Agent commission coming under fire from consumers

As real-estate agents and brokers watch their bottom lines find new bottoms in the post-boom world, the way most of them earn a living — the commission system — is coming under increasing attack from consumer groups.

By law, commissions are negotiable. Whether consumers take advantage of that or find a willing agent appears to be the heart of the issue.

In June, the Consumer Federation of America accused the residential real-estate industry of functioning "as a cartel that tries to set prices and restrict service options," in the words of Executive Director Stephen Brobeck.

The desire of traditional brokers to maintain the 6 to 7 percent commission "and the opportunity for a 'double-dip' — one broker collecting the entire commission — lies behind almost all of their anti-competitive actions," Brobeck said.

"In nearly all areas of the country, traditional brokers have tried to charge commissions of either 6 percent or 7 percent, although many sellers of higher-priced homes have been able to negotiate reductions of one percentage point or even more," Brobeck said, quoting survey results.

Surveys show that most consumers believe commissions are too high, and the growth of the for-sale-by-owner segment of the market during the recent boom was an indication of that.

The common perception "is that we make millions of dollars a year because we get to keep a 6 percent commission on every house," said Michael McCann, a broker with Prudential Fox & Roach in Center City, Pa. "As any agent knows, after the broker takes out the expenses of doing business, the agent gets only 2 percent, from which he has to pay his own expenses and taxes."

The latest attack on the commission system came from a lawyer, Mark S. Nadel, and was published by AEI-Brookings Joint Center for Regulatory Studies.

"Real-estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided," Nadel said. "Rather, this fee has been based solely on the price of the home."

But it doesn't necessarily cost more to sell a higher-priced home, Nadel said; a percentage-based fee "creates little incentive for real-estate agents to provide home buyers or sellers with additional value."

Though commission remains the primary business model for real estate, the National Association of Realtors plays no favorites, spokeswoman Stephanie Singer said.

"We have no policy on any business model," Singer said. "The association encourages innovation and competition in real-estate brokerage, including different business models like fee-for-service."

Discount brokerage involves a reduced package of services at a lower cost to the seller. Fee-for-service operations offer consumers a variety of services for specific fees.

Traditional brokers don't like discount brokerages. A study by Abdullah Yavis of Pennsylvania State University's Smeal School of Business and Ron Rutherford of the University of Texas at San Antonio said the Realtors group's lobbying had "led to laws in 15 states making it difficult or impossible for consumers to use discount brokers."

The association's Walt Molony disagrees.

"No, there's been a lot of misunderstanding about that," Molony said. "Most discount brokers are NAR members, and they've been an important niche market ... since the early 1990s."

The NAR's sensitivity to these charges led it to publish a survey Oct. 23 showing that "there is a wide array of firms and services breeding competition that benefits consumers," Molony said.

The Yavis-Rutherford study showed that while houses sold by discount brokers got the same prices as those listed by traditional brokers, it took five days longer and the listings were 12 percent less likely to sell.

A fee-for-service setup "unbundles" the services — such as staging the home, providing advertising and holding open houses — that a traditional broker provides and develops a price list for each.

This is the model Nadel advocates.

"Consumers would benefit most from a fee-for-service approach — combining flat fees, hourly fees and bonuses, including percentages of extra value created," Nadel said.

McCann, a traditional broker, sees no problem with fee for service.

"It's good to have options," he said.

"When you are on a commission, you only get paid if the property is sold. But if you offer a package of services for fees, you are paid whether you sell the property or not."