Craig is the founder and Managing Broker of Added Equity Real Estate. Added Equity charges a 1% fee to list and sell a home, total. Not 1% plus another 3%. Added Equity is different than any other firm. This is Craig’s blog series exploring why and how most realtors don’t talk openly and frankly about the actual fees they charge, keeping real estate agent commissions at their longstanding level.
First Installment: Real estate agents – intentionally or not – hide behind the law to avoid revealing their commissions.
Real Estate Broker Commissions Kept High with Secrecy
It goes without saying that real estate brokers benefit by high commissions. It also need not be said that those commissions will go down only when the prices are effectively communicated to consumers so that they can make informed decisions. By keeping commissions secret, real estate agents can keep them artificially high. How will consumers know of a better deal? They won’t. As a result, real estate agents have a strong personal incentive to “go along” with the system, charge the same high commission as anyone else, and keep it all from the public’s view.
Real Estate Agent Commissions Are Subject to Anti-Trust Law
The Sherman Anti-Trust Act is a federal law that is nearly two centuries old. Passed during the great reform movement that began in the late 19th Century, the law bars unfair business practices. Today, the government still uses the law to make sure businesses and entire industries don’t misbehave and trample on the fair workings of the market. Thanks to the Sherman Antitrust Act, the only legal monopoly in this country is the board game.
Around the same time as passage of the Sherman Act, the real estate industry formed as a cooperative business model. It worked well for the first hundred years or so. But the industries’ business practices did not subsequently evolve with the times.
In the early 21st Century, the U.S. Department of Justice began using the Sherman Antitrust Act to crack down on real estate agents and bring their practices up to modern standards. The DOJ believed that some realtors worked to keep their high real estate agent commissions. But even before that, the government charged real estate brokers with felony price fixing in 1977. Because of this longstanding legal oversight, real estate agents today have huge concerns with any discussion of the commissions they charge.
Realtors Hide Behind the Law to Avoid Discussing Realtor Commissions
Ostensibly as a result, real estate brokers almost always invoke the “it’s illegal to discuss!” shield whenever anyone wants to talk about their commissions. It is the routine, standard response on blogs, social media, and everywhere else.
It turns out that the fear is almost entirely misplaced. So says Brad Inman of Inman News, a reputable source to be sure. As he notes about any discussion of commissions on social media, “Someone utters the word ‘commission’ and there is a pile-on from Realtors who say ‘no-no-no.'” It’s a veritable Code of Silence, enforced by members of the club. One new agent commented on the “standard” treatment: “I have been a real estate agent all of few weeks now, and I have been cautioned about anti-trust law violations no less than a dozen times, NOT including actually learning it in class.”
But it simply isn’t true. Generally speaking, the law bars conversations between just brokers about the commissions that they charge, if they then act together in setting those commissions. A conversation that includes consumers on social media – where many, many conversations these days occur? Not even close.
It is, however, in brokers’ interests to keep these conversations out of the public view. Any discussion of commissions quickly leads to the conclusion that the seller almost always pays the buyer’s agent a 3% commission. A commission on top of the additional “listing commission” paid to the seller’s agent. Brokers would far rather focus on just the listing commission – after all, they’re likely to represent a buyer down the road, so why jeopardize that future big payday? The 3% buyer agent’s commission is best left unspoken. For brokers, anyway.
So agents routinely hide behind the Sherman Antitrust Act, instead of openly discussing their real estate agent commissions so that consumers can make informed pricing decisions. It is a huge irony, of course. The DOJ wants the market to exert price pressure on commissions. But the law used to make sure that pressure exists, and is exerted? The same law used by real estate agents to keep their high commissions concealed from the market. They’ve turned the consumer’s shield into their own sword.