Home Sellers Hit by Higher Sales Commissions

Business couldn't be better in the real estate industry, but that's not stopping some real estate agencies from raising the standard sales commission from 6% to 7%. That takes a bigger chunk out of a seller's profit--an additional $1,500 on a $150,000 home, for example. It's not good news for home buyers, either, because sellers are free to hike their prices to cover the commission.

Along with higher commissions, some agencies also are charging sellers "administrative fees" of $100 to $500. What's the bottom line for home sellers? Shop around!

The increases follow a wave of industry mergers that shrunk the number of real-estate brokerage firms in the U.S. Consumer advocates are worried that things may get worse with fewer real estate firms competing against each other, making it easier for the industry to raise fees, and harder for home sellers to shop around. Big investment firms and marketing companies are gobbling up agencies with household names, such as Coldwell Banker and Century 21. According to industry estimates, the number of residential real estate firms in the U.S. has dropped from 150,000 in 1990 to only 80,000 today.

6% has long been the industry standard, and the rate hikes have been controversial. Fortunately, the commission hikes are not yet an industry-wide trend. Some consumers are deliberately taking their business elsewhere. Perhaps that will be enough incentive for competing firms to stick with 6%. Certain brokerages such as Long & Foster in the Washington, DC area, a firm with $12 billion in sales in 1998, are leading the 7% movement.

Coldwell Banker Parnegg Metro in New Mexico not only raised commissions from 6 to 7% but also added on a "global marketing fee" of $245. The new fee hikes seem to be more widespread. Perhaps it's easier to raise prices incrementally by a few hundred dollars than by a whole percent of the sales price. Additional charges as high as $500 are appearing on settlement sheets around the country. What's the justification? Some brokers say that paperwork processing and technology costs are getting higher. They say they must invest in computer equipment and software to stay efficient and keep up with the competition. Others just cite the cost of doing business and of providing high-impact marketing to their customers.

The best hope for consumers is that more firms will keep rates at 6% to undercut the competition. Obviously, every time a firm charges 7% or adds on higher processing fees, the more it favors competing firms that charge less. The worst fear for consumers is that more mergers and acquisitions will consolidate the real estate industry, and reduce competition to monopolistic proportions. For Sale by Owner, anyone?

Sources used to create this article include writer Felicia Paik and The Wall Street Journal.