REALTOR® Compensation 101

“You’re a REALTOR®? All you do is drive around in big cars and put signs in people’s front yards, right?” I’ll admit, over the past couple of years, I’ve heard variations of this notion more than a few times. After all, everyone knew that the real estate market was hotter than it had been in recent memory. It wasn’t out of the question for a newly listed property to have multiple offers above the asking price just hours after hitting the local broker marketplace place, otherwise known as the Multiple Listing Service (MLS). It was the norm. And honestly, these favorable market conditions led some to enter the real estate profession thinking that real estate was an easy gig, a great way to make a quick buck.

And then what happened? To fight inflation, the Fed raised interest rates to their highest point in 20 years. Interest rates rose to more than 7%, and suddenly, real estate wasn’t so “easy.” Having been a REALTOR® since 2007, I have experienced fast and not-so-fast markets, which is what most of the country is experiencing now. Sure, folks are still purchasing homes and securing business space, but these recent months have been a real “back to basics” for those who practice residential and commercial real estate.

For REALTORS®, “Back to Basics” means fully educating our clients and the public on what is involved in a successful real estate transaction. The National Association of REALTORS® (NAR) recently compiled a list of the different services provided by REALTORS®. This list of 179 items spans all aspects of the transaction, from preparing the preliminary Comparable Market Analysis (CMA) and establishing fair market value to entering property data in the MLS and negotiating from offer to closing.

So yes, there’s much more involved than just putting a sign in the front yard. And like any working person, we don’t work for free.

You might have seen a recent court ruling involving NAR where the plaintiffs claimed real estate commission rates were too high, buyer brokers were paid too much, and NAR’s rules and industry practices led to set pricing. Those of us in the real estate industry disagree strongly with this ruling, and NAR has begun the appeal process.

The reality is that NAR rules prioritize consumers, support marketdriven pricing, and promote business competition. We stand by the fact that NAR’s guidance for local broker marketplaces ensures that consumers get comprehensive, equitable, transparent, and reliable home information and that brokerages of any size, service, or pricing model get a fair opportunity to compete.

So, how does real estate compensation work exactly? Simply put, the seller and that person’s listing broker agree on the amount the listing broker will receive for the services they provide to the seller. The listing broker and seller also discuss and agree upon an amount the listing broker will pay a broker who successfully closes the transaction with a ready, willing, and able buyer. But sometimes, details in these types of matters can get confused. Let’s look at some key facts:

Commissions are always negotiable.

Commissions can be negotiated at any point throughout the transaction, including at the outset, after the results of a home inspection and after an offer has been made. Sellers negotiate with their broker what fee they are willing to pay for their broker’s services and what fee they are willing to pay a buyer broker for finding someone who wants to buy their home.

There are different commission models to choose from.

Buyers have many different choices about which broker they want to work with in terms of everything from the commission model to a real estate agent’s particular expertise to the agents’ customer service approach. In the full-service approach, commissions are negotiable at any point during the homebuying process. The reduced service/discounted fee model allows for flexible offerings and pricing. The flat fee approach allows buyers to negotiate a set price per service.

Commission rates are set by the market.

The free market organically establishes commission costs within local real estate markets based on service, consumer preference and what the market can bear, among other things. NAR’s guidelines ensure that the listing broker advises all other participants in their local broker marketplace what the amount of compensation to the buyer’s broker will be for closing the sale. That amount is determined by the seller and the seller’s broker. Commissions fluctuate over time, including having decreased steadily in recent years and having fallen to a new low of 4.94% in 2020.

Commissions cannot be included

as part of a mortgage. Unlike mortgage broker fees, closing costs, and appraisals, real estate sales commissions are not directly linked to the mortgage loan production and, therefore cannot be financed. By definition, a mortgage is a lien against a property, which means the property itself serves as the asset that the lender can take back to recoup value if the borrower defaults. Commissions, on the other hand, are based on a service provided and there is no way for the lender to recover the value of the service in the event of a default on the mortgage. Further, lenders rely on investors to purchase mortgages to help fund these loans. Since mortgages do not include personal services today, if that changed and mortgages started to cover costs that are not secured by the property, lenders and investors may be less willing to lend and invest, and mortgages could be more costly.

REALTORS® are bound by a strict code of ethics in the homebuying process.

REALTORS® are bound by NAR’s Code of Ethics to always further clients’ best interests, including showing homes that meet buyers’ needs regardless of compensation offered. Additionally, in November 2020, NAR introduced its Fair House Action Plan, abbreviated “ACT,” which emphasizes (A)ccountability, (C) ulture Change, and (T)raining in order to ensure America’s 1.5 million REALTORS® are doing everything possible to protect housing rights in America.

Broker cooperation keeps local broker marketplaces from fracturing.

Because of broker cooperation, buyer and seller brokers are incentivized to share their information in their local, independent broker data hub. Without it, lack of complete, transparent and accessible data for all would mean smaller brokerages and new entrants have to piecemeal information and couldn’t offer as many options to sellers and buyers, and larger brokerages would dominate local markets, creating emerging behemoths that would drive up costs.

Listing and buyer brokers contributing to local broker marketplaces sets the U.S. real estate industry apart from the rest of the world.

The U.S. model has long been – and is still – viewed as the best option for consumers around the world. Buyers abroad are forced to wade through a complex and fragmented market where they have to work with multiple brokerages and where there is no exclusivity so sales can fall through. Generally, the homebuying process abroad is similar to buying a car in the United States where you have to go dealer to dealer, it’s very time-consuming and impersonal. It’s also common for brokers to charge fees and taxes in other countries that add up to the equivalent or greater of costs associated with buying and selling property in the U.S., yet only provide a fraction of the services consumers receive here.

Still have questions? I would recommend people visit the website Competition.Realtor to get a more complete view as to how NAR and REALTORS® help consumers with their most valuable investment.

REALTORS® are everyday working Americans who are experts at helping consumers navigate the complexities of home purchases and advocates for fair housing and wealth building for all. Real estate transactions are no walk in the park, but as REALTORS® we are compensated to provide the best service to our clients and their homebuying and selling needs, and we will continue to serve our clients and communities to the best of our abilities. Because That’s Who We R®.

Founded in 1912, Greater Chattanooga REALTORS® is the voice for real estate in Greater Chattanooga. A regional organization with more than 2,700 members, Greater Chattanooga REALTORS® serves Hamilton and Sequatchie counties in southeast Tennessee and Catoosa, Dade, and Walker counties in northwest Georgia. The Association is one of approximately 1,100 local associations/board of REALTORS® nationwide that comprise the National Association of REALTORS®. Greater Chattanooga REALTORS® owns and operates a Multiple Listing Service (MLS), which is one of approximately 600 MLSs in the country and services more than 3,000 MLS users. Local Association membership is comprised of REALTORS® servicing the Greater Chattanooga area and specializing in a variety of disciplines – appraisal, commercial, industrial, land, multi-family, property management and residential. Working alongside REALTORS® are our Affiliate members, who represents related industries in sympathy with the objectives of the Association. Our Affiliate members include mortgage lenders, home inspectors, title and closing services, pest inspection and control and insurance.