Defense of Commissions

by Victor Lund on July 27, 2012

Dollar Signs with handshaleAmerican business is founded on the principal that pricing for a product or service is based upon what a willing seller will accept, and what a willing buyer will pay. This happens on an individual basis with each transaction, and price fixing is not allowed. Recently, Casey William Hyland who purchased a home from a Home Services of America brokerage, Semonin REALTORS brought a suit challenging the 6% commission rates on real estate transactions. His claim indicated that the 6% rate was price fixing and is a Sherman Anti Trust Act Violation.

When there are multiple transactions of commerce, pricing patterns emerge. Consider the grocery store shelf. Within a given product category of similar items, pricing becomes normalized around a price point, plus or minus 20%. This trend happens everywhere, in every industry, and well beyond the grocery isle.

The Plaintiffs claims were articulated as follows:

Defendant engaged in parallel behavior by charging a “standard or typical commission of “6%” for “virtually standardized Services;” and

Defendants “are expressly aware of the fee charged by one another” via their membership in and organization of at least 28 Multiple Listing Services (“MLS”) in the Commonwealth; and

Defendants require that the real estate brokers pay their franchisees the “regularly charged brokerage commission or fee” for any home that the brokers purchase for their own habitation.

The Defendants have engaged in parallel pricing of real estate broker commissions since at least 1991 at a “standard” or “typical” 6% even though: (a) the costs of providing these services have decreased, and (b) the prices of real property in Kentucky have increased dramatically; and

The Defendants have “an aggregate market share in excess of 70% and, in certain areas of the state, in excess of 90%; and

The Defendants have “boycotted price cutting rivals, such as Help-U-Sell…a non-Internet based discount brokerage firm that recently began operating in Kentucky.”

The court ruled in favor of Homes Services. The Plaintiff failed to satisfy parts of the Sherman Act Test which include (1) a contract, combination, or conspiracy; (2) restraint of trade; and (3) an effect on interstate commerce.

There are many interesting considerations that come from reading about the facts in this case regarding the conduct of brokers and agents when they are discussing commissions and fees. Clearly our industry has found an economic balance around a commission of 6%. 6% represents much more compensation to the practitioner on homes valued in the millions than it does for homes valued at $100,000.

What we find is that discounts of 1% or more off of the 6% balance is typically absorbed by the seller’s representative more often than the buyers representative. This is a rather interesting note because the seller’s representative has greater costs, specifically marketing costs, associated with the transaction.  Listing agents routinely list a home for 5% but offer 3% commission to the buyers representative in the MLS. Still other transactions routinely discount agent commissions as a concession at closing.

{ 1 comment… read it below or add one }

John D'Ambrogio July 30, 2012 at 5:02 pm

Fantastic, insightful article – very well explained! It’s simple market economics.

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