the commission that the buyers agent would get right on the MLS.
And when you went to list your house, the realtor would make you sign a contract that you agree to pay the 6% fee and split it with the buyers agent.
There were some ways around this, but it made it WAY harder to sell your house.
I want to tell you a real story of exactly how it worked.
I have sold 2 houses without using a realtor and I have purchased 1 home without a realtor.
In recent years some services sprung up to offer a way for you to sell a house and have it listed in the MLS by paying a flat fee of between $100 and $500. It is way less expensive than the $25,000 commission for the average home sale in America.
So why didn’t everyone do this like I did? Because real estate agents HATED IT and they essentially wouldn’t work with you. I experienced this myself first hand.
Realtors will frequently claim that this never happened and that they would never put their commissions over the needs of their clients. I know for a fact this was a lie.
When we were selling our house in East Lansing I met with 4 different realtors to list the house. Only one would negotiate on the commission rate and it was only a slight decrease.
All of them gave me their suggested listing price.
I ended up opting to list it myself on a self serve MLS platform and I decided to market and advertise the property myself. I took all the pictures and videos and I paid money to advertise it myself.
Our house was listed in the MLS, Zillow, Realtor.com, Facebook, etc. Just like it would be if it was listed by a traditional agent.
Within a day or two, we showed the house to a friend of a friend and they agreed to purchase it. It was a military couple, it was their first house purchase, and they were not represented by a buyers agent yet.
From the very beginning of the process I was very clear with them.
I warned them:
We will not pay your realtor commissions. That is up to you.
You certainly have the right to get your own realtor.
If you choose to get a realtor, you are responsible for paying the commissions.
The biggest warning of all: if you do get a realtor, they will try to kill the deal.
The couple was amazing but they couldn’t understand why a realtor would try to kill the deal since the couple had done all the work to find the house, done the showing and walk through, and negotiated the sale price.
But since this was their first house purchase, after speaking with their parents, they decided to hire a real estate agent.
Immediately, problems started. The agent and I spoke. I explained that I would not pay their commissions and that the buying couple was well aware of that and had agreed.
The buyers agent would verbally say they understood but then would sneakily send me contracts with hidden language that tried to get me to agree to paying their commissions! It was very sneaky.
They attempted this 3 times. I refused every time. Luckily, I’m a nerd and read contracts.
When I refused to sign, the agent sent their broker to try to convince me. Again, I refused. They even suggested that I RAISE the price of the house to cover their commissions.
Translation: they tried to get their clients a worse deal! It was so gross to watch.
When I denied their attempts, I immediately informed their clients, the buyers of the house, of what was going on. The clients were shocked to learn that their own realtors were working against their own interests.
Nonetheless, the deal moved forward. For a short while.
Like many Americans, we have security cameras on the outside of our home by the doors.
Somehow the agent didn’t realize that these cameras record audio. I heard the agent give the client every reason in the book why they should NOT buy this house.
Over and over the agent would try to kill the deal. “You won’t want to be this close to the road”. “You won’t be worried being in East Lansing with college kids?” “You know 2 bedrooms might not be enough in the future”.
The agent didn’t say a single positive thing. It was so obvious what they were doing.
Of course, the buyers called me personally and told me they were going to back out of the deal and I could keep their earnest money deposit because they were so embarrassed by everything that had happened.
I refunded their money and moved on.
With this particular house sale, I had more than 15 agents contact me representing their clients. On every contact a few things were clear:
The agent was only contacting because their client wanted to buy the house or get a showing.
The agent hoped to talk me into letting them list my house for sale. (This way they would pocket both sides of the commission and get closer to keeping the full 6%)
The agent wanted me to agree to pay their commission fee before they would show the house to their client. I of course refused.
Only one of those agents ended up showing the house to their client.
This experience was so gross to me because it showed that the actual buyer of the home, their client, was not being responsibly represented. Their best interests were not being considered.
At least 14 buyers that wanted to see our house, and asked their agents to setup the showing - we’re not able to tour the house because their own realtor put their financial interest over the interests of their clients.
Now, I am NOT saying all realtors are bad. I am NOT saying that realtors don’t deserve to be paid. But I am sharing a story that actually happened.
And when I sold a house a few years later, it happened the same way. 100% of the times that I sold a house by myself without the use of real estate agents, this is what happened.
This doesn’t mean that it happens all the time, but it definitely means that it happens at least some of the time.
So what happened with the sale of our East Lansing house?
