Here’s how it typically works today: in a real estate transaction, you, as the seller, pay commissions to both your agent and the buyer’s agent. As an example, for a $500,000 house, each agent usually takes about 3%, which totals $30,000 deducted from your proceeds.

Paying a 3% commission to your own agent seems reasonable since you’re hiring them to represent your interests. However, it feels unreasonable to also pay 3% to a buyer’s agent who negotiates against you. This system disadvantages sellers who have invested significant time and money into their properties.

You can manage some of these costs by handling the sale yourself and only paying the buyer’s commission, as I recently chose to do, primarily to ensure that agents show your house. Alternatively, you can undertake the entire sale process yourself. However, given how the real estate industry and MLS are structured, this task can be extremely challenging. Another option is to negotiate for a lower commission, but this may result in agents de-prioritizing the showing of your property.

The system should mirror other professional services where costs are borne by the beneficiaries. For example, if you need help filing your taxes, you hire an accountant; if you get sick, you consult a doctor; if you need a computer application, you engage a programmer (and you can hire me! :). Similarly, in real estate transactions, sellers should only pay their agents, and buyers should pay theirs. This arrangement ensures that each agent is truly representing their client’s best interests.

At the heart of this issue is the Multiple Listing Service (see Wikipedia) and network where agents exchange property listings and compensation. From Wikipedia:

The primary purpose of an MLS is to provide a facility to publish a “unilateral offer of compensation” by a listing broker, to other broker participants in that MLS. In other words, the commission rate that is offered by the listing broker is published within the MLS to other cooperating brokers. This offer of compensation is considered a contractual obligation…

There are currently 529 Multiple Listing Services in the US. They are owned by associations of realtors individually, collectively, or by, in a small number of cases, brokers. They are not freely accessible to anyone and a fee must be paid to be a user. In addition, only licensed real estate agents, and brokers, and appraisers are eligible to belong to an MLS.

This MLS system, which functions collectively like a monopoly, incentivizes buyer agents to focus primarily on MLS listings. Although I, as the seller, pay the commission, the buyer’s agent is duty-bound to represent the buyer’s interests. This arrangement can lead to situations, such as the one I experienced, where the buyer’s agent negotiates for a lower price and other concessions. As a result, they work against my interests as the seller in maximizing sale proceeds, despite the fact that I am funding their commission.

I am not opposed to realtors earning an honest living, nor am I against protecting buyers’ interests. However, I advocate for fairness for all parties involved in real estate transactions. A more equitable approach would be a separation where sellers and buyers each pay their respective agents. This ensures that each agent is fully committed to representing their client’s best interests, promoting transparency and integrity in the process.

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Originally posted on February 26, 2023. Republished on May 9, 2024, following recent news: ‘Real estate brokerages seek final approval of landmark settlements with homebuyers‘ (via Yahoo!).