House hunters may not be seeing every place on the market that fits their criteria. According to new research, buyers' agents tend to turn up their noses at listings that don't offer the largest commissions.
It has long been suspected that some agents engage in "steering" -- guiding their buyer-clients away from low-paying listings. And a new study -- conducted by Jordan M. Barry from the University of Southern California’s Gould School of Law, John William Hatfield from the University of Texas at Austin and independent researcher Will Fried -- indicates that the practice is alive and well in the housing ecosystem.
Steering not only hurts buyers, the authors maintain, but also sellers: Houses that offer buyer-agents a smaller share of the commission pie take longer to sell, if they sell at all.
The researchers say that steering is "a key reason why (real estate) agent commissions have remained high in the internet era, even as commissions in other industries have plummeted.” They call their study "the first systematic, nationwide evidence that buyer-agents do, in fact, steer clients away from properties that offer low buyer-agent commissions.”
Some may say it’s a conclusion in search of a theory, but the researchers believe otherwise. They based the study on the number of page views for individual listings on the Redfin website, and tested the hypothesis that the listings paying the least would receive fewer hits.
The study has nothing to do with the various class-action lawsuits filed against the National Association of Realtors and several large brokerage firms. The suits allege that NAR and the brokerages have conspired to require sellers to cover buyer-agents' commissions, thereby forcing sellers to pay excessive fees. A jury has already sided with the plaintiffs in one such case in Missouri, and now the plaintiff’s attorney is going after other brokerages.
The study is, however, another shot at the way home sales are normally handled.
Let me get into the weeds here for a minute: Real estate is a classic collaborative business, in which agents working at cross purposes -- one for the seller and one for the buyer -- are paid only when the deal closes. Even though they serve competing sides, the two rivals share the same goal.
Sellers set the rate their agents will be paid, typically 5% to 6%. And that fee is shared with the buy-side agent, usually split in half. But this means that sellers are, in effect, setting the rate for the buy-side agent -- who is negotiating against them to get the best deal for their client. Knowing that, some sellers and agents decide to lower the buy-side agent’s share. "After all," the thinking goes, "that agent doesn’t work for me, so why should I pay them so much?"
Going further, the Consumer Federation of America has suggested each side should pay their own commissions, effectively giving buyers the opportunity to negotiate their own fees.
Now back to our original topic: Federal lawmakers and regulators have been concerned about steering for decades, but they have been unable to unearth hard evidence about the practice.
A few years ago, though, the Department of Justice entered into an agreement with NAR that allowed portals like Zillow, Redfin and Realtor.com to publicly display what share of the sales commission would be paid to the buy-side agent. And now that buy-side agents can see the commission they stand to earn, they have a strong incentive to direct their clients away from low-commission properties.
Therefore, the researchers say, sellers have little inducement to offer lower commissions, costing both them and their eventual buyers millions in sales commissions every year.
The findings are based on a review of about 265,000 listings in more than 30 of the county’s largest markets. Since steering is difficult to observe directly, researchers looked at page views per listing.
“This is a significant innovation,” Barry, Hatfield and Fried say. “Page views measure how much attention particular properties garner, and can thus indicate how much steering is taking place.”
What they discovered is sobering. They found that, all else being equal, low-commission listings attracted less attention. The lower the fee, the more agents who wanted nothing to do with it.
Moreover, the researchers observed that listings with the lowest commissions took 33% longer to sell. Even when the commission was just slightly below the going rate, selling took longer. Worse, there was a higher risk of a failed sale. In a typical market, they reported, “our best estimate is that these lowest-commission properties face a 75% greater risk of not selling at all."
NAR, the trade group for the million-plus agents and brokers nationwide, has always maintained that its members do not engage in commission-based steering, largely because it would be directly opposed to their fiduciary responsibilities to their clients.
But the researchers’ statistics paint a different picture. Even controlling for such variables as a home's asking price, location, size and age, they found that buy-side agents show less interest in houses with commissions lower than the prevailing rate.