Delinking buyer and seller commissions will make markets for real estate agent services more competitive, allowing buyers and sellers to negotiate commissions and allowing for a diversity of commission structures, thus putting competitive pressure on high intermediation fees.


When you go to a used car dealership, you know that the salespeople selling you a car want to make a big commission. Since you don’t buy a car very often, you might worry about being taken advantage of by a salesperson, either by overpaying or buying a car that is not a good match. A common solution would be to bring along someone who is an expert in cars to help you decide which one to buy. You might even pay them back (say, $100) for the time spent picking the best car for you and negotiating the price. 

Economists think of the above as a solution to the problem of “asymmetric information”—the salesperson knows more than the potential buyer about the quality and market price of a given used car. By bringing along someone as an advisor, the gap in information between you and the salesperson decreases. 

But what if the used car salesperson was the one who is paying your car advisor, and they were paying a fixed 2.5 percent commission of the selling price, conditional on sale? Moreover, the dealership set the commission rate and it was non-negotiable. Would this still seem like a good idea for a car buyer? Your advisor would now have an incentive to make sure you buy a car—any car, since they don’t get paid otherwise—and no incentive to negotiate a lower price. 

While the above is not how the car buying process works, it is a useful analogy to real estate because this is exactly how almost all residential real estate sales in the United States occur. A seller sets a commission to be paid to a buyer’s agent as a percentage of the selling price of the home (typically 2-3 percent) and this is paid out of the seller’s proceeds from the transaction. This creates an unusual and potentially problematic situation for buyers, where the commission that is paid to the expert looking out for them—the buyer’s agent—is set and funded by the seller. 

Historically, some real estate agents would tell buyers that the “buyer’s agent is free” since their fee is paid out of the seller’s proceeds. However, the buyer’s agent fee is an economic cost of the transaction and leads to higher sales prices. In 2020, the Department of Justice (DOJ) sued the National Association of Realtors (NAR) to stop buyers agents from advertising their services as free (the DOJ is still investigating the NAR due to a breakdown in settlement talks around this lawsuit). To see why the buyer’s fee is an economic cost, take a simple example: a seller willing to sell a property for $300,000, expecting to pay a 2.5 percent commission to a buyer’s agent ($7500). If the buyer’s agent were truly free, the seller would accept an offer of $292,500. However, if they have to pay the buyer’s agent fee, then they would not accept an offer below $300,000. Therefore, the buyer has to pay a higher price for the property. Economists view this fee as a type of tax and refer to who bears the burden of this cost as the “incidence” of the tax. In this case, even though the buyer is not writing a check for the buyer’s agent fee, they are paying it through higher prices. 

To be clear, this fee is necessary to compensate the buyer agents for their expertise and time spent helping buyers navigate the housing market. What is surprising to economists is that despite big changes in the process for buying homes—for example, 95 percent of recent home buyers use online tools in their search—these commissions have stayed relatively stable for decades

Why is there so little variation on fees charged by agents (buyer or seller) in residential real estate? Further, why are fees necessarily tied to the selling price? The commission paid to agents—the intermediation fee—remains stubbornly high, between 5 and 6 percent of the transaction price (roughly $14,000-17,000 for the median house in the US, according to Zillow’s estimates). In fact, the housing market is one of the few industries where the commission for intermediation has remained unchanged since its structure was established in 1913. Moreover, these commissions do not vary across agents, despite huge variation in their experience and quality of service.

Why are agents not competing on fees? One answer may be the unusual bundling of real estate agent services that is unseen to most consumers. The 5-6 percent fee paid by the seller is typically split between multiple intermediaries. First, in a typical transaction both a seller and a buyer have their own agent. These two agents split the overall commission between them—the share of the overall commission offered to the buyer’s agent is pre-specified in the initial listing. Next, each agent works for a brokerage, which takes its own cut from each agent’s share. 

“Why are agents not competing on fees? One answer may be the unusual bundling of real estate agent services that is unseen to most consumers.”

How does this bundling of services get split up? Take our simple example from where a house sells for $300,000 and the seller paid five percent commission upon the sale. Then, the total commission is $15,000. The listing and buying agencies are compensated $7,500 each, which is further split so that each agent gets 60 percent ($4,500) and each broker receives 40 percent ($3,000) of the earnings.

