The MLS (commission) problem
Consumers often lack education on when or how to negotiate estate agent commissions, leading many to accept the status quo. The challenge of selling a home is generally not reflected in the agent’s commission. Consumers find themselves between agents who are open to negotiating their commission and those who insist their commission is non-negotiable. “I’m worth my 7.5% commission”, is proclaimed in many Facebook group discussions.
Who sets the commission?
While agents ultimately set the commissions as independent contractors, the rates can be influenced by a variety of factors, including experience and the split they have to pay to their agency, franchise royalty fees and marketing overheads.
In South Africa, I’ve heard of agents being penalised for accepting commissions below the agency’s prescribed minimum rate, or where the agency’s preferred attorney or mortgage originator is not used in the deal (due to kickbacks received).
Ultimately, it is the seller who sets the commission, but when you look a the US MLS system, things get a bit complicated and you notice a norm of 5–6% being used. It is no wonder then that the current lawsuits in the MLS-powered US real estate industry are bound to shake things up.
$418 Million to remove ‘one field’
The National Association of Realtors has just agreed to a $418 million settlement to resolve a series of class-action lawsuits initiated by home-sellers:
Additionally, NAR consented to a potentially significant structural adjustment: removing the database field that allows the listing agent of a home to propose a commission to the buyer’s agent.
Death of the MLS or the birth of alternative real estate compensation models? Many predict that more listing agents will sell homes directly to sellers and that the number of homes selling outside the MLS would increase. This could play in the favour of US portals like Zillow and Homes, as buyers would want to see a complete view of the housing market.
If there is indeed a drive then to lower commissions, one could see agent attrition, with some agents being forced out of the industry altogether, particularly those who are unable to scale up their transaction volume or who cannot compete on service quality.
Money for nothing
In an MLS system, the commission is split between buyer and seller agent (in the US around 5–6%; in South Africa, 4–7.5%). So, when an agent submits a low 4% commission on an MLS mandate, it leaves 2% to each agent on a 50/50 split.
Depending on the agency commission structure, this could be further reduced to just over 1% to each agent. In a discussion I had with a South African agency owner, they mentioned how agents don’t even bother to attend an open hour where the commission is set too low, yet work on bringing their buyers to this listing. This steering is not fair to consumers but also why MLS finds it difficult to caught on nationally in South Africa: it has to compete with the lucrative 7.5% sole mandate. Furthermore, depending on the property, many agents will tell you that a sole mandate is guaranteed money in the bank, so why even split it?
Paper vs Reality
For consumers, MLS sounds great on paper: multiple agents working as a team to sell your home. The reality is that it works great if everyone sticks to a minimum commission. If the agent wants or is forced to lower their commission, the model falls flat: the house and the selling agent become the black sheep of the family, and the consumer ends up with less exposure. Understandably, this is an extremely tough environment for low-fee agencies to flourish in.
Unless there is very limited choice, agents would be reluctant to show a qualified buyer a house where the commission is too low. This is in essence the problem the US is facing with the multi-billion dollar lawsuits: although commission is negotiable, the system is not structured to facilitate this without penalizing the consumer.
In predominantly non-MLS environments like South Africa, Namibia and the UK, portals hold the key to consumer eyeballs, although it comes at the price of a buyer having to contact different estate agents to view homes.
Is there a future for MLS?
Various studies from NAR and MLS organisations like Bright MLS show that homes sold on the MLS sell for more, according to Bright MLS:
- Between 2019 and the first quarter of 2023, on-MLS homes sold for 17.5% more than comparable off-MLS homes.
- Listing on the MLS draws more competitive offers. On-MLS homes reach a greater audience and fuel competition, leading to a significant financial benefit for sellers who list on the MLS. In 2022, a typical on-MLS seller received $53,890 over what they would have gotten by selling off-MLS.
MLS therefore seems to promote good competition and better exposure, which is a win for consumers. It would be interesting to see how this now plays out in the US and if buyers would be prepared to continue using the services of a buyer’s agent in future, or just work directly with the listing agent.
Ultimately, consumers will have better choices but need to be educated on their options. The way I see it:
- FSBO: least exposure, lowest fee, more risk to achieve the best price.
- Off-MLS / Single Agent: more exposure, custom negotiated fee, less risk.
- On-MLS : best exposure, higher fee, least risk.
MLS has some other advantages in that it helps to consolidates current sales data. This is invaluable to agents for compiling CMAs and why pockets of MLS organisations still flourish in South Africa.
Teamwork sells houses fast. What do you think?