We ended up selling the house to a person that found it on Zillow. They did not have a realtor representing them. On average between the 4 different agents we considered listing with, the sales price of the house was $10,000 more than the listing agents suggested listing price and because we didn’t have to pay any realtor commissions, we ended up keeping $15,000+ more than what we would have if we had used a realtor.
The NAR settlement does the following:
The settlement bans N.A.R. from allowing seller’s agents to set compensation for buyer’s agents.
It aims to prevent "steering" by prohibiting practices that encourage buyers' agents to favor pricier homes for higher commissions.
All fields displaying broker compensation must be removed from MLS databases.
It eliminates the requirement for agents to subscribe to MLS to offer or accept compensation.
The settlement may lead agents to reconsider their association membership due to severed links between agent compensation and MLS access.
It goes without saying, I love all my real estate friends and none of these systems were their fault. I think that this recent settlement will end up being better for realtors and consumers in the long run. But it might be a bumpy ride for a bit.
As a broker, my experiences and opinions are a mixed bag. Sometimes I represent myself, sometimes I hire a “realtor” to represent me. Sometimes I represent my friends/family, sometimes I suggest they hire a different realtor. Sometimes, I want to recommend that my friends/family represent themselves…. But that last option isn’t viable if the listing is held by a realtor.
Some questions to consider and hopefully respond to:
1) what industry do you hire an agent/representative that is paid for by the opposing party?
2) “Realtor” is a trademarked word reserved by agents that are a never of the NAR. The NAR is very influential. As an independent broker, I get subpar treatment from listing agents. I definitely get noses turned up at my because I don’t use Showtime. There is no question sellers have missed out on opportunities.
3) Why would/does the listing agent get full commission if a buyer represents themself?
4) Why are there not financial incentives for buyers agents to be paid on lowering the price or bettering terms? More showings = more time… more time = less ROI. the best intentions will have bias to the money trail.
5) Commercial deals are even worse, but we wont get too sidetracked! :)
I definitely know and respect good agents a brokers and use them often…but i think there is little question or debate that realtors natural and trained bias is to keep everything in the NAR arena for self preservation. I am not even suggesting changing anything, but the conversation is worthwhile for improvement.
First, as an agent, I'm triggered :) second and more important, I'm glad to hear you love your real estate agent friends, so I hope that love will extend to allowing me to push back on this at least a little.
I believe that you are allowing your perosnal experiences in life, business, and particularly negotiation color your experience. The vast majority of people have no experience in contracts, contract negotiation, or the process of a home sale, much less the ability to effectively market a home, much less correctly price it for market conditions. You were very fortunate in the timing your sales and purchases to be in a climbing market and I'm not surprised to hear that your were very successful, you should note that you were successful mostly due to the market, sorry. It's as equally true that agents were successful in sales during the same period, myself included, for the same reasons. That does not equate to success across the board and certainly not success for all people. Did you know that the owner of zillow couldn't sell his own home himself? I would also argue that while this process may have been great for your family, with independent representation it would be fair to argue the buyers of your homes may have gotten a better deal.
The challenge with requiring buyers to pay for their own representation is that the savings required for downpayment is the single biggest challenge to purchases in any market. I believe that is the silver lining to Sitzer-Burnett, borrowers can now finance into the home, the cost of their representation, this actually doens't change the process of a home transaction, with or without agents, it only changes the column the cost for the service is accounted from the seller to the buyer, which is more accurate. I'm the first to state that agents are paid well, and I also believe that I provide great service, with transparency and integrity. There are pros and amatuers in every business so I won't apologize for other independent contractors only state that it is very important who you choose for representation.
One final thought to consider, given that your final sale price was $15k over the estimates provided by the agents interviewed, I'm curious what percentage that is of your total sale price? The reason I ask that since 2020 homes on the MLS have sold on average around 105% of the listing price, I would argue due to maximum exposure to the market and equal representation in the best interest of both parties. Did you get 5% over your asking price, if so great, I'm happy for you, if not maybe you didn't get the savings you thought.
Thanks for allowing me to stand up for my craft, you are an entreprenuer that I respect and a person that I admire, so please understand I mean no disrespect, but I do believe in my chosen profession and in my ability to negotiate win-win scenarios. I also have found that when a hard line around cost is drawn, it only hurts all parties. In agreeing to work with a great professional, you could potentially have had a faster, more profitable sale, with less of your time involvement, and the buyer's would have had a more positive purchase experience with peace of mind after closing, knowing that they were set up for success in a home they love. That's the view point I strive for with each my clients and customers.