eli5 this realtor news

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I kind of grasp the concept that people aren’t forced to pay commissions, but that’s really it. I don’t understand how/why this is so great.

In: Economics

2 Answers

Anonymous 0 Comments

Realtors traditionally make their money on commission — a certain percent of the sale price gets taken off and, instead of going to the people selling the house, it goes to the realtor. That commission would then get sliced up in between the realtor representing the seller, the realtor representing the buyer, and their respective agencies/companies. The standard commission for many years was 6% — so, if I sell you a $100,000 house, then $6,000 of that money goes to our realtors.

There was recently a lawsuit over this based on antitrust laws. Basically, the antitrust laws here in the US say that very powerful players in the market cannot unfairly rig the prices using their dominant position in the market. In this case, the accusation was that the members of the National Association of Realtors were rigging prices by imposing this 6% commission on everyone. They’ve settled the lawsuit by agreeing to end the fixed 6% commission.

Exactly what that means for the future is uncertain. People will **still** pay for realtors in some form — you can be sure of that — but the 6% is no longer standard, so as a first step, it is likely that some companies will offer lower commission rates in hopes of getting more customers, and so the commission rate will come down below 6%.

Anonymous 0 Comments

According to the article, the National Association of Realtors *strongly encourages* its members to follow “best business practices”:

– Charge a 6% commission
– The seller’s agent gives part of the commission to the buyer’s agent
– Only do business with people who respect the Association’s rules

This causes a few problems:

– If an individual real estate agent (say, Henry’s Homes) tries to charge a lower price to attract business, Henry will have a very difficult time. He’s disrespecting the Association’s rules. If you hire Henry to sell your home, the Association members — most of the other real estate agents in town — will discourage the buyers they represent from buying your home.
– As a buyer, you hire an agent to show you affordable houses, and negotiate aggressively to convince the seller to give you a lower price.
– The fee means your agent gets paid more if you buy a more expensive house, and/or if he negotiates badly and fails to convince the seller to give you a lower price. Will he really do the job you hired him for properly, if he gets paid more for messing it up so you pay a higher price?

Basically, this is a court ruling that the Association is running an illegal price fixing conspiracy. It will have to get rid of those rules, and pay an enormous fine.

The Association says the court is making a mistake, its rules are perfectly legal, and a higher court should fix the mistake, cancel the fine, and let it keep its rules as they are.