How American Real Estate Really Works

Originally distributed December, 2023

The highly publicized Burnett trial verdict of October 31, 2023, found the National Association of Realtors® and two other defendants liable for 1.78 billion in damages.  

This and other lawsuits have utterly mischaracterized the facts that the Multiple Listing system not only does not artificially inflate prices but significantly benefits consumers, and that agents are in fact paid fairly...and only when a sale occurs.  

In seller listing agreements, MLS’s have historically offered compensation to the agent who produces the buyer for three reasons:

1.       To give sellers maximum exposure for their homes to generate competition resulting in a higher sale price.

2.       To give buyers the broadest selection of homes for sale.

3.       To wrap buyer agent fees into the financeable purchase price so buyers do not add more expenses to down payments and closing costs. 

When sellers sell, they agree to pay both seller and buyer agents in advance in writing, but if they then do not benefit from a higher sales price contract that covers the buy-side fee, they will not accept the offer. And when they buy homes, they are the beneficiary of this structure. The result is win-win. 

If, as lawyers and the DOJ seem to suggest, buyers must pay their agents out-of-pocket, prices may decline without the buy-side fee included, and thus, so will seller equity, while fewer buyers will be able to afford houses. Most properly educated sellers will opt – as is their right – to cover the buyer’s fee if the purchase price justifies that expense. 

As for ACTUAL agent compensation for the valuable services they provide:

1.       The gross fee appearing on the closing statement is not all paid to the agent, just as the price of a sofa is not all paid to the salesperson. 

2.       Like every product or service business, the real estate fee offsets the fixed overhead and transaction-related costs of doing business for multiple parties – technology, professional fees, health insurance, auto and gas for showing homes, yard signs advertising, staging and much more. The real earnings are what remain AFTER that overhead is deducted.

3.       The fee is divided between the brokerage companies and their respective (listing and buyer) agents, and sometimes a client source that may charge a referral fee as high as 45 percent of the gross fee.

4.       Agents are independent contractors paid only when there is a sale. Their share of the gross fee must also cover their expenses AND the unpaid time spent with clients who never purchase through them, the listed homes that do not sell, the ~15 percent of contracts that fall apart prior to closing, their business development, planning, and educational activities, their vacation/sick time off, and retirement savings.   The alternative is for clients to pay agents by the hour, an unlikely scenario.

5.       An example of an after-expenses-before-taxes paycheck to an active agent doing 24 transactions/year (twice the median level), is about $2,000-$5,000 per transaction, depending on whether there is a referral fee, based on a national average home price of $388,000 with a $23,000 gross fee. Most average annual agent incomes, depending on experience and working hours, are in line with teacher salaries, but without health insurance, paid time off, and retirement plans.

6.       Based on their efforts, agents and brokerages have the right to charge a minimum fee for their skills and business resources, which the seller or buyer can take or leave, as there are always other agents who will do it for less and will offer less. 

The annual 3.8 million home sales spread over 1.5 million NAR Realtors results in a meaningful percentage earning nothing, and a median income of just under $40,000. Active agents are hardworking independent contractors – entrepreneurs who effectively own their own business within a brokerage, not corporate “suits.”

The American real estate industry built the MLS to benefit consumers, and this system is the envy of the world. Creating more transparency around the process adds value, but dismantling the system and attacking agent compensation are not the solution. A great deal is at stake for the American homeowner and those with the dream to become one.