No discounts offfered on real estate commissions

November 17, 1991|By Randolph Smith | Randolph Smith,Knight-Ridder News Service

PHILADELPHIA -- When demand drops in a recession, you expect to get hefty discounts.

Consumers are finding big price cuts on cars, appliances, vacation travel and many other goods and services, as vendors try to stimulate sales.

Home buyers are negotiating discounts of 10 percent to 20 percent because of the huge oversupply of property for sale.

But consumers aren't getting any breaks on stiff real estate sales commissions averaging 6 percent of home prices.

The nation's more than 1 million real estate brokers are mostly charging full price, even though the supply of agents is probably five times the number needed to serve the market, says Consumer Federation of America.

Why isn't the price of their services subject to supply and demand?

Consumer Federation charges that the real estate industry is a ++ monopoly that "overcharges home buyers and sellers more than $10 billion a year."

In a recent study, the federation says commissions are nearly twice as high as they should be, given that rates in other countries are only 3 percent to 4 percent. In addition, the story says, consumers pay full price regardless of quality, agents face serious conflicts of interest and buyers lack adequate representation.

What's more, high sales commissions push up home prices, making housing less affordable. "High commissions represent a significant barrier to home ownership," says CFA, a Washington, D.C.-based non-profit federation of 250 consumer groups with 50 million members.

"Many buyers don't know that agents represent only sellers' interests. Their job is to get the highest price for the seller," says Stephen Brobeck, CFA executive director and study author.

Mr. Brobeck says the industry actively discourages competition and lower commissions.

Buyers who hire brokers to represent them often have to pay an extra fee because listing agents won't share commissions with buyer-brokers.

The Multiple Listing Service, the computer listing of homes for sale, discourages lower commissions by listing how much cooperating agents will be paid.

Cooperating agents, who are picked by buyers, have a financial incentive to show only homes offering them half of a full commission, or 3 percent. The other 3 percent goes to the listing agent picked by the seller.

The National Association of Realtors, which represents 800,000 agents, calls the CFA study "fiction." The industry group cites surveys showing that about three-quarters of consumers are happy with agents' service. "There is no percentage in ill-will," NAR contends.

Nonetheless, CFA says savvy consumers can take steps to get a better deal.

Sellers can often get a commission discount of 1 percentage point. They may get a faster sale by hiring a top-selling agent who knows the market. Buyers may get a lower price by hiring a buyer-broker to negotiate for them.

First, Mr. Brobeck recommends interviewing at least four agents, asking them how many homes they've sold this year and in their career. Get referrals from friends, relatives and loan officers at banks and savings and loans.

If you're a seller, ask agents whether they're willing to knock 1 percent off the commission rate. By reducing the commission to 5 percent, from 6 percent, you would save $1,000 on the sale of a $100,000 home.

Make sure the contract reduces the listing agent's commission to 2 percent, but gives the cooperating agent a full 3 percent share. Otherwise, the discount will show up in the MLS listings and cooperating agents won't want to show your home.

"Quite a few listing agents will lower their commission, if they know you understand the pricing mechanism," Mr. Brobeck says.

Lower commissions are warranted, CFA contends, because selling agents don't have to do much work. "The MLS listing and setting the right price is more than 90 percent of what sells a home," Mr. Brobeck says.

Selling agents point to the cost of newspaper advertising, and time spent organizing open houses. But CFA says those activities mostly benefit brokers by providing additional client contacts.

Buyers face other pitfalls. Agents will first want to show you homes they have listed, so they won't have to share commissions. To get the widest selection, make sure the agent also shows you homes listed by other agents.

Don't tell the agent what price you're prepared to pay. The agent is obligated to convey that information to the seller. "Talk in general terms about a price range," Mr. Brobeck advises.

Another option is hiring a broker who represents the buyer exclusively. A buyer-broker would help to find a property and negotiate the price and other terms with the seller.

Consumers should insist on a single agency contract to ensure the buyer-broker won't also represent sellers. The best deal is an agreement to split the sales commission between the buyer-broker and the listing agent, thereby avoiding an extra fee paid by the buyer.

In many cases, however, buyers have to pay fees ranging from 2 percent to 4 percent because listing agents refuse to share commissions, says James Arrow of the Single Agency Realty Association, which represents buyer-brokers.

"Ask whether the buyer-broker has been successful in sharing commissions, and whether you'll have to pay a fee if the listing agent won't cooperate," Mr. Arrow says.

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