Did 20th-Century Curbstoners Create The 6% Real Estate Commission Standard Of Today?
In 1908, the National Association of Real Estate Exchanges was founded to bring agents and brokers together “for the purpose of effectively exerting a combined influence upon matters affecting real estate interests.” In 1913, the real estate industry adopted its first draft of the Code of Ethics. In 1916, the association became the National Association of Real Estate Boards (NAREB), and the term “realtor” was adopted to distinguish members of the national association, who subscribed to the Code of Ethics, from dishonest “curbstoners.” The country had no license laws until late 1919, so anyone could call themselves a real estate broker.
In 1938, the Women’s Council of Realtors was founded to empower and support women who wanted to be entrepreneurs and practice real estate in a historically white male-dominated industry. In 1947, black people created an organization and called themselves “Realtists” out of a need to secure the right for equal housing opportunities regardless of race, creed or color.
A reflection of the early, dark and ugly days of America, the association at that time functioned accordingly as it condoned discrimination, price-fixing, segregation, sexism, etc. Many of these behaviors were documented in the iterations of the National Association’s Code of Ethics.
The Good News
As laws, people and society evolved, so did the National Association of Realtors. Throughout the decades, the right thing was done by those in leadership. The Code of Ethics was routinely updated to reflect the current state of societal views. In 1963, 100 years after the Emancipation Proclamation, in response to calls for a fair housing law, NAR produced a very controversial Property Owners’ Bill of Rights, asserting that all Americans, regardless of race, color or creed, should be allowed to occupy and dispose of property without government interference.
The Lingering Effects
History is important because it’s the foundation for understanding how things came to be. Tucked inside the cracks and crevices of the years noted above were decisions and events that have impacted and shaped the real estate industry as we know it today.
In 1950, a Supreme Court decision found brokers to be price-fixing in violation of antitrust laws. However, this ruling did not end price-fixing. It wasn’t until the NAR officially adopted a “hands off” policy regarding commission rates that the issue was truly addressed. Then in 2007, the DOJ took action in response to factors including suggested fee schedules.
Yet price-fixing in the form of commission standards, in spite of all the rules and regulations, is still happening today. Is that why most real estate agents and brokers still charge 6% commission? Better question: Who selected that percentage and why? Was it the dishonest curbstoners? Even better question: If laws were put in place to stop price-fixing, why do most agents and brokers still charge 6%?
Seventy years after the Supreme Court ruling, real estate commissions are still practically fixed and high regardless of the law and the technological advancements that have benefited the industry. And in the pursuit of preserving its price-fixing behavior, if a consumer attempts to negotiate the commission, I often hear of agents and brokers comparing themselves to doctors and lawyers. Yet, doctors and lawyers with years of education and independently of each other set their own individual rates.
Today, from discrimination to sexism, most issues from decades past have been legally addressed. However, in regards to price-fixing, consumers have been conditioned and strong-armed into believing that real estate commissions are nonnegotiable. According to a 2019 report from the Consumer Federation of America, which studied over 260 agent and broker websites in four cities and surveyed more than 2,000 Americans, nearly three out of four real estate agents, 73%, said they would not lower their standard 6% rate.
As Mark S. Nadel noted in the 2007 Cornell Real Estate Review, this standard 6% percentage commission works to the benefit of neither buyers nor sellers, and creates little incentive to provide the outstanding service many agents are capable of. Nadel wrote, “The traditional commission rate structure has become structurally unsound and should be rebuilt.”
Unlike any other industry, agents and brokers don’t buy, distribute, inventory, manufacture or service the product they sell. Yet, the 6% commission that’s charged to sellers is flagrantly high and can significantly impact the consumer’s ability to buy or sell property. This also means it impacts the economy.
Commissions Are Negotiable
I repeat: Commissions are negotiable. This has been the case for the past several decades. When a seller is executing their listing agreement, the agent must discuss compensation. Note that there will be a specific section discussing compensation in the contract with a blank space that must be filled in. Why is it blank? Because commissions are negotiable, not fixed.
There are several approaches to negotiating your commission. Are you buying a home after you sell? If so, ask your agent to reduce the commission on the sale of your home since they are going to get paid again when they represent you on the purchase of a new property. Another approach is to ask your agent if they can reduce the commission if you pay upfront to help with the expense(s) to market your property. Lastly, interview three different agents, and require that they be very specific about their services. Ask them about their cost to market your property. Then, negotiate accordingly. Furthermore, until laws change, I recommend never reducing the buyer’s agent commission.
I challenge you to share with your co-workers, family and friends that real estate commissions are negotiable. There are good agents and companies in your market area who provide good service at a fair price. Agents are going to routinely attempt to discourage you from negotiating their commission, so changing this historic price-fixing behavior begins and ends with you. Do your research. Understand the details of the services that are being provided and negotiate the commission. Make sure you feel like you are getting the service you are paying for.