There once was a time when 6% was the going commission rate for real estate agents. But recent reports by Real Trends and Realogy Corp. show that the average commission is at less than 5% -- and that percentage is usually split between the listing agent and the buyer's agent.
Let's take a look at why this is happening and what it means for real estate investors looking to cash in.
How the market affects agent commissions
A hot seller's market is to blame for falling real estate commissions. When home prices are skyrocketing and bidding wars are a common occurrence, many homes spend barely any time on the market before that SOLD sign is hung. The argument is that agents simply have far less work to do to close the deal, particularly when multiple offers over the asking price come in, frequently at that -- even before the open house is over.
Of course, this can work out for agents in the end, particularly if the sale price is high and they can close out two or three deals in the same amount of time it would take to close out one deal in a cooler real estate market.
On the flip side, in slower markets where high property inventory is more likely to see price reductions than bidding wars, agent commissions tend to be higher. From a buyer's perspective, that might seem counterintuitive at first, but the logic is that real estate agents deserve a higher rate for doing more work to market lingering listings to a smaller pool of buyers.
Room for negotiation
Sellers are in a good position to negotiate not just price and contingencies in their contracts with buyers but also commission rates with their agents. And the fact that there are just so many of them out there is a huge reason agents aren't driving a harder bargain themselves. The National Association of Realtors (NAR) reports a membership of 1.4 million licensed agents. In 2019, there were 5.6 million property sales, which breaks down to just four sales per member on average.
It used to be that real estate agents would only go head-to-head with other real estate agents in the same town or city. But now, agents are battling large firms like Redfin that are looking to disrupt the traditional model of selling real estate and offer much lower commission rates. So it's not so surprising that to stay in business, real estate agents themselves have given up on the nearly mythical 6% commission.
The bottom line
Not only are sellers making a killing in the real estate market but also holding on to more of their profits because of lower real estate commission rates. If you have previously been reluctant to work with a real estate agent because of the commission rate, now might be the time to switch up your strategy.