As a result, the seller signs a contract with an agent who retains only a fraction of the total commission. The agent’s brokerage often sets the remaining fee that goes to them (seller agent brokerage), the buyer’s agent, and the buyer’s agent’s brokerage. This “bundle” of intermediation services makes it challenging for sellers to negotiate the commission down. Even if a selling agent were willing to work for free, forgoing their entire portion of the fee would still leave a sizable commission to pay to the remaining intermediaries (in the above example, a $10,500 or 3.5 percent).

There have been some market entrants that have tried to alter the status quo—Redfin, for example, charges lower seller fees (1-1.5 percent of the selling price, while employing a salaried workforce), but still offers a 2.5 percent commission to buyer’s agents so that buyer’s agents do not steer potential buyers away from their homes. Others like Houwzer and REX do fixed-fee sales: pay a flat rate to list your home and sell it, while again paying a buyer’s agent a fee of 2.5 percent. Entrants like these are making inroads, but the vast majority of transactions still follow the old model.

Why are buyer and seller intermediation services bundled? Historically, there were good reasons for the seller’s agent to pay other agents involved in the sale. When these initial rules were established in 1913, realtors were the gatekeepers to information on available listings, and brokerages typically promoted their own listings to arriving buyers. Commission-sharing fostered cooperation, encouraging agents to bring buyers to “rivalrous” listings at outside brokerages, with the expectation that other brokerages would reciprocate. While some studies find that agents continue to prioritize listings within their own agency, the arrival of Zillow and other web-based platforms has significantly changed the information access for buyers. The buyers themselves (and not just their agents) have knowledge of most of the available homes on the market, and so the need to encourage buyer agents to come to rivalrous listings is likely low. In other words, the reason to bundle seller and buyer commissions is outdated.  

The persistence of this structure for over a century across the United States is facilitated by the NAR [and it’s predecessor, the National Association of Real Estate Exchanges]. The NAR provides valuable resources on training, codes of ethics, and industry information to its members. It also plays an important role in setting expectations and guidelines for its members, establishing rules about how the listing data platforms should be run. The NAR is careful to encourage appropriate competitive behavior: “Boards and associations of Realtors® and their MLSs shall not … [f]ix, control, recommend, or suggest the commissions or fees charged for real estate brokerage services.” But it also carefully delineates the appropriate way to compensate buyer agents for their services. Given the dominant role of the listing data platforms and the NAR, it is not surprising that the industry continues to use the traditional bundling practice.

The November 2020 lawsuit filed by the DOJ against the NAR alleges that the bundling of seller and buyer agent commissions has kept the agent fees high despite the technological innovations that have decreased intermediation costs in other markets. While the DOJ initially reached a settlement, it withdrew from it in July, stating that “[t]he proposed settlement sought to remedy those illegal practices and encourage greater competition among realtors, but it also prevented the department from pursuing other antitrust claims relating to NAR’s rules.” This suggests future action by the DOJ is likely. The NAR clearly senses that changes may be afoot as they are already making moves towards making fees more transparent. The important question is what enforcement actions can the DOJ take, and what will the consequences be for consumers.

Delinking buyer and seller commissions will make markets for real estate agent services more competitive, allowing buyers and sellers to negotiate commissions and allow for a diversity of commission structures, such as fixed fees instead of percentage commissions. This will make the buyer’s commission salient to the buyer who will then be responsible for the fee. This may have additional knock-on effects for sellers as well, as they can now negotiate over the seller’s agent commission more directly. This market competition on fees will likely help alleviate the over-entry of real estate agents as well.

However, there may be initial challenges after unbundling commissions. One key issue is that paying a buyer’s commission upfront might be difficult for liquidity-constrained buyers. To alleviate this issue, the fee could be folded into the mortgage, as with some other current mortgage closing costs. However, a variety of compensation structures might emerge in the market (analogous to the different ways that lawyers are compensated) that might impose significant upfront costs that would be burdensome for some buyers. Undoubtedly, moving to a new system of commissions will involve growing pains and new experiences for buyers and sellers.  

In the long run, however, unbundling buyer and seller commissions will help put competitive pressure on intermediation fees. Both buyers and sellers will take back the negotiating power over their portion of the commission. Delinking is not the only possible measure to increase competition, and the DOJ could also examine other industry practices, such as exclusive contracts, and access to listings. However, delinking can be an important first step towards new intermediation service structures and lower costs to consumers. Housing wealth is the biggest portion of most Americans’ savings, and the exorbitant transaction costs in the current system are erasing these savings. With higher housing intermediation fees than most other countries, it is time for a change.

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