There’s a Persistent Myth That the “Standard” Real Estate Commission Is 6 Percent  

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.

The Way Real Estate Agents Are Compensated Confuses Many Buyers & Sellers

The real estate industry is unlike any other industry in the way its sales personnel are compensated. Since it is a persistent source of confusion for the general public, allow me to explain.

Imagine you went to a Ford dealership and described what you need in a car or truck. The salesman goes to his computer and pulls up his own inventory and the inventory of all the other dealers in the metro area.

It turns out that Chevrolet or Toyota might have a vehicle that better fits your needs, and the salesman knows that he’ll earn just as much by taking you to their lots and selling you one of their vehicles, so you get in his Tesla and go car-hunting. He even takes you for test drives without a salesman from the other dealership being involved at all. You go back to the Ford dealership, where a purchase offer is signed and emailed to the dealership which has that vehicle. The salesman helps you arrange financing with a trusted lender and sends proof of cash or financing with the offer.

Although there are some “auto brokers” who function as I’ve described above (in fact, I bought my Chevy Volt using an auto broker), that’s not how most car sales transactions work. It is, however, exactly how real estate works.

You’ve probably heard of the Multi-List Service (MLS) on which real estate listings are posted. The central premise of the MLS is “cooperation and compensation.”  To be a member of the MLS — essential if you’re in the real estate business — you must agree to cooperate with every other member of the MLS and to offer compensation if another member sells your listing. The percentage commission offered to other members is called the  “co-op” commission. In the Denver market, that commission is typically 2.8%. There’s an interesting history of MLS-type “exchanges” dating back as far as the 1880’s, which you can read at www.NAR.realtor.

The listing contract which every agent prepares for a seller specifies the total commission (typically between 5 and 6 percent) and the co-op which the listing agent is offering to other MLS members. In the “old days,” before Taft-Hartley anti-trust laws were enforced in our industry, the Denver Board of Realtors prescribed a 7% listing commission, and prescribed that 40% of that commission (or 2.8%) be offered to other agents as a co-op.  Under that formula, sellers would pay 4.2% commission to the listing agent and 2.8% to the selling agent at closing.

Once the Department of Justice said that anti-trust laws apply to the real estate industry, the Board of Realtors and the MLS could no longer dictate commission rates, and listing rates began their inevitable decline as agents competed with each other for listings. This is a good thing for sellers, but it has no real meaning for buyers. Indeed, when listing agents have tried to pay less than 2.8% co-op commission, they have found that buyers’ agents are less likely to show and sell their listings. As a result, listing agents now earn less than buyers’ agents in a given transaction, even though they are the ones laying out money for photographs, brochures, staging consultations, advertising and other expenses associated with maximizing their listings’ exposure to potential buyers.

Now and then, this commission model — wherein the entire commission is paid by the seller — is challenged, but it endures almost universally, if for no other reason than “it works.”

Where this business model causes confusion is when a broker or brokerage advertises a 1% or 2% “listing fee” in order to get a listing appointment, at which time the seller learns that this does not include the requisite (or at least recommended) 2.8% commission to the buyer’s agent.. These brokers and brokerages know that honestly advertising a 3.8% or 4.8% listing fee would garner them far fewer listing appointments.

Another source of confusion is what’s known as the variable commission. This term applies to a commission that is reduced if the listing agent doesn’t have to pay a co-op commission because the buyer has no agent of his own. However, most listing agents — 85% by my calculation — don’t mention reducing their commission in their listing presentations and hope that the seller won’t ask them about reducing their commission if they don’t have to pay a co-op commission. At Golden Real Estate, it is office policy to offer a variable commission.

As real estate values continue to increase, it’s reasonable to ask whether the commission rates — which I’ve said are typically between 5 and 6 percent) should be reduced on the theory that it takes little more money and effort to market a million-dollar home than it does to market a $400,000 or $500,000 home.

The extent to which listing agents can reduce their commission, however, is limited by that 2.8% co-op commission that we feel obligated to offer. After all, if we reduced our commission to, say, 4%, we’d only earn 1.2% after giving away 2.8% to the buyer’s agent.

Where we can be more accommodating on those higher priced homes is in agreeing to a lower variable commission. My practice is to reduce my 5.6% commission to 4.6% when I don’t have to pay 2.8% to a buyer’s agent, but I’m willing to adjust both those numbers on a higher-priced listing.  By the way, that appears to be the practice of most broker associates at Golden Real Estate.  Because of Taft-Hartley, I can’t dictate what they offer.

About 5% of transactions are double-ended, although that percentage is much higher at Golden Real Estate because of our more extensive marketing of listings and the fact that we offer Totally Free Moving to Colorado buyers when they are unrepresented.