Why we pay Realtors the way we do, and why it is strange
You know… I’ve been in this business a long time now, and when I think back to my very early days I remember a LOT of confusion around how we as Realtors get paid. I understood that we didn’t get paid until the closing of the property, but beyond that, I didn’t really grasp the entire concept. In fact, when I was working at Trader Joe’s while going to real estate school, I recall a co-worker of mine challenged me when I said that the seller generally pays both commissions; for the buyer’s agent and the seller’s agent. He said, “No. Actually the buyer is paying the commissions because the buyer is the one that is bringing the funds to the closing table.” His comment stuck with me, and got me thinking a lot about this whole fee structure. Since then, I have talked to dozens and dozens of people about this topic and what I can say for sure is that… most people are confused by how Realtors get paid. But, things are becoming more transparent thanks to some recent changes in policies.
A little history:
Mid 1800’s - early 1900’s - Land was “donated” to select white men (often taken directly from Native populations) and real estate soon after became a formal profession, with the percentage commission model increasingly common. Local Realtor boards began forming, and Brokers would represent the buyer and the seller, or sometimes a different Broker would represent each. This eventually became fundamental to American real estate.
1908 onward - The National Association of Realtors (NAR) was founded. During the early 1900’s, professional standards, codes of ethics, and systems for Brokers to share listings were established nationwide. Commission sharing became a part of the brokerage infrastructure, and Brokers would say “I have a listing on 123 Main Street, and if you bring the buyer and close the deal, I’ll share my commission with you.”
1920’s - 1950’s - Real estate licensing laws spread across the states and brokerages became more regulated. The commission percentage varied by location and type of property, but essentially the structure is what we still recognize today.
1950’s - 1970’s- the MLS changes everything; instead of every brokerage having it’s own inventory of properties, Brokers pooled listings into a common marketplace. The listing agent would offer compensation to another agent for incentivizing them to bring a buyer to the property. During this time, the agent working with the buyer was legally considered a subagent of the seller, even though the buyer often thought that agent represented them.
1970’s- The DOJ challenged the real estate industry, accusing it of violating antitrust laws (price-fixing). This is the origin of the current practice that commissions are negotiable.
1980’s - 1990’s - Buyer Agency is created. Most states began formally recognizing that buyers could hire an agent whose fiduciary duties ran to them. The buyer’s agent was frequently paid from the commission the seller had agreed to pay the listing broker, and that amount was around 5-6% (which is the percentage that has remained the most common cultural norm since this time). Generally, the listing agent would tell their seller client that their commission was X% which is split between the buying side and selling side (often 50/50). Discount brokerages, flat-fee MLS companies, and alternative models have existed since this time as well. The internet also created a platform where many consumers were starting to find houses themselves.
2010’s - 2023- The commission structure comes under antitrust pressure once again. The central argument became: “If the buyer’s agent represents the buyer, why is their compensation being established through the seller/listing agent side of things?”
August 2024 - NAR was involved in a $148 million settlement that changed some of the rules around commissions, which resulted in increased transparency around this topic. What changed: Offers of buyer-agent compensation could no longer be displaced in any NAR-affiliated MLS’s. And, agents working with buyers are now required to have a written buyer agreement before touring homes, establishing the terms of the representation and compensation. Sellers can still pay or contribute toward a buyer’s agent’s commission, and listing brokers can sill communicate compensation arrangements outside of the MLS, but buyers have a lot more transparency about their agent’s compensation being negotiable and not necessarily always paid by the seller.
SO… after almost a century of bundling brokerage services together, the post 2024 changes are pushing real estate toward price transparency and unbundling. The compensation architecture that has dominated years well beyond my 24 year career is being redesigned in real time. And, this is a good thing, in my opinion.
I believe what we will see moving forward are even more creative models… and I’m open to this. I am excited for more transparency in our business as it relates to commissions. And I’m looking forward to what kinds of alternative structures are coming. The current structure has its continued problems; and the system doesn’t work well for a great number of Realtors as well as for a great number of consumers. From the Realtor side of things - I’ve heard consistently that 10% of the agents do 90% of the business - a large number of Realtors are not able to make a living in this profession. So much to say on this topic; more on this another time! From the consumer side of things, housing costs have gone up exponentially and sometimes, the Realtor’s fee doesn’t match the amount of work or the value that agent provided. I have thoughts and ideas and dreams and visions about all of this, and I’ll be sharing these in upcoming writings, so stay tuned for that :)
