Commission rates emerging from behind veil of secrecy

Nation's Housing

July 25, 2004|By Kenneth Harney

WHAT DO American home sellers and buyers really pay to real estate agents in commissions?

Although every market and region in the country has its typically quoted set of norms - often 6 percent to 7 percent - most consumers never learn what commission rates get paid in their areas.

Commission rates are the most sensitive subject in the real estate industry. Brokers or agents from competing firms can be charged with antitrust law violations for even whispering about rate structures among themselves. It's the ultimate taboo topic for Realtors.

But there are hard data on what homebuyers and sellers pay. There is a national average real estate commission rate. And there are data on average commission rates region by region. It's just that nobody ever tells consumers what the numbers are.

Now consumers are going to find out. Based on internal financial data supplied by nearly 900 of the largest real estate brokerage firms across the country, the average commission paid by consumers in connection with home sales last year in the United States was 5.06 percent.

The highest average commissions, 5.38 percent, were in the Southeast and Midwest. By far the lowest, 4.78 percent, were paid in the Mid-Atlantic states. New England consumers paid an average of 5.14 percent. West Coast, Hawaii and Alaska consumers paid an average of 5 percent, and Southwest and Mountain region consumers paid 5.26 percent.

The commission data come from the realty industry's only comprehensive annual survey, to which firms voluntarily provide internal financial data, cost structures, subsidiary income, commission income, sales agent compensation and other corporate data to an independent research firm, Littleton, Colo.,-based REAL Trends Inc., co-founded by Steve Murray.

Murray's annual study accepts only verified financial statements and promises each contributing firm that its private financial reports never will be shared with anyone or published. Instead the data are used in aggregate to analyze what's happening in the realty brokerage industry overall, from giant nationwide companies with thousands of sales agents to smaller, locally focused real estate offices.

For several years, the survey has documented declining average commission rates, pushed by aggressive competition among realty firms, booming sellers' markets in large swaths of the country and the rapid spread of discount and limited-service realty-listing firms, online and off-line.

Last year, average commission rates stabilized, Murray said. Some firms apparently decided to abandon the commission bidding wars with discounters and emphasize their far more extensive marketing services to clients in exchange for slightly higher rates.

Many traditional, full-service firms have never cut their rates much. Although brokers generally are reluctant to discuss their pricing philosophies publicly, Washington-based independent broker Donna Evers of Evers & Co. Real Estate Inc. recently agreed to share some insights on the record.

Generally, she said, her agents quote 6 percent to prospective sellers when making listing presentations on resale houses. For renovated or new homes, the target rate is 5 percent.

But in some cases, when the company potentially has both sides of the transaction in hand - with an Evers & Co. agent representing a willing buyer for the house - the commission might be lower than the target rate.

One of Evers' top agents, who asked not to be identified, said that "other subjective considerations" sometimes enter the picture. For instance, if the prospective listing client was referred by a previous client or friend of the agent, the commission quote might be below the standard rate. Also, most listing agents might respond to highly competitive situations in which contending firms drop their negotiated rates in a battle to land a listing.

The point for sellers and buyers is that commission rates are negotiable - and surprisingly variable. Discount, limited-service listing firms might charge minimal commission rates or flat fees to get a house into the local multiple listing service (MLS). But they're also likely to perform fewer marketing functions and to leave certain advertising, purchaser appointments and open house responsibilities to the seller.

Full-service firms probably will charge more, but they do more and spend more to sell the property. In a sizzling seller's market, the seller might not need all the heft of a traditional broker to sell successfully and might get away with less marketing.

Or the seller can negotiate for a lower commission rate from a full-service broker, given the likely ease of the sale. In a weaker market, the highest-power firm or agent might be desirable - and maybe an agreement to the full asking commission rate - to get the sale closed quickly and correctly.

Ken Harney's e-mail address is kharney@winstarmail.com.

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