Cracks are showing in one of the biggest rip-offs in American life
Lesson summary
Hi there everyone, I’m Jeff and you are listening to Plain English, the podcast that helps you upgrade your English with current events and trending topics. This is lesson number 666, so that means our producer, JR, has uploaded the full lesson content to PlainEnglish.com/666.
What are the biggest rip-offs in American life? Things like short-term, payday lending; extended warranties; printer cartridges; and airport food all come to mind . But with those, you at least have the option not to buy them. I think some of the biggest rip-offs are the wastes of money that you can’t avoid.
And one of the biggest ones is real estate commissions. Americans pay some of the highest rates to brokers when they buy and sell homes—far higher than they pay in the U.K., Australia, and in other countries. But now, after a recent court judgment, American home buyers and sellers may—may—be getting some relief.
That’s our main story today. As you know, in every Plain English lesson we show you exactly how to use an English expression. The expression I’ll share with you today is to put something “in the best possible light.” I think we’re ready. Let’s get started.
Will real estate fees in America finally come down?
In many parts of life, technology has eliminated expensive intermediaries or at least reduced their cost. You don’t need a travel agent to book a cruise, a plane ticket, or a hotel room. You don’t need an expensive, human stockbroker to buy and sell stocks. But you do need an expensive real estate agent to buy or sell a home—and you have no choice in the matter.
Every year in the United States, between five and six million homes are bought and sold. The total value of homes traded last year was about $1.5 trillion. And in about ninety percent of sales, both the buyer and the seller use a real estate agent. The agents earn a commission to help facilitate the sale. The commission is a percentage of the selling price of the house.
The custom is that the seller pays the commission from the proceeds of the sale; and the seller pays both sides. That means the seller’s agent gets about three percent; the buyer’s agent gets about three percent. And it’s all deducted from the payment that the seller receives at closing.
Real estate agents do important work. Sellers’ agents help homeowners determine the asking price. They arrange for professional photographers to show the home in the best possible light . They write a description of the property. They help the sellers choose which offer to accept. They host open houses and arrange for buyers to see the property.
Buyers’ agents can help home buyers get to know new neighborhoods, take tours of homes for sale, and submit offers. They advise buyers on how much to offer. They recommend local inspectors and they help people through what can be a stressful and confusing time.
So they do good and valuable work. And they should be paid for the work they do.
But the problem for home buyers and sellers is that they don’t have any choice in the matter: they have to hire an agent, even if they don’t want to; and they have to pay the full commission, even if they don’t need all the services an agent provides.
That’s because the trade organization representing real estate agents has one key stranglehold on the industry. They control the database of homes listed for sale. And they use that control to their advantage.
In the U.S., if you want to browse homes for sale, you can go to Realtor.com, the official site of the real estate agents. You can go to any agent’s web site. You can go to third-party sites like Zillow. But all the data comes from just one place: the local databases controlled by the agents.
And here’s what the agents say: they say, we won’t publicize a home for sale unless you, the seller, agree to pay a high-priced commission—not just for your own agent, but you, as a seller, are required to pay a high-priced commission for the buyer’s agent.
And if you don’t agree to this, the agents won’t publicize your home listing on their database. And the buyers’ agents won’t steer their clients to your home. And your listing won’t be available on any of the major web sites. And then you really won’t have any buyers.
For real estate agents, this is a cozy arrangement. Home buyers typically don’t mind: they get full service for free, since the seller pays for it. And home sellers are afraid to negotiate a lower commission because they want their listing in the database.
And so it won’t come as a surprise to you that real estate commissions are higher in the United States than in almost any other country—in fact, Americans pay double or triple the typical commissions in many other developed countries like the U.K. and Australia.
But recent court cases have challenged this arrangement. Homeowners have sued the National Association of Realtors, the agents’ trade association. The homeowners say the agents’ control of the database amounts to monopolistic behavior, and that they, the sellers, are harmed because they are forced to pay commissions that are too high, and not determined in a competitive market.
Juries are starting to agree. In November last year, a court case in Missouri ordered agents and their trade association to pay $1.8 billion in damages. And last month, agents in Chicago settled a different lawsuit. They’ve started to agree to let buyers and sellers have more control over the commissions they pay.
Optimists say that the age of the six percent commission is ending, slowly but surely. They say that after these court cases, home buyers and sellers will soon have the freedom to choose the services they want, and the price they’ll pay for them. I hope they’re right.
But pessimists say that real estate agents will find other ways to control the market. Buyers’ agents may only steer their clients toward sellers that include high commissions in their offers, for example. And agents may simply not offer lower-priced services out of fear they’ll be punished or shunned by fellow agents. If that happens, and if there are no choices on offer, then what good is the freedom to choose?
Jeff’s take
We pay five and a half to six percent of every home sale. The typical home sells for about $400,000. So that means that home sellers pay, on average, $24,000, just in commissions to the agents.
I said earlier that agents do good and valuable work and they should be paid for it. But this is out of all proportion to the value they add to the process. I’ve bought two homes and sold one. Both times I bought a home, I did probably 80 percent of the agent’s work myself.
The fact that agents control every aspect of buying and selling means that technological improvement is just shut out of the whole process. There’s no room for innovation. Every time I bought or sold a home, it was like being transported to a previous age where everything was done manually, there were no systems, and you just had to accept the way things were—and pay an eye-watering sum for the privilege.
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