Why do sellers pay buyer-broker commissions? 

With the National Association of Realtors and several major U.S. brokerages embroiled in class action lawsuits over agent pay — with billions of dollars at stake — one might wonder how we got to this point.

In October, the Burnett vs. NAR (formerly Sitzer vs. NAR) trial is expected to get underway in Missouri. Sometime in 2024, an even farther-reaching case, Moehrl vs. NAR, is scheduled to take place. Both lawsuits have the potential to upend how buyer agents are paid commission.

The current system of buyer and seller agents splitting the commission has a long history in the United States, according to research by Panle Jia Barwick and Maisy Wong published in 2019.

Barwick and Wong traced the practice back to the original Code of Ethics issued In 1913 by the National Association of Real Estate Exchanges (which would later become NAR). The code stated, "An agent should always exact the regular real estate commission pre-scribed by the board or exchange of which he is a member," and that agents should "... always be ready and willing to divide the regular commission equally with any member of the Association who can produce a buyer for any client."

What buyer agency looked like 100 years ago 

In 1913, buying or selling a home required a lot of legwork — there was no centralized database of listings, and buyer's agents had to put in a lot of travel time, going through neighborhoods to find homes that were available.

Throughout the 1920s, commissions were around 2.5% for both agents, and home prices averaged around $6,000 — meaning a buyer's agent was getting around $75. Commission rates rose to 5% in the 1940s and have hovered between 5-6% for decades.

Representation also looked a little different in the early 20th century. Home sellers tended to have a lot of control over the transaction, with buyer agents working as subagents in the interest of the seller. In the late 1980s, real estate firms began solely representing buyers, with the Real Estate Buyer's Agent Council (REBAC) being formed in 1988 to promote buyer agency.

Initially, MLSs weren't very accommodating, but that changed in 1993 when NAR policies started allowing brokers to offer compensation through the MLS, according to a recent Swanepoel Trends Report. 

Even though buyer's agents represented the interests of the buyers, the compensation structure didn't change: The money was still coming out of the seller's pocket.

And that brings us back to the lawsuits, which contend that sellers should not be responsible for buyer agent commissions. 

Technology and brokerage models change, but not commissions 

Buyer agent commission has remained fairly stable over the years, according to Barwick and Wong. Using the Boston area as a sample, they found the median buyer commission rate was 2.5% every year between 2000 and 2018. Given the steady rise in home prices, average commission fees have largely outpaced inflation over the past 20 years.

Other reports have also noted how similar buyer agent commissions tend to be across the U.S. A study by the Consumer Federation of America analyzed 10,000 home sales in 21 cities  in 2021. In 15 of the cities, more than 88% of the rates ranged between 2.5% and 3%.

This consistency in buyer agent commission rates is a bit unusual given the rise of brokerages that offer discounted rates or flat fees for sellers — and given the prevalence of home search portals, which have made it easier for homebuyers to find new listings themselves.

One reason buyer agent commissions have remained steady could be due to "steering," whereby agents steer clients away from listings that offer lower buyer agent commissions. In their research, Barwick and Wong indeed found that listings with low commission offers for buyer agents did suffer worse sales outcomes.

The study concluded that a natural policy intervention would be to let the seller and buyer pay independently for the services each party obtains, which is common in other consumer service industries, the report noted.

Along with reducing steering, "it would allow buyers to shop for the level of service that suits their needs and bargain for its price."

NAR, in defending itself in the upcoming court cases, has maintained that the current system of buyer agent commissions is best for consumers, particularly given the possibility of buyers paying those fees upfront.

Mapping out next steps

Regardless of the outcome of the lawsuits, changes at the brokerage level are likely, such as encouraging or requiring agents to sign agreements with their buyers early in the relationship.

Dean Cottrill, who leads T3 Sixty's brokerage consulting division, expects brokerages and agents to experiment with different approaches. (Note: T3 Sixty and Real Estate News share a founder, Stefan Swanepoel.)

"Ultimately the consumer is going to choose who they feel is the best value for their dollar," Cottrill said. "It's all going to be negotiable."

While not everyone in the industry has taken notice of the challenges to buyer agent compensation, many are concerned, and T3 Sixty recently issued an open letter urging the industry to be proactive. Buyer's agents can represent a big portion of a brokerage firm's revenue, and changes to compensation could impact their bottom line, especially in the current market.