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Market forces and real estate commissions

for sale sign outside houseConsumers have most likely complained about real estate agent commissions since the advent of real estate brokerage. However, before the turn of this century, most did not question the commission they paid their real estate agent because they chalked it up to the cost of selling a home. Times have changed, such that having a conversation about commissions and compensation is a common topic when agents and consumers first meet.

Real estate agent compensation is evolving as fast as the industry. The U.S. Bureau of Labor Statistics (bls.gov) reports the median annual wage for real estate sales agents was $44,090 in May 2016 .

Before the turn of this century, there was more conformity in the real estate commissions because most agents were not negotiable in the commissions they charged. However, modern agents have adjusted their business models and are open to negotiate how much they will be paid.
There are also many real estate broker compensation structures from which you can choose. Some brokers offer limited services, and some offer fee-for services, which includes a MLS placement service. Some fee for service brokers offer à la carte services, where you can choose specific services for which you want to pay. Most “full service” agents still charge a percentage, but the percentage can vary from agent to agent. Full service agents can also vary on the extent of the “full” service they provide; however, many will be open to negotiate their commission rate. Regardless of model, get the agent’s services in writing and hold your agent accountable. The increased market pressure on agent compensation is actually good for the consumer. It doesn’t only lower the cost of the real estate transaction, but it also increases the quality of services. This was the finding of an empirical study by Panle Jia Barwick and Parag A. Pathak (The costs of free entry: an empirical study of real estate agents in Greater Boston; The RAND Journal of Economics; Vol 46, No. 1, Spring 2015, p.103–145). Their study investigated three scenarios that are chipping away at the traditional real estate agent compensation models: lower commissions, commissions based on break-even costs, and improved information about agents’ past performance.
Barwick and Pathak found some interesting outcomes from their research. Besides concluding that there are consequences for fixed commissions, they also discovered that the easy entry into the industry (i.e., the ease of getting a real estate license) reduces the quality of service. Furthermore, the increased competition among real estate agents caused by easy entry into the industry is not beneficial to a home selling or time on market. They also concluded that “...lower commissions reduce transaction costs, which might lead to a more liquid housing market, improved asset allocation, and better housing consumption. Flexible commissions also provide a channel for consumers to choose services tailored to their preferences.”
Real estate agents should embrace the discussion about compensation and commissions with their clients. It offers the agent an opportunity to demonstrate their accountability. It also promotes transparency and the services we Realtors provide, and builds the trust that is lacking in the industry.

Dan Krell is a Realtor® with RE/MAX All Pro in Rockville, MD. You can access more information at www.DanKrell.com.

@dankrell

 

Last modified onTuesday, 27 June 2017 15:45
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