How real estate commissions work and why they might get lower
When you sell a house, both your agent and the buyer's agent get a slice of the pie. But just how big of a slice is a question snaking its way through the courts.
A jury in Kansas City this week found that the National Association of Realtors and a number of real estate brokerages conspired to keep home sale commissions artificially high. Defendants, who have pledged to appeal, are on the hook to pay nearly $1.8 billion in damages to about a half-million Missouri home sellers, and that amount might grow. The outcome could totally upend how real estate agents get paid, and how homes are sold.
But to understand how things may change, we first need to clarify just how the system works.
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How do real estate commissions work?
Most real estate agents make their money from commissions. In the United States, there's generally an agent representing the seller and one representing the buyer. The seller pays the commission to both of them. This has been standard practice for more than 50 years, according to Christy Reap, spokesperson for Bright MLS, the database of homes for sale in the Mid-Atlantic.
Generally, commissions are 5 to 6 percent of the home-sale price. The buyer's and seller's agents split that money. So if a home sells for $500,000 with a commission of 6 percent, the agents on both sides of the deal will split about $30,000 from the proceeds of the sale.
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What's the problem with the status quo for agent commissions?
A seller and their agent cannot cut the buyer's agent out of the commission without facing big consequences. This requirement to "couple" the commissions - or else - is one of the standards under fire in the lawsuit. The seller-defendants claim it amounts to forcing them, unfairly, to pay both commissions.
So, what's the penalty if you don't...