Why Are Real Estate Commissions 6%? – and Why That May be Changing
2 min read
Court Case in Kansas City Could Shake Up Real Estate Commission Rates
A recent court case in Kansas City has the potential to disrupt the longstanding tradition of real estate commission rates and who pays them. Currently, sellers pay a percentage of the sale price to their broker, who then splits it with the broker who brought the buyer. This commission typically ranges between 5% and 6%, which can amount to tens of thousands of dollars out of the seller’s proceeds.
The National Association of Realtors (NAR), a powerful lobbying group representing 1.5 million real estate agents, has been a driving force behind the standard 6% commission. Unlike other industries such as stockbrokers and travel agents, the internet has not significantly affected the 6% commission. However, a recent court case and other lawsuits could potentially lead to a shift in the commission structure, giving buyers and sellers the ability to negotiate both rates and who pays them.
One obstacle to change is that some Multiple Listing Services (MLS) have restrictions that make it difficult for sellers to offer lower commissions, as agents fear they will be “steered” away from those properties. The shared commission structure has a long history, with its establishment in 1913 and inclusion in the National Association of Real Estate Exchanges’ Code of Ethics.
While the NAR is appealing the recent court decision, cracks in the current system of selling homes are beginning to appear. If the commission structure changes, it could result in significant savings for sellers. However, buyers may have to pay for representation out of pocket or go without a broker.
In response to the changing landscape, some MLSs have already implemented changes to allow for more flexible commission arrangements. The Real Estate Board in New York City, for example, has decoupled agents’ commissions from the sale price. These developments, coupled with the recent court cases, are expected to have a profound effect on brokerage commissions throughout the country.
As the court case progresses and more lawsuits emerge, it is becoming increasingly clear that the real estate commission structure is ripe for change. While the outcome remains uncertain, one thing is for sure: the traditional way of doing business in real estate may be on the verge of a major shift.
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