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.
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.