Editorial | What’s at stake in court’s real estate ruling on fees

The number of homes on the market is a third below normal in Southern California mainly because of high mortgage rates. But some believe capital gains taxes also contribute to a shortage of homes for sale. (File photo by Joe Raedle/Getty Images)

It’s no wonder that selling real estate, and representing real estate buyers, is a popular and sometimes lucrative occupation in Santa Cruz County.

With median prices of homes still hovering around $1.5 million, commissions for agents can range from 3 percent to 6 percent ($45,000 on a median price home with a 3% commission); estimates are that more than 1,100 people in the county are engaged in the real estate trade, with 564 active real estate offices (some of which are one-person). For instance, Coldwell Banker, a nationwide real estate firm, lists 107 agents just in this county.

Nearly 203,000 people in California are affiliated with the real estate industry and about 3 million in the U.S.
Are they all getting rich on commissions? Not that often, according to surveys, which show the average income of a real estate agent in the state is around $90,000. Many agents (not Realtors) work part-time at the trade.

But, the industry has been shaken over the past month by a federal court anti-trust decision on commissions that could change how agents are paid for their work.

Here’s how the system has been working: Home sellers pay a commission typically between 5% and 6% of a home’s selling price — which is usually split between the seller’s and buyer’s agent. The commission gets baked into the home selling price.

The current set of rules governing how agents are paid, which effectively mean sellers are the ones who set compensation for buyer agents, date to the 1990s. Commissions have mostly remained around 5% to 6% of the sale price even as home values have skyrocketed and many buyers do more of the work finding a home themselves online.

In the federal court case, a Kansas City jury delivered a $1.8 billion verdict to home sellers in Missouri against the National Association of Realtors and two major brokerages, finding they had conspired to keep commission rates high. A judge could triple that judgment to $5 billion. The NAR says it plans to appeal. Other lawsuits making similar objections to commission rates are also in the pipeline.

Lawyers representing home sellers in the court case argued the current model suppresses competition by making it difficult for buyers and sellers to negotiate lower rates. If buyer-broker commission rates were negotiated directly by the home buyer, they might eventually fall as agents would likely be pushed to further compete for buyers’ business.

But according to the NAR, commission offers are negotiable and are determined by the market and the value that real estate agents bring to consumers.

Many industry watchers say it could become less standard for sellers to offer compensation to buyers’ agents.

But some are forecasting more radical changes, such as sellers being banned from compensating buyers’ agents.

If buyers become largely responsible for paying their own agents, some might opt not to use agents altogether, which would mean less business for real estate agents who primarily work with buyers. A decline in buyers’ agents, in turn, could harm real-estate listing companies such as Zillow and Realtor.com, which sell leads to buyers’ agents.

The timing of the ruling came as many real-estate brokerages faced a tough business environment. The volume of home sales has slumped this year because of higher mortgage rates and a limited supply of homes for sale.

But spokespeople for the National Association of Realtors and large residential brokerages say that while the ruling is likely to change the amount of commissions paid by home buyers and sellers, as well as how they are paid out, both sides will still seek out, and need, representation.

Two points to consider: Sellers do not, in most cases, raise the price of a home to cover commission and other closing costs. The market sets the price of a home. Period.

In addition, the industry already has changed with the times. Despite all the technology and information housing consumers have at their disposal, over 90% chose to use an agent last year. To avoid chaos and conflict in buying and selling, we’d expect that to continue, even under a new commission system.