Real-estate agents are ripping off homebuyers

The other day, Linda, the real-estate agent whom my wife and I used to buy our home, called me out of the blue.

Both agents were paid out of the seller's account, which created the appearance that Linda's services didn't cost me anything.

Cutting a better deal with Linda would have been like trying to negotiate with our obstetrician over the $10,000 we had paid out of pocket, on top of our insurance premium, for delivering our youngest child.

In some cases, real-estate agents even drive up the cost of homes by pushing for all-cash offers and "escalation clauses" that trigger automatic bidding wars — moves that, in turn, drive up their commissions.

If Americans paid the same rate as the British, they would save more than $72 billion a year in real-estate commissions.

For most people, paying an agent to help them navigate a costly, once-in-a-lifetime transaction seems like a worthwhile investment.

When we asked that they clean out the piles of leaves in the house's gutters, their agent wound up paying for it out of his own pocket.

According to an international survey of brokers conducted by a discount brokerage in 2015, American buyers and sellers, on average, pay a combined commission of 5.5%.

(Last year, the Justice Department announced that it was broadening its investigation of the association for violating antitrust laws.) And at the local level, according to economists, agents systematically hog the most valuable listings for themselves and steer buyers away from sellers who dare to offer a discount on commissions.

"When you're a buyer and you ask, 'How do I pay you?' they say, 'Oh, I split 6% commission with the seller's agent.' They don't tell you that it's negotiable.

Buyers who want to compete for "coming soon" listings — often some of the fastest selling and most desirable properties — have no choice but to use an agent who has MLS access. .

One study found that sellers actually received a lower price for their properties when using an agent — as much as 7.7% less.

That's in part because agents for buyers tend to steer their clients away from properties on the MLS that offer lower commission rates, where they stand to make less money.

Buyers might not see a house they would really like, and sellers would have fewer bidders.

In one undercover investigation, double-dipping agents were caught on camera breaking the law by revealing confidential information to buyers and plotting to push sellers to accept low offers.

But over time, the rebates have gotten smaller, and the company's business model has drifted closer to that of a conventional brokerage, albeit one that charges sellers a discounted commission of 1%.

For starters, if you're selling your home, it's important to understand that you don't have to sign what's known as an "exclusive right-to-sell" agreement, under which the agent gets their commission even if you wind up bringing in the buyer.

In that scenario, you may find yourself having to pay for things like staging and photos, but competition between agents helps open the door to a frank conversation about adjusting their commission prices.

If you're willing to do some of the work yourself, a number of startups — including Redfin, Houwzer, UpNest, Rex, Redfy, and ListingSpark — offer discounted commissions for sellers.

(In some states, seeking to maintain their monopoly, agents have successfully lobbied to ban Flat Fee options.) But keep in mind that "for sale by owner" involves not only hiring a photographer to shoot your home but also paying a lawyer to handle the closing paperwork.

Finally, don't listen if the seller's agent tells you not to worry about the commission because you're not the one paying it.

Every dollar that is paid out in a real-estate transaction — to sellers, agents, inspectors, insurers, and the IRS — comes from you, the buyer.

"It's baked into the housing price." Part of the reason, in fact, that both brokers are paid out of the seller's proceeds is that it allows their commissions to be financed by the buyer's mortgage.

Banks wouldn't allow buyers to borrow directly to pay brokers, and many buyers don't have the money to cover broker commissions out of pocket.

If a savvy agent has control of a particular house, neighborhood, or network of buyers, the benefits of paying full commission can easily outweigh the costs of trying to hack your way to a better deal.

For example, under the rules of the National Association of Realtors, the seller's agent is the one who sets the commission for the buyer's agent — paying them, in effect, for delivering a client who's willing and able to purchase the property. "That's open-market capitalism," the association's spokesperson told Insider

"Stopping that would go against ensuring the idea of a free and open market." But the arrangement deprives buyers — the ones paying for the entire service — of the ability to negotiate directly with their own agent on price

Regulation is also needed to protect real-estate startups and discounted commission models from being pushed out of the marketplace by the incumbents

I don't regret having used Linda as my agent when we bought our home, even though the system was clearly rigged against me as a consumer

Besbris, the sociologist, describes such gifts as a tool that agents use to generate "a series of successful service interactions with buyers and sellers, leading to more referrals, with the network of people ever expanding."