In the US, the cooperative (‘co-op’) commission structure has long been a fundamental aspect of the real estate industry. But recent legal challenges and a notable settlement involving the National Association of Realtors (NAR) have brought this practice under intense scrutiny. So, let’s take a step back and look at how this unique compensation structure came into being, what the arguments for it were at the time and how it makes the US real estate industry unique in comparison to how brokers are most often compensated in similar countries.
What is a Co-op Commission?
So, what is the ‘co-op’ commission anyway? A ‘co-op’ commission in real estate refers to the practice of listing brokers (brokers representing a seller) offering compensation to buyer’s brokers for bringing a buyer to a sale. Typically when a property is listed in the US, the seller agrees to pay a certain percentage of the final sale price as compensation to the brokers involved (this is the commission). This amount is usually negotiated between the listing broker and the seller and then it is split between the seller’s agent and the buyer’s agent (typically evenly, though this is not always the case).
History of the ‘Co-op’ Commission
The ‘co-op’ commission model of broker compensation started over 100 years ago in the 1910’s and was originally promoted by the National Association of Real Estate Exchanges in Chicago, Illinois and would later become the National Association of Realtors (NAR) which is far and away the most dominant professional real estate association in the US and one of the most influential lobbying groups in the country bar none. Back when the system was originally architected the goal was to get listing brokers to post an offer of compensation on listing databases as a means to attract buyer’s agents and match their clients with these brokers’ listings.
Interestingly, the average commission under this system has varied pretty widely over the last century. As HousingWire notes, in their excellent 3-part piece on real estate commissions, “During the lively 1920s, a commission averaged around 2.5 % of a home’s sale price, according to a study from Cornell University economist Panle Jia Barwick and University of Pennsylvania real estate professor Maisy Wong.” This commission rate would rise
Advantages of the Co-op Commission
The co-op commission model offers several benefits:
Motivation for Buyer’s Agents: It ensures that buyer’s agents are motivated to work diligently on behalf of their clients since their payment is contingent on closing a deal.
Simplified Transactions: By standardizing how agents are paid, the co-op commission can streamline the transaction process and reduce complexity.
No Direct Cost to Buyers: Typically, buyers do not have to pay their agents directly, as their compensation is derived from the agreed-upon commission with the seller.
Disadvantages of the Co-op Commission
Despite its benefits, the co-op commission structure has several drawbacks:
Potential for Higher Prices: Since the commission is based on the sale price, there is an incentive for agents to prioritize higher-priced properties, potentially pushing overall prices upward.
Conflict of Interest: Buyer’s agents might be influenced to close deals quickly rather than negotiating aggressively for the best terms for their clients.
Lack of Transparency: Buyers often are unaware of how much commission is being paid and may not understand how it influences the transaction.
The NAR Settlement and Its Implications
The recent class-action lawsuit against the National Association of Realtors (NAR) and subsequent settlement have spotlighted these issues. The lawsuit alleged that the NAR’s rules around co-op commissions artificially inflate the costs of selling homes and maintain high commission rates. The settlement led to changes in how commission information is disclosed and how buyer’s agents are compensated, which could reshape the landscape of real estate transactions in the US.
Co-op Commissions: A Global Perspective
Interestingly, the co-op commission model is relatively unique to the United States. In many other parts of the world, real estate transactions do not involve such intricate sharing of commissions between buyer’s and seller’s agents. This difference raises questions about the efficiency and fairness of the US model. However, it’s important to recognize that buyer representation, where the agent’s duty is to protect the buyer’s interests, can be incredibly valuable, particularly in complex transactions.
Conclusion
As the real estate industry continues to evolve in response to legal pressures and market demands, the role and structure of co-op commissions may undergo significant transformations. While they offer clear benefits by encouraging active participation of buyer’s agents, their drawbacks and the lack of transparency have led to growing calls for change. It remains to be seen how these changes will impact the industry long-term, but what is clear is that both buyers and sellers must remain informed and vigilant to navigate this shifting landscape.
Moving Forward
For buyers and sellers alike, understanding the nuances of co-op commissions and how they affect real estate transactions is crucial. As your real estate broker, I am committed to providing transparency and advocating for your best interests in every transaction. Whether you’re buying your first home or selling a property, knowledge is key to a successful real estate experience.
