There’s a term in journalism called “the buried lead,” meaning that the key point of an article doesn’t appear until several paragraphs into it.
Well, last week’s column had a buried lead. You may recall that the headline spoke about the myth of the 6% listing commission. The point of the column was that it’s common for prospective sellers to think there’s a “standard” 6% commission that’s charged by most listing agents. In fact, as I explained, the listing commission is negotiable and has declined over the last 40 years from a 7% commission dictated by the Denver Board of Realtors to listing commissions averaging, according to surveys by the National Association of Realtors (NAR), in the mid-5% range.
What has slowed the decline of the listing commission is the more resilient “co-op” commission paid to buyer’s agents from the listing commission.
Until recently, 2.8% was almost universally offered to buyers’ agents. If listing agents offered less, they ran the risk of limiting the number of showings and contracts they would receive, since the amount of the co-op commission was prominently displayed on the MLS.
What’s now allowing listing commissions to drop to (or even below) 5% has been the freedom that listing agents now feel to offer a smaller co-op commission.
It has been my own practice to list homes for 5.6% because I felt it necessary to offer half of it — 2.8% — to the agent who represents the buyer. With a 2.5% co-op becoming more common (as I showed in last week’s column and as evidenced in the chart below), I’m more comfortable now listing homes, especially higher priced homes, for 5% instead of 5.6%. I believe next year’s survey by NAR will show a big drop in listing commissions, and it will be because of the lowering of co-op commissions.
In addition to being good news for sellers, this is not bad news for listing agents because of the increase in selling prices of listings. Getting 2.5% on a $700,000 transaction pays $3,500 more than getting 2.8% on that same listing when it sold for $500,000 a few years ago.
Trelora began as an outspoken anti-Realtor brokerage that also was against paying buyer’s agents a co-op commission. (The name “Trelora” was derived from a scrambling of the word “Realtor.”) However, Trelora has made an about-face in the last couple of years and is now both a Realtor brokerage and a brokerage that offers 2.5% to 2.8% co-op commissions on its listings.
When it started as a non-Realtor brokerage in 2010, its first 96 listings all advertised a co-op commission of $2.80, an apparent play on the common co-op of 2.80%. Perhaps they wanted buyer agents to misread the co-op on the MLS and only realize later that they had worked for free.
By April 2013, Trelora had adopted the practice of recommending to sellers a flat co-op of $3,000, although it wasn’t universal because many buyers felt their listings might not get shown if they were too miserly in their compensation offer. I myself was paid 3% on a listing during this time because the seller told me that he wanted buyer agents to show and sell it knowing they’d earn a commission equivalent to a million-dollar listing.
Also, during this time, one of my broker associates spoke to a Trelora agent who encouraged him to put into the listing contract that the buyer would pay 2.8% instead of $3,000, and that indeed worked for him, although I’ve been advised since then that inserting an additional provision related to broker compensation was inappropriate.
In mid-2019, Trelora created a separate Realtor firm that operated side-by-side with their original non-Realtor firm for about two years. That non-Realtor firm appears now to have been phased out. Meanwhile, the Realtor firm has listed over 500 homes and has closed 450 of them. Of its first 50 listings, 33 offered 2.8% co-ops, three offered 3% co-ops, and seven offered 2.5% co-ops. Only three of the 50 offered less than 2%.
The 50 most recent closings reflected the same shift I reported on last week: Only 13 offered 2.8%, 34 offered 2.5%, and none offered less than 2%.
My fellow Realtors will be less surprised by the change in co-op compensation than by Trelora becoming a Realtor brokerage, given its original animus toward Realtors.
I barely remember the one time that I charged 6% to list a home, but I think it was over a decade ago and it was for a condo priced under $100,000.
Agents who have been in this business longer than I have may recall when the Denver Board of Realtors dictated a 7% listing commission with 2.8% of that going to the cooperating (i.e., buyer’s) agent as a “co-op” commission.. If the listing agent sold the listing himself, he would keep the entire 7%.
Times have certainly changed. The Sherman Anti-Trust Act of 1890 wasn’t deemed to apply to the setting of real estate commissions until the 1980 Supreme Court decision in McLain v. Real Estate Board of New Orleans, Inc. It took until then for the Court to rule that the brokering of real estate transactions involved enough elements of interstate commerce for the local practice of real estate to be reason-ably subject to that federal law.
As a result of that decision, the Denver Board of Realtors abandoned the dictating of commissions. Commission rates have been declining ever since, although listing commissions still average in the mid-5% range, largely because few brokerages or their agents have been willing to offer less that 2.8% co-op commissions lest their listings not get shown and sold by other agents. But even that is changing now. With real estate prices skyrocketing, there is increasing free market pressure to reduce both the listing commission and the portion of that commission offered to cooperating brokers.
In real estate school it was drummed into us that there is no such thing as a “standard” commission, that listing commissions are negotiable. We were also told that we should never discuss with fellow agents what we charge. Even to suggest that there is a standard commission or discuss commissions with others would be a violation of anti-trust laws.
