Lightbulbs, Real Estate and Collusion
Have you heard of the Phoebus cartel? In 1925 the light bulb was able to last 2,500 hours. The cartel formed worldwide to control light bulbs. Markets were divided up to manufacturers and the life of light bulbs was reduced to 1,000 hours. The result was an inferior light bulb that cost more and had to be replaced more often.
So what does a 1925 collusion that lasted for nearly three decades have to do with the price of real estate? Ask the National Board of Realtors. The Justice Department and the National Board of Realtors reached an agreement in regard to price fixing in 2021, but never implemented the new rules.
The Justice Department and several online brokers argued that the National Board of Realtors encourages price-fixing with buyers’ and sellers’ agents. Sellers in a typical transaction pay a commission of 6 percent to the seller's agent who then splits the commission with the buyer's agent. The buyer typically does not pay any commission. The public assumes that the buyers’ agent represents the buyers’ interests; however, the commission paid by the seller is not disclosed to the buyer. Some buyers’ realtors steer buyers to the highest commission home, or neglect to show homes with lower commissions. This refusal to show property is a way to force seller's agents into collusion and to keep commissions at 6 percent.
Are all real estate agents members of the National Board of Realtors? No, in fact the term Realtor is trademarked and can only be used by National of Board of Realtor members. So does the collusion go on today, and are members of the National Board of Realtors actively pushing collusion? First, the DOJ decided to withdraw from a settlement with the Board of Realtors in December of 2021, because the DOJ believed that there may be even deeper problems of collusion and price fixing, than first uncovered. So the issue is not yet settled.
I state all this, because my firm isn't in the National Board of Realtors and we don't support price fixing nor do we want to be part of any organization that does.
I want to point out that the seller's agent can negotiate any commission with the seller. In addition, the seller's agent can share any amount of the commission with the buyer's agent. As long as the selling agent and the buyer's agent are aware of the commission split, any split is allowable, and the split can be changed at anytimes if both the seller's agent and buyer's agent agree. While the typical split is 50/50 of the commission, the seller's agent can pay more or less than 50 percent, as long as the information is clear to the buyer's agent.
Today, I sent an email to a Realtor that inquired about two listings of new construction homes. I said, "Just FYI, these have a total 3 percent commission with 2 percent to buyer's agent and 1 percent to seller's agent."
In this case, the total commission the seller pays is 3% and the buyer's agent receives 2/3rds of the total commission. My firm receives 1/3rd of the total commission. Why is the total commission 3 percent instead of 6 percent? Because I am satisfied with a 1 percent commission on an expensive home and the builder puts most of his homes with my broker firm. Also, his homes are slightly below the market price, so he sells homes quicker. Pretty sweet deal for everyone right? Seller moves home quickly. Buyer pays less for home. My firm receives 1 percent commission and the buyer's agent receives twice as much as I do!
Here's the Realtor's response: "Many of us are refusing to go with those percentages. It's disrespectful to the years of hard work and experience we have earned."
Understand what the Realtor is saying? The commission of 2 percent is too low for him to show the property, regardless of whether the property is the best price and best property for his client. Think about it. Should Realtors be more concerned with the size of the commission or the best interest of the buyer?
I thought about responding to the Realtor to explain how collusion and price fixing is bad for everyone and should not be part of a free market capitalism. But instead, I waited a couple of hours for another agent to submit an offer at full list price, which the seller accepted.
What are your thoughts? Should real estate commissions be at a fixed rate of 6%? Should commissions and sales incentives be transparent to buyers? All ideas are welcome. Let's have a discussion!
All thoughts, opinions, photo and text are by @methodofmad.
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