In a historically tight housing market, people are falling over themselves to purchase homes — so why are nearly half of American home sellers overpaying brokers who represent buyers?
The average commission sellers offered to buyers’ agents was 2.7 percent of the final sale price in 2020, according to a new report by Redfin. But 45 percent of Americans selling their homes last year didn’t get the memo and extended the conventional fee of 3 percent or higher.
That’s an improvement from previous years; in 2012, about 60 percent of Americans paid 3 percent or more to buyers’ agents, while the national average was 2.8 percent.
But if you’re a seller who paid more than the average, those fees represent thousands of dollars that ended up in someone else’s pocket.
It’s also bad news for homebuyers. Broker’s commission fees are traditionally paid by the seller — both for the agent they hire and the buyer’s agent — so are often baked into the price of a home. In a market where prices are rapidly climbing thanks to historically low mortgage rates and inventory, the last thing buyers want is another reason for higher costs.
Even the savviest sellers would be hard-pressed to figure out whether they are paying too much or too little in commissions.
The industry’s longtime rule of thumb is that agents representing buyers and sellers evenly split a 5 to 6 percent commission off the final sale price, so both walk away with 2.5 percent to 3 percent. But until last year, there was no publicly available record of what sellers actually paid real estate agents to sell their homes.
It took a landmark settlement between the Department of Justice and the National Association of Realtors to mandate that brokerages and Multiple Listing Service systems publish sales commissions for agents who represent buyers. (There is still no public record or requirement for disclosure of commissions paid to agents representing sellers.)
Redfin has quickly embraced the new transparency requirements — and as a discount brokerage that’s baked under-market-rate broker fees of 1 percent to 1.5 percent into its business model, doing so is in its best interest. Earlier this month, it published agent commission data for 700,000 of its listings.
The company’s chief economist, Daryl Fairweather, noted that greater transparency will allow all participants in the housing market to better advocate for themselves and get the best deal.
“When a homeowner can see that their neighbor offered a 2.5 [percent] buyer’s agent commission rate, it makes it much easier to justify offering a similar rate when they sell their home,” she said in a statement.
On the flip side, when buyers can see that their agent is getting paid thousands of dollars more if they purchase one home over another, “it makes it easier for the buyer to ask their agent for a refund of a few thousand dollars if they opt for the home with the higher commission,” Fairweather explained.
Redfin’s analysis was based on data provided by MLS systems, so a market like New York City with no MLS will not have comprehensive accounting. The analysis also excluded commissions over 10 percent or under 0.5 percent as outliers.