‘Inflated’ agent fees cost consumers thousands, report claims 

Buyers and sellers shouldn't be afraid to consider low-fee agents and brokerages, a new report suggests — especially since consumers stand to save thousands of dollars. 

The paper, published by the Consumer Policy Center on Jan. 20, challenges the assumption that discount brokers are more likely to offer lower-quality services, arguing that the "you get what you pay for" maxim doesn't hold up when it comes to real estate commissions. 

Why? Because fees charged by traditional brokerages are inflated, not because discount brokers are operating on the cheap.

Why low-fee options haven't forced more competition 

Despite the rule changes mandated by the National Association of Realtors' landmark settlement in Sitzer/Burnett — a deal intended to do away with alleged price-fixing around agent commissions — the industry has "successfully resisted competing on price," CPC Senior Fellow Mark Nadel writes in the report. 

Based on real estate commissions in comparable countries and price competition in other industries, Nadel estimates that commission rates in a competitive U.S. marketplace would be reduced by about half, saving consumers around $6,000 on a typical home sale, or roughly $30 billion to $50 billion annually. 

That transfer of revenue away from brokerages serves as "an enormous incentive to avoid price competition" — something those companies have achieved, in part, by attempting to "sabotage brokers offering lower prices by steering clients away from deals that involve 'low-fee' brokers or agents on the other end of the sale," Nadel claims.

Agents can also be complicit by suggesting that discount brokers provide substandard services or require buyers to pay fees out of pocket — assertions, Nadel says, that "are misleading in the context of the residential real estate brokerage market."  

"One should not assume that real estate agents offering low rates are any less qualified than those charging two or three times that fee," he adds.

Effort, expertise not closely aligned with fees

While Nadel acknowledges that agent services "can be very valuable," he believes consumers are "grossly overpaying" for those services due to a lack of price competition — a claim likely to rankle many real estate professionals.

For one, he suggests there is little reason to believe an agent representing a million-dollar home works twice as hard as an agent selling a $500,000 home. Even if a higher-end property requires additional staging or marketing, those tasks aren't likely to add more than a few extra hours of work, he surmises, which doesn't justify collecting double the fee.

Moreover, unlike other commission-based salespeople who may be motivated to work harder to secure more deals or bonuses, real estate agents have less incentive to go the extra mile, according to Nadel.

As an example, he says, consider the sale of a home worth $400,000. An agent who secures $390,000 for the seller earns just 5% less than an agent who works hard to secure $410,000. "What kind of incentive system rewards an excellent job by paying only about 5% more than for a disappointing job?" Nadel asks.

He also points to the unusual nature of the housing market, which can experience major spikes in home prices over a relatively short time. If a home sells for $300,000, and the property is resold two years later after doubling in value, the agent handling the second sale receives twice the compensation, even if they performed the same work for the same number of hours as the first agent. 

That's because "the time and costs incurred by residential real estate agents is generally unrelated to the sale price of a home," Nadel says.

Agents should be compensated like other professionals 

So how should agent pay be determined? 

"Consumers should consider what they pay other professionals when preparing their homes for sale," Nadel suggests — typically an hourly rate plus the cost of supplies.

"Most of an agent's fee is compensation for their time," Nadel continues. "And while an experienced, expert agent might demand and deserve a much higher hourly rate than a new agent, basing fees on sale prices of homes does not serve that end. It merely encourages the best agents to compete to work with buyers and sellers of the highest-priced homes."

Providing an incentive based on an agent's ability to net a higher-than-average sale price could be an interesting alternative, Nadel notes. In that scenario, a seller could ask competing listing agents to present their benchmark price for the home, the share to be paid on the amount exceeding that price, and a flat fee for the agent's costs and services regardless of the sale price.

In the meantime, Nadel concludes, "most home buyers and sellers can save many thousands of dollars if they are not afraid to use a low-fee real estate agent." He encourages consumers to consider multiple factors when choosing an agent, including their specific skills and market knowledge, their working style, their understanding of the client and sales strategy — and their fee. 

"A lower fee should be a plus, not a minus in such an evaluation," Nadel says.