Years ago, I experimented with offering 2.5% co-op commissions on my listings and I found that they got fewer showings and no offers, so I went back to offering 2.8%. Nowadays, however, because of higher home prices, lower co-op commissions are less of an impediment. I am back to offering a 2.5% co-op commission on higher-priced listings so I can charge a lower listing commission, and they’re still selling immediately.
I did some research to quantify the effect of the lower co-op commissions and found that 30% of the homes which sold in one day were offering between 2% and 2.6% co-op commission, with a 2.5% co-op being the most common. The homes that took 10 to 12 days to sell had twice as many showing lower co-ops, so lower co-op offers appear to have slowed sales, but the homes still sold relatively quickly.
It seems only right to me that higher priced homes should carry lower listing commissions and lower co-op offers, so I did some research on that, too. The MLS does not reveal listing commissions, but I was able to research co-op commissions which, to a certain extent, should reflect the listing commission, since agents are reluctant to give away more than half their listing commission to buyers’ agents.
What I found surprised me. Of homes that closed in the last 30 days, I found that 46% of the closings under $450,000 offered less than 2.8% co-ops. Only 26% of home which sold between $1 million and $1.3 million offered less than 2.8% co-op. And most shocking of all, only 16% of the homes that sold for $3.4 million or more offered less than 2.8% co-op.
There’s currently a listing in the foothills above Golden for $25.7 million that is offering 2.8% co-op commission. The lucky broker who sells that listing will earn a commission of $770,000 for writing that contract. And, of course, the listing agent is getting about that much for putting it in the MLS. That seems excessive to me.
That brings up the topic of whether real estate agents generally are over compensated — a belief that generates considerable antagonism toward my colleagues and myself.
Here, too, the myth of the 6% commission is at play. Since the commission is typically lower than 6% and is split between the agents on each side of the transaction, a broker typically earns between 2.5% and 2.8% on each closing, not 6%. In most brokerages, the agent only gets a percentage of that commission and what’s earned is pre-expense income — referred to as Gross Commission Income or GCI.
The National Association of Realtors has reported that its members had a median GCI of $43,330 in 2020. Deduct expenses such as MLS fees, E&O insurance, cell phone and car expenses, computers and their software, plus licensing fees, and we are not a highly compensated industry on average. Keep in mind that only half of licensed brokers are Realtors, because NAR dues cost about $500 per year. Licensees who won’t pay the dues to be Realtors likely earn even less.
The 80/20 rule applies in real estate as it does everywhere. Twenty percent of agents do 80% of the business and earn 80% of the commissions. Golden Real Estate’s brokers are all in that 20%. We attribute our success to the fact that we give back, spending far more money, for example, on publishing this educational column than we do on all other expenses related to the real estate business.
I believe we earn our commissions and offer a great “value proposition.” See our list of services below. I hope you agree.
Yes, it’s a seller’s market, and maybe you think you don’t need to hire an agent to put your home on the MLS, but the opposite is true. Take, for example, the listing which was featured in this space last week. For 7 days it was listed as “Coming Soon” on our MLS, REcolorado, during which time it was not visible to non-mem-bers of the MLS (i.e., buyers). But that listing was emailed to over 250 buyers who had email alerts set up by their agents. One of those buyers tagged the listing as a “favorite” and another six tagged it as a “possibility.”
Those numbers, however, only reflect buyers who had included “coming soon” among the criteria that would trigger an alert. After the listing changed from “coming soon” to “active” on the MLS, the number of buyers who were alerted jumped to 720 and two more buyers tagged it as a “favorite.” When a buyer tags a listing as either a “favorite” or a “possibility,” the buyer’s agent gets an email letting him or her know which client liked the listing and may want to see it when it’s “active” and showings are allowed.
These numbers don’t include the buyers who set up their own alerts on Zillow or other consumer-facing sites, including Redfin. Also, those websites don’t display “coming soon” listings until they have been changed to “active.” Thus, buyers who had agents include “coming soon” as a criterion benefited from a 1-week earlier notice of that listing than did any of those buyers who were setting up alerts on their own.
For buyers wanting the earliest alerts of new listings matching their search criteria, please make this a reason to have an agent set up alerts for you instead of setting up alerts on your own.
Knowing the power of MLS alerts should cause any seller to have second thoughts about selling without an agent. It used to be that sellers could hire a “limited service” agent who would put their home on the MLS for a flat fee (say, $300) without performing any other service, but that is now illegal. The Colorado Real Estate Commission has ruled that there are certain minimum services which must be performed by all listing agents. Those services include exercising “reasonable skill and care,” receiving and presenting all offers, disclosing any known material facts about the buyer (such as their ability to close), referring their client to legal and other specialists on topics about which the agent is not qualified, accounting for the receipt of earnest money, and keeping the seller fully informed throughout the transaction.
