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Real Estate Commission: Unveiling Collusion and Misaligned Incentives

Since 2003, I have been involved in real estate investing, and throughout my journey, I have been increasingly disillusioned with the buying and selling process. While other industries have embraced technology and reduced transaction costs,...

Since 2003, I have been involved in real estate investing, and throughout my journey, I have been increasingly disillusioned with the buying and selling process. While other industries have embraced technology and reduced transaction costs, real estate commissions have remained excessively high. This begs the question: is real estate collusion at play?

When I sold a rental property in 2017 and paid a staggering 4.5% commission, I made a vow to never sell another property until commission rates came down. Paying over $120,000 in commissions felt unjust, but what felt worse was having to pay the buyer's real estate agent a commission as the home seller.

The Negotiable Nature of Real Estate Commission

Many home sellers are unaware that real estate commission rates are negotiable. I managed to negotiate my commission rate down to 4.5% from the initial 5.5%. However, it is disheartening to see that most home sellers either don't realize this or are hesitant to negotiate.

During my negotiation, my agent tried to justify the commission rate by saying she had to convince her brokerage to lower it. She went on to explain that she would only earn a 2% commission while paying the buyer's agent 2.5%. This seemed unfair, so I asked why the buyer's agent couldn't be paid less to save me money.

The response I received was that it would be difficult to attract buyers if the buyer's agent was offered less than a 2.5% commission. They reasoned that, historically, buyer's agents earned a 3% commission. While this explanation seemed plausible, it raised suspicions of real estate collusion.

Misaligned Incentives in Real Estate Transactions

It is absurd to think that a buyer's real estate agent would refuse to show a property to their client if the commission offered is less than 2.5%. This misalignment of incentives arises from the expectation that the more the selling agent is willing to pay the buyer's agent, the more likely the buyer's agent is to persuade their client to purchase the property.

On the flip side, a home seller paying a higher commission to the buyer's agent may increase the chances of getting a higher sale price. However, as a seasoned buyer, I believe that today's buyers are informed and can easily access information on recent property sales. Moreover, I was not selling a starter home for first-time buyers and was not willing to pay exorbitant commission fees.

The Experience That Highlighted the Flaws

During the process of selling my home, I encountered an experience that solidified my belief that paying the buyer's agent commission is illogical. The buyer requested financing and inspection contingencies, which I initially didn't mind. However, after the deadline for removing financing contingencies had passed, the buyer's agent claimed that the windows needed replacement, causing a delay.

The buyer's agent argued for a credit of $35,000 to cover the window replacement costs. Despite their persistence, I refused to cave and eventually offered a $10,000 credit, which was reluctantly accepted. Paying a substantial commission to an agent who was trying to negotiate a lower selling price felt foolish and unjust.

The Need for a Fair Commission Structure

It is evident that commissions in real estate transactions need to align with the representation provided. Buyer's agents should be paid by the buyers, and listing agents should be compensated by the sellers. This logical approach would establish a fair and equitable incentive structure.

Buyer's agents play a crucial role in identifying suitable properties, submitting attractive offers, negotiating terms, and protecting buyers from costly surprises. As a result, I am willing to pay a buyer's agent up to $10,000 for their services. However, I believe that a flat fee or a lower commission rate for higher-priced homes would better serve buyers and sellers.

The Legal Verdict: Revealing Collusion

Recently, a landmark verdict in Missouri revealed collusion in the real estate industry. The National Association of Realtors, HomeServices of America, and Keller Williams were found guilty of colluding to maintain high commission rates. This verdict, which resulted in damages of $1.78 billion, is a clear indication of the industry's collusion to the detriment of both buyers and sellers.

The Future of Real Estate: A Positive Outlook

The repercussions of this verdict are expected to bring positive changes to the real estate industry. Commissions are likely to decrease significantly, creating a more favorable environment for buyers and sellers. The alignment of incentives, with buyers paying their agents and sellers compensating listing agents, will create fair and transparent transactions.

In the short term, there may be a decline in housing supply as sellers wait to list their homes in the hope of securing lower commission rates. However, this will be balanced by an increase in transaction volumes due to lower commission rates and higher supply. Ultimately, buyers will benefit from reduced commission fees and improved representation.

Holding onto Properties: A Wise Move

Considering the evolving landscape of the real estate industry, my advice is to hold onto properties for as long as possible. With the anticipated reduction in commission rates, it is worthwhile to wait for a more favorable selling environment. Additionally, owning real estate has historically been a reliable wealth-building strategy, despite periodic downturns.

Looking Ahead: Questions and Recommendations

As we move forward, it is crucial to reflect on the impact of real estate collusion and question the existing incentive structure. Home sellers should demand fair commission rates, and buyers should be willing to compensate their agents for their valuable services. By challenging the status quo, we can foster a more ethical and transparent real estate industry.

Do you believe there is real estate collusion? Are you perplexed by the idea of home sellers paying the buyer's agent commission? How do you think the recent verdict will shape the future of the industry? Share your thoughts below!

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