US realtors should grasp the importance of fee transparency

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In 2001 I left the world of estate agencies. I had enjoyed selling houses in prime west London, but struggled with the question of who I was actually working for. Was it the vendor, the buyer, or myself? There were too many conflicts. 

So it didn’t surprise me when the US system of buying and selling houses was exposed in the courts late last year for allegedly inflated commissions and a lack of service to both buyers and sellers. The case against the National Association of Realtors (NAR) resulted in a change to rules that had previously enabled such high commissions for brokers. They came into effect this August. The court also stipulated the association must pay $418mn over four years to settle several cases. 

US real estate practices differ significantly from those in the UK. Traditionally, British vendors appoint one or more estate agents to market their property; the successful agent is rewarded with fees ranging broadly between 1 and 3 per cent of the sale price. As the market is generally transparent, with properties listed on a variety of media platforms, buyers receive a free service from agents but have to trust their information on a property or rely on their own due diligence.

In the US, lots of information has hitherto remained hidden from public view, forcing both buyers and sellers to use an agent. Vendors agree a commission with their listing agent at the beginning of the process — usually 5 to 6 per cent — which will also be used to remunerate the agent representing the buyer. This may be the same agent acting for the seller; a clear conflict of interest.

The NAR is the largest trade association in the US and only its fee-paying realtors have access to its database of properties available for sale. These directories are known as “multiple listing services” (MLSs) and require the seller’s agent to reveal the commission each client is paying. Buying agents are able to see this information. The system can enable buying agents to direct their clients towards properties where the commission is higher.

This legal case helps to illustrate the importance of fee transparency in the housing market. Everyone involved needs to understand what fees are being paid, and the obligations and benefits that come with them. Recent reports in the US show the new rules have led more sellers to realise that commissions are negotiable, and that the buyer might cover more.

Everyone involved needs to understand what fees are being paid, and the obligations and benefits that come with them

Unlike in the UK, American realtors have responsibility for writing sales contracts. They may sit under the umbrella of a big brand but, ultimately, it’s all about them and their contacts. Remuneration reflects this — with a large percentage of the fee being kept by the individual (who often receives no basic salary).  

In the UK it’s all about the estate agency; regulations are applied to them rather than the individual. Staff are traditionally salaried, with small commissions paid on fee income. Competition for instructions helps keep fees down.  

The British “challenger” agent, Foxtons, tried the British way of doing things in the US market in the late 1990s but was squeezed out, in part because it failed to attract star employees — whose income aspirations were considerably higher than their model could afford. Top agents in the US can earn eye-watering sums. 

With the ruling in the NAR case, it would appear that the cat is now firmly out of the bag: sellers have been paying inflated fees for years, and buyers used as pawns. The situation must change, and will change, but just how far it will go remains to be seen.

The new ruling means that commissions cannot be displayed on MLSs. The typical buyer’s commission is now down to 2.55 per cent. The Consumer Federation of America recommends 2 per cent as a target.

It has also seen the emergence of exclusivity contracts between buyers and buying agents for a specific time period. However, the whispers are that some realtors are already finding ways around this, with sellers agreeing to also pay buyers’ agents independently.

Eighty-six per cent of brokers now believe the commission structure changes will lead to professionals leaving the industry.

Many in the US had seen a change in real estate fee legislation coming. A decade of strongly rising prices ensured that despite high fees, vendors were banking significant profits. But as soon as interest rates and cost of living started stalling the market, the spotlight fell on the frictional costs.

Transparency, particularly with the rise of the internet, has impacted most areas of the business world, mostly to the consumer’s benefit. Yet for too long US agency fees were hidden and ring fenced. With the upcoming presidential election, there have been comments from both camps concerning property transaction costs. The only remaining question is how fast US real estate agencies will fall into line with new global norms that ensure all fee payers are actually getting the service they deserve.

Philip Harvey is senior partner at buying advisers Property Vision

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