Why are real estate commissions 6%? – and why that’s about to change

Washington, DC
CNN
 — 

Here’s how paying for a real estate agent to sell your home has long been done: A seller hands a percentage of the sale price to their broker, who then splits it with the broker who brought the buyer.

The commission is typically between 5% and 6%, which is usually tens of thousands of dollars out of the seller’s proceeds. But the seller also factored that cost into what they listed their home for, so indirectly, the buyer is paying the cost, too.

How did that become the standard? And will this process continue?

Changes may soon be on the horizon for real estate commission rates after a Kansas City jury determined – in a $1.8 billion judgement in October – that commissions had been inflated and that brokerages and industry groups conspired to keep them that way. This landmark antitrust court case, along with similar lawsuits like it, could overhaul the standard 6% commission and who pays it.

A shift could allow home buyers and sellers to negotiate not only commission rates with brokers, but also who is responsible for paying them — the buyer or the seller. It’s already happening in New York City, where the fee structure is set to change on January 1.

Many thought the internet would eventually kill the 6% real estate commission. But it has yet to put much of a dent into the share home sellers pay, which is about double the percentage that is paid in other countries, according to a report on commissions from the Brookings Institution. Even as the ranks of stockbrokers and travel agents have dropped in recent years as commissions petered out, the number of real estate agents has grown and their typical commissions are bigger than ever as home prices have risen.