Failure to perform those minimum services could subject the agent to discipline up to and including loss of license, which has caused “limited service” listings to disappear. If an agent offers such service to you, you should report them to the Division of Real Estate.
By the way, the Colorado Real Estate Commission has also ruled that it is the duty of all licensees to report known wrong-doing by other licensees, which their competitors are happy to do. We can be disciplined for not performing that duty.
Studies have shown that homes which are listed “for sale by owner” (FSBO) sell for less than ones which are listed by an agent on the MLS, and you can see why, because the more exposure your home has to prospective buyers, the more showings and offers you are likely to receive. And that difference in bottom line proceeds can far exceed the commission you are likely to pay.
Consider this: whether or not you hire a listing agent, you’re still likely to pay the “co-op” commission to the buyer’s agent, which is typically 2.8%. The average listing commission (which includes that co-op commission) is now around 5.5%, not the 6% everyone tells you. As a result, the savings you might experience from not hiring a listing agent could be about 2.7%, and that is likely less than the increased selling price you might get from listing your home on the MLS with a true “full-service” agent such as my broker associates and myself.
Note: Some brokerages mislead you by promoting a 1% listing commission, but when they get into your home to sign you up, they disclose that the 1% is in addition to the 2.8% that they recommend as the co-op commission and is increased further if they don’t earn a co-op commission on the purchase of your replacement home. It is also increased if they double-end the sale of your home, meaning that they don’t have to pay that 2.8% co-op commission to the buyer’s agent.
Such deceptive advertising, to me, is reason enough not to hire such a brokerage, but it may be hard for some people to say “no” to an agent they invited into their home with contract in hand.
Unlike such a brokerage, Golden Real Estate tells you upfront that we reduce our listing commission when we double-end the transaction, and we discount it further when you allow us to earn a commission on the purchase of your replacement home.
That said, our final commission might be only 1% or so higher than what you might pay to a discount brokerage, and our version of “full service” is much more complete than theirs. For starters, we produce narrated videos tours on every listing. Our video tours are not just slideshows with music or un-narrated interactive tours which can be dizzying and annoying. Our narrated tours resemble an actual showing, where the listing agent is walking you through the house, talking all the time, pointing out this or that feature which may not be obvious otherwise. Are those quartz countertops? Are there slide-outs in those base cabinets? Is that a wood-burning or gas fireplace? We have sold listings to out-of-towners who only “toured” the home on video, not seeing it in person until they flew into town for the inspection. That’s the power of narrated video tours.
Among the real estate terminology that confuses home buyers and sellers is the term “selling agent.”
The selling agent is, in fact, the agent representing the buyer in the purchase of a home, not to be confused (hopefully) with the seller’s agent, also referred to as the listing agent.
The reasoning behind calling a buyer’s agent the selling agent is that the buyer’s agent is the one who actually sells the home. The listing agent could, of course, sell his listing himself, but 90% of the time (actually closer to 95% of the time), the home is sold by another agent who shows the home to a buyer and then writes the contract to purchase it. In return for finding the buyer, the listing agent then shares his or her listing commission with the selling agent. It’s called the “co-op” commission, because the selling agent is cooperating with the listing agent to sell the listing.
I like to compare our industry to the automobile industry. Picture, for a moment, a sales person working for a Chevrolet dealership being able to bring a buyer to a Subaru dealership, get the keys to any of the cars on the lot, give multiple test drives and then get paid 40 to 50% of a Subaru sales person’s commission for selling one of that dealer’s cars. That’s how real estate works. The Mulitple Listing Service, or MLS, was created to facilitate such “cooperation and compensation” in the real estate industry. It benefits both buyer and seller as well as both real estate agents.
Last week, the Department of Justice simultaneously sued and settled with the National Association of Realtors regarding how brokers representing buyers are compensated and the public disclosure of that information.
As you may know — because I have written about it many times — the seller typically pays the commission of both the listing agent and the agent representing the buyer. The standard listing agreement includes the total commission and specifies how much of that commission will be shared with a buyer’s agent.
In that listing agreement, the total commission typically ranges from 5 to 6 percent, but the amount of that commission that is offered to buyers’ agents is traditionally 2.8% in our market. Our office policy at Golden Real Estate, like that of many brokerages, requires our agents to offer no less than 2.8%, because it has been demonstrated that offering less than 2.8% can result in fewer showings our listings.
Currently, that “co-op” commission is not displayed on consumer-facing MLS websites, but the settlement requires that it be displayed starting in January. Also, agents will be forbidden to tell buyers that their services are “free” or at “no cost to the buyer,” on the premise that the cost of that commission is reflected in the purchase price paid by the buyer.
Under the settlement, brokers who display MLS listings on their websites may not filter out listings which offer less than a specified co-op commission. We have never done that on our website, www.GoldenRealEstate.com.
Lastly, the settlement requires that lockbox access be provided to licensed agents who are not members of the same MLS, an issue I have never encountered.