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Real estate brokers ‘purposely’ hide commissions: study

Sarah Paynter
Reporter

Realtors “purposely hide” their commission rates and the lack of transparency has stunted price competition, a consumer watchdog agency alleged in a new study.

If consumers could see commission rates, they could effectively compare and “shop” for their broker, which could incentivize brokers to lower their rates, said the Consumer Federation of America (CFA), a national organization of more than 250 nonprofit consumer groups.

“The reluctance of traditional real estate agents and firms to provide information about commission levels helps explain why there is so little price competition in the industry,” said Stephen Brobeck, a senior fellow at the CFA, who has over two decades of experience researching brokerage practices.

The CFA examined hundreds of agencies to find out why only 32% of Americans, and only 44% of recent homebuyers, know that the average realtor’s commission is 5% to 6% of the home’s purchase price, according to the CFA.

The CFA examined hundreds of agencies to find out why only 32% of Americans, and only 44% of recent homebuyers, know that the average realtor’s commission is 5% to 6% of the home’s purchase price, according to the CFA.

More than 99% of 263 firms and agent websites surveyed did not list commission rates. Even among local Multiple Listing Services, listing aggregators not sponsored by specific brokerages, “nearly all” restricted access about commissions, the study found.

“If you look at a savings account, there is extensive information about all the details and costs and interest rates paid. The same thing would be true for a loan. For auto insurance, you can get individual quotes. But here, you can’t find any mention in the large majority of websites of consumer costs,” said Brobeck.

Brobeck noted that Pacific Northwest MLS now allows brokers to disclose commission splits on individual properties, and Redfin has also agreed to do so. A commission split occurs when there is a buyer and seller broker, forcing them to share the commission.

But brokers took issue with the allegations, saying that commissions are fluid and negotiable — something that’s not easy to convey on a website.

“Commission is not something that’s set in stone, like a jacket in the store window. When it comes to commissions, they vary, and that’s really the truth… This is a relationship business. It’s a little more complicated than this study makes it,” said Bess Freedman, CEO of Brown Harris Stevens.

Movement to disclose commissions

Brokerages were also hesitant to share commission prices over the phone, the study found. Less than a fourth of brokerages disclosed rates in response to general phone inquiries, according to the study. Almost all firms eventually disclosed the commission rate when they were pushed by the CFA, which posed as home sellers in a second round of calls for the study.

The National Association of Realtors (NAR) disputed the CFA’s findings, saying that 2018 data shows brokers most often initiated conversations about compensation.

“NAR considers transparency critical to an ethical negotiation with a prospective seller or buyer, including how commissions are calculated. We encourage brokers to have a conversation with their prospective clients about commissions at the very beginning of the relationship,” said Mantill Williams, vice president of communications at the NAR.

Brokers said that they provide information about compensation on closing sheets, managing expectations along the way. “We’re always honest about commissions, or they wouldn’t hire us. Clients need to know what the costs are... Transparency is a must,” said Freedman.

Brobeck said he thinks disclosure will someday be expected of the entire industry, citing a class action anti-trust lawsuit against the NAR over buyer broker commissions, which challenged the practice of split commissions. The U.S. Department of Justice is also investigating CoreLogic MLS data, with concerns surrounding commission price competition and negotiability.

“The industry is beginning to feel more pressure from litigators and regulators to increase price competition,” noted Brobeck. “We believe that more visible pricing would not only lower costs for consumers but also increase consumer confidence in agents who play a critical role in most home sales.”

Sarah Paynter is a reporter at Yahoo Finance. Follow her on Twitter @sarahapaynter

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