How much were real estate commissions in the United States prior to the Multiple Listing Service?
Commissions were always negotiable between the principal and real estate agent, way before the MLS came along.Indeed, back in the day, commissions were often higher as it was quite difficult to complete a sale transaction. With the lower prices and tons of legwork involved, the listing real estate broker would command between 7–10% commissions on a sale. Since the concept of a buyer’s broker wasn't well developed, the listing real estate broker would handle the entire transaction, mostly for the benefit of the seller, who paid the commission fees. The buyers were left to their own devices.This is still very much how it works in commercial real estate.Eventually, residential home buyers sought to get some better advice for themselves to avoid being scammed by the listing real estate brokers. Starting in the 1960s and 1970s, new regulations came along to force additional disclosures to be provided to buyers and new rules of ethics were created to stop all the egregious violations of public trust like steering and blockbusting. No doubt the rising demand for government money for home financing through the major agencies had something to do with that.With the rise of the real estate buyer agents, buyers had more say and confidence in the purchase transaction. Given all the work that the buyer’s agent did, they demanded a commission split from the listing real estate broker. While this split is also negotiable, the rise of the MLS stabilized it at around 50/50 to ensure that buyers were comfortable that their agents were paid enough to work hard on their behalf.The MLS also opened up much more competition to the real estate professional market and that drove down the asking commission rates to about the 6% range. There it stabilized as ever increasing numbers of government regulations about the real estate transaction poured in, all in the guise of trying to protect home buyers from fraud. Well, all those protections had a time and effort cost. You can either be safe or get a cheaper deal, not both. Most choose to be safe.As for your ancillary questions:If there was no MLS and agents didn’t have to share commissions, wouldn’t commissions be cut in half?The MLS is just a marketing tool. Without it, there would still need to be agents involved to put together deals. The only way to save on commissions is to do a deal directly with the listing real estate broker and having the buyer take his chances. Even then, the listing real estate broker is unlikely to welcome the additional litigation risk and would need to bring in another broker to represent the buyer. Hence, commissions wouldn't be cut in half. Now, if the buyer is as competent as a professional real estate broker, then he can negotiate the commission discounts accordingly. There's nothing to prevent that from happening, even now.In some countries (UK) commissions are half what they are in the U.S. and you get highly qualified agents. Why are we forced to pay for two agents and two brokers here?This is simply the free market at work. It's the same as comparing health care costs between the U.K. and the US. Until there's a structural change that reduces the number of regulations and litigation risk, the cost structure today will remain for both. It's simply what the market has determined is necessary to do the job. As it is, abut 80% of new real estate brokers and subagents are out of the business in five years. They just don't make enough to survive. The average income for real estate agents is about $25K, much lower than the median income in the US, around $33.6K.And, nobody is forcing the buyer to pay two agents and two brokers here. That just doesn't happen. Indeed, the buyer DOESN’T pay for any broker or agent. The seller hires a real estate broker to list and market the property, paying the full commission to get the result, whoever is involved. Obviously, during negotiations, the broker’s split may come into play, so regardless of how many people are involved in the transaction, the total commission paid may be reduced.If the coop commission were offered directly to buyers instead of to their brokers, wouldn’t there be more do it yourself home buyers saving lots of money as a result?Maybe and maybe not. Again, a competent buyer who can negotiate toe to toe with the listing agent can always bring the coop commission into the deal as a result. Why doesn't this happen more often? Simply, most buyers are way out of their depths when it comes to negotiations, the ever changing landscape of regulations, and all the legal nuances required to complete a successful transaction. Real estate brokers are constantly playing catchup with whatever new requirements come out from the Federal, state, and local governments, each one a potential new legal land mine. It's hardly something to be risked when you're living in such a litigious country.Bottomline, all the technology changes will have minimal impact on overall real estate commissions. The only way to make a meaningful reduction in the cost of the real estate transaction is to reduce the number of protections in place. Currently, we are headed squarely in the opposite direction, at least until the Orange clown in the White House and the crazy doctor leading HUD gets to work, if ever.