The Wild History of Real Estate Commissions and A Breakdown of Where Your Money is Going

With everything that has been in the news lately about the commission lawsuit involving the National Association of Realtors (NAR), Keller Williams Realty, RE\MAX, and others, I thought it would be helpful to talk about the history of real estate commissions and also give a breakdown of who gets a portion of your money when you are involved in a real estate transaction. I'm all for transparency and I think we aren't talking about it enough.

‍The Lawsuit

If you haven’t been following the news, here’s what you need to know. A group of home sellers filed a lawsuit against the National Association of Realtors (NAR) – the largest trade organization for real estate agents. They claimed that NAR, along with major brokerages like Keller Williams, RE/MAX, and others, secretly worked together to inflate agent commissions. In other words, they allegedly made it cost more to buy or sell a home than it should.

‍A History of Real Estate Commissions

Real estate commissions have undergone significant changes over the past century. These commissions, influenced by historical events, regulations, and technology, play a crucial role in shaping how homes are bought and sold. 

At the beginning of the 20th century, real estate deals were kind of chaotic. There were no clear rules for commissions, and anyone could claim to be a broker. The National Association of Real Estate Exchanges started in 1908 to bring some order to the chaos, but without license laws, commission rates were all over the place until about 1919.

By the mid-1900s, people wanted more consistency in commission rates. The 6% commission model became popular around the 1930s, with 3% going to the listing agent, and 3% going to the buyer’s agent. This meant sellers agreed to pay about 6% of a home's sale price as commission. In 1950, the Supreme Court ruled that this was illegal price-fixing, but despite the ruling it still managed to continue being the standard.

Understanding Who Gets a Piece of the Commission

Today, people still debate whether real estate commissions are fair and when you bring it up to a real estate agent, they are likely to get defensive. That’s because real estate agents often don’t receive the full 3%. What a lot of people don’t know, and where I’d like to see more transparency, is a breakdown of who all is receiving a portion of the commission that the seller is paying. 

This is best illustrated in an example. Let’s say you’re browsing Zillow, Redfin, or some other housing site and you click a button to schedule a showing to look at a house, or to find a real estate agent. By doing so, you’re establishing a relationship between you, the tech company, and the real estate agent they put you in contact with. And you are likely unknowingly agreeing to the tech company getting a large referral from your transaction. If you end up buying or selling a house with that real estate agent, the tech company (Zillow, Redfin, etc.) will receive a referral commission up to 40% of the total commission. Now, let’s say this real estate agent that represented you also worked for a team. In addition to the money they had to pay to the tech company who made the referral, they also owe their team a split - typically between 25-50%. After all is said and done, they may only receive 25% of the 3%, which equates to a commission of less than 1% for the agent, and that doesn’t even begin to factor taxes and expenses. Most real estate agents work 7 days a week and will do anything to make sure their clients have a good experience. It’s important for consumers to understand that despite all the work that agents are putting in, many are receiving only a fraction of the commission, which is why this is such a sore subject for many of them.

A Call for More Transparency

Now, what if all these real estate tech companies were required to be more transparent and say something along the lines of “by getting connected with a real estate agent from our site, you are agreeing to our company receiving 40% of the commission”. And what if at the beginning of a transaction consumers had to sign a disclosure that listed a breakdown of who all was receiving a commission, including the tech company, team, agent, and anyone else that might be involved. I imagine that if consumers understood this breakdown, they might be more likely to go straight to an agent instead of involving all these middlemen. If consumers went to agents directly, then agents would have more flexibility to negotiate the commission because they wouldn’t be as bogged down by splitting it with so many other players who are skimming it off the top of their paycheck.

I’m not against real estate referrals, tech companies like Zillow and Redfin, or real estate teams. There are valuable things about each of these, but I’m advocating for more transparency to the consumer. The amount of commission skimming happening is putting agents in a really tight spot, and has a negative impact on the real estate industry. 

Another concern I’ve heard from many professionals in the real estate industry, and it’s a concern that I share, is that, if sellers stop covering the commission for the buyer’s agent, who is going to start paying for the buyer’s agent? The buyer? That might seem logical at first, but it is harder now than ever for first-time home buyers to purchase a home. With the combination of high interest rates and high home prices, it’s hard enough for buyers. Asking them to also pay their agent is going to push even more people out of the market, causing the demand to drop more and making it harder for sellers to sell. It’s a lose-lose for everyone.

I don’t have the solution, but I’m all for transparency of commissions and real estate fees. These should be highly visible, not hidden on some terms or conditions page, and consumers should know who exactly is receiving their money. As consumers understand these commission structures and by raising awareness of these issues, consumers can help create a more equitable real estate market for everyone involved. I encourage you to stop in at a local real estate office or three. Interview a few people. Or go to an open house and talk to an agent there. Establishing a connection with an agent personally and without getting others involved is the best way to create negotiating power with the agent you choose.

‍