Multiple Listing Services. Do they help or hurt American Consumers?

Some people see the real estate multiple listing service (MLS) business model as a great benefit to the American consumer. Others (Not-REALTORS) have doubts. The Department of Justice and some judges are on the side of the doubters. I favor a competitive environment that allows more brokerage service and fee options for the consumer; the MLS model has room for growth. Essential Real Estate has proven long-held beliefs are myths.

The essence of the issue is that MLS systems are designed for the Seller to pay one commission to the listing broker, and the listing broker then commits to paying half of the commission to a cooperating broker. More often than not, that cooperating broker is working diligently for the buyer’s advantage to the Seller’s detriment and then collecting their fee from their opponent, the Seller. The rules of membership in an MLS result in listing brokers obligating their home-selling clients to promise to pay the highest typical rate of commission to the buyer’s agent in most cases. (I estimate that rate to be 3.0% in 90% of all listings)

Paying the other side to work against you is unprecedented. The closest example might be losing in court with the obligation to pay court costs and attorney fees for the other side. The Seller isn’t losing in a home sale, but they still pay the buyer’s broker. That’s peculiar. 

This article in the New York Real Estate News summarizes the complex issue. I’ll offer a solution suggestion. Split the commission in two. 

The MLS is a Private Club

To understand how the MLS works, consider it similar to a private club for people with specific credentials. In this case, it’s a real estate license. Licensees apply for membership and pay dues to join the MLS. The members promise to cooperate with all members in exchange for the privilege of access to every member’s inventory of listings. Cooperation is guaranteed, while meeting standards earn compensation.

One rule of membership in the MLS can not be an obligation to pay a set price commission to members. Over time, some practices become Standard Operating Procedures. About 88-90% of all listings in an MLS will include a 3.0% offer of compensation to be paid by the Seller. That’s not a rule; it’s the way it is. The following most likely number below 3.0% is 2.5%.  

Split the Commission. Let the Free Market Decide. 

Cooperation between MLS members will not change, and the consumer will not suffer if the practice of one commission paid by the Seller ends. My proof is two years of running an alternative business model with more options for the home seller’s advantage. Instead of obligating the Seller to pay a 6.0% commission expecting half of that commission will be delivered to a buyer’s agent, listing contracts with clients of Essential Real Estate are signed with commitments set less than 6.0%. 

Where the same Seller has an option to sign a listing contract at 6.0% with another broker member of the MLS, Essential Real Estate Clients might sign a contract committing themselves to no more than 4.0% commission and promise to pay the buyer’s agent 2.0% commission instead of 3.0%. This way, our selling client retains the opportunity to agree to pay a higher commission and can decide after seeing the quality of offers. The results are compelling. An uncommon member is a broker who demands a 3.0% commission from the Seller in exchange for their buyer’s Offer to Purchase when the Seller offers 2.0%. 

It’s a Seller’s Market. They should get all of the advantages.

The compensation method we use is the kind of advantage owners deserve in this market. Locking a Seller into an obligation to pay top rate commission for any offer artificially supports the highest commission rate placing the seller at an avoidable disadvantage. Free markets drive prices up and down. The commission is the price of the service. There might be some artificial support for the commission to hold firm at 3.0% in any economy. Splitting the commission into two sides might remove one of those supports. 

Essential Real Estate. A Free Market Choice by the Numbers.

For a market to be free there must be a choice on both sides of the transaction. Do we have a free market real estate service economy?
Maybe.

Real estate representation is a licensed service. The standard of performance is the same for every real estate licensee. There is no choice as to which legal obligations a licensee will perform. There is a minimum standard though, and we expect some licensees to rise above the minimum to be a choice of higher-skilled service for the consumer.

What about the price? As long as the consumer is willing to pay *6.0% broker fees the market will be dominated by firms that choose to offer the same real estate licensed service for the same 6.0% price. Eventually either the consumer will demand a range of prices for the legally obligated services or licensees will choose to structure their business model to be profitable and sustainable at an alternative fee.

Essential Real Estate, LLC was created in 2019 in Madison to be a free market choice for home sellers who want to keep more of their home equity by spending less on broker fees. These are the numbers.

When the fee of choice tends to be 6.0% of the sale price the regressive nature of the “tax on value” hits those who can least afford the fee the hardest.

$400,000 Value. $300,000 mortgage. $100,000 equity
$400,000 x 6.0% = $24,000.
$24,000 is 24% of the equity.

OR

$400,000 x 4% = $16,000
$16,000 is 16% of equity.

To pay a 6.0% commission the home seller will pay 50% more money compared to a 4.0% commission.

50% more, in this scenario, is $8,000. By moving that $8,000 back into the hands of the seller the difference is impressive:

The $8,000 is a 33.3% reduction in the price of the commission.
The $8,000 is a 10.5% increase in retained equity.
The $8,000 applied to the next down payment will reduce a monthly payment on a 30-year mortgage at 4.1% by $39.
$39 per month is $468 per year
$468 per year for 30 years is $14,040.00

Finally, home owners have a choice to pay less in selling commission and keep more of their home equity. Essential Real Estate has set the market free.

Listing fee: $499 at signing. Commission of 4.0% or less due at closing. We will show you how to make that 4.0% less.

* The Internet Didn’