Richmond, Virginia – Real estate agents in the United States could see a significant change in their compensation model, according to a new working paper from economists at the Richmond Federal Reserve Bank. The paper suggests that by adopting a new “à la carte” compensation model, U.S. homebuyers could potentially save around $30 billion in commissions annually.
In the paper, economists Borys Grochulski and Zhu Wang highlight the current disparity in real estate commissions between the U.S. and other countries. While countries like the U.K., Ireland, and the Netherlands typically pay less than 2% in commission to their agents, the U.S. averages around 5.5%, according to their analysis. This difference raises questions about the inefficiencies and high costs associated with the current U.S. model.
One of the proposed changes in the new compensation model involves separating the compensation of agents from the final home price in the transaction. This approach aims to prevent steering, a practice where agents direct clients away from low-commission properties. By allowing buyers to pay for individual agent services separately, such as home searches and negotiations, the economists believe consumers can shop around for better prices and ultimately reduce the overall commissions paid.
The economists argue that this shift in the compensation model could lead to increased competition among agents, aligning compensation with the actual cost of services provided. Additionally, they suggest that buyers would not overuse agent services under the new model, promoting more efficient and cost-effective transactions.
The real estate industry has been facing increasing pressure on commissions, with national brokerage firms and the National Association of Realtors currently embroiled in lawsuits related to alleged collusion to inflate agent commissions. These legal challenges, along with market dynamics, are prompting discussions about the need for a more transparent and consumer-friendly compensation model for real estate transactions.
While the proposed changes may face resistance from some within the industry, the economists believe that transitioning to an à la carte model could benefit both buyers and sellers by promoting fairer pricing and increased efficiency in the homebuying process. As policymakers and industry stakeholders continue to explore ways to improve the real estate market, the conversation around commission models is likely to remain a key point of interest.