For decades, the real estate industry has operated under a commission structure that has seen little change, with real estate agents typically charging around 5% to 6% of the home’s selling price. This system has largely persisted without significant competition, despite technological advancements and consumer demand for transparency and cost efficiency. There are several historical, structural, and regulatory reasons that explain why real estate commissions have remained unchallenged and unchanged for so long.

1. The Traditional Model is Entrenched

Real estate agents operate under a traditional business model that has been in place for over a century. Buyers and sellers typically rely on real estate agents to guide them through the complex process of buying or selling a home. This includes marketing the property, negotiating the terms of the sale, arranging viewings, and handling paperwork. As a result, agents are seen as indispensable intermediaries, and the standard commission structure has become deeply ingrained in the industry.

Moreover, the 5% to 6% commission is typically split between the buyer’s agent and the seller’s agent, with both parties receiving around 2.5% to 3% each. This system encourages cooperation among agents and disincentivizes them from offering lower rates since they would need to share their commission with a counterpart, further reinforcing the traditional model.

2. Lack of Transparency and Consumer Knowledge

Another major reason for the lack of competition in real estate commissions is the absence of transparency. Historically, consumers were often unaware that commissions were negotiable or did not know they had the option to shop around for lower rates. Real estate transactions can be overwhelming and stressful for many buyers and sellers, and negotiating commissions often takes a backseat compared to the pressing task of closing the deal.

Additionally, many homebuyers and sellers may not fully understand how the commission structure works. Buyers, in particular, often haven’t directly paid their agent’s fees, as the commission was typically rolled into the home sale price and paid by the seller. As a result, they may have felt less compelled to seek lower rates, inadvertently preserving the status quo.

3. Cooperation Among Real Estate Brokers

The way real estate brokers cooperate within the industry has also discouraged competition. Brokers typically list homes on multiple listing services (MLS), which are databases that agents use to find properties for their clients. MLS systems used to mandate that brokers offer a commission to the buyer’s agent, creating a form of cartel-like behavior in which all brokers implicitly agree to a similar commission structure.

While brokers may have theoretically competed on the level of service they offer, the commission split between buyer’s and seller’s agents remained consistent. This has prevented downward pressure on commission rates since both agents have benefited from maintaining higher fees.

4. Regulatory Barriers

The real estate industry has also seen minimal disruption due to regulatory barriers that protect traditional brokers and agents. Many states have regulations that mandated certain licensing requirements, further reinforcing the traditional model. Additionally, real estate commissions were often bundled into closing costs, making it difficult for buyers and sellers to identify specific costs associated with agent fees.

Some critics argued that antitrust laws have not been adequately enforced in the real estate industry, allowing entrenched players to maintain control over commission structures. Litigation and regulatory challenges to the status quo have been slow, allowing the industry to continue operating in a relatively uncompetitive environment…until recently.

5. Resistance to Technological Disruption

Finally, despite the rise of technology platforms that could disrupt the traditional real estate model, many have failed to gain significant traction. Companies like Redfin and Zillow have attempted to introduce lower commission rates, but these platforms face resistance from established brokers and agents, who control access to local MLS systems. Traditional agents have also argued that technology cannot fully replace the personalized service they provide, which helped maintain the status quo.

In conclusion, the lack of competition in real estate commissions stems from entrenched business practices, lack of consumer awareness, broker cooperation, regulatory barriers, and resistance to technological disruption. However, with increased consumer awareness and pressure for more transparent and cost-efficient services and a landmark class action lawsuit that was just settled in favor of the consumer, the industry is undergoing a major upheaval regarding the commission structure right now. There are a few innovative and forward thinking companies that have embraced this consumer centric decision, the most prominent one being a company started in Phoenix called just990. If you are a home seller in need of a breath of fresh air, check them out first at www.just990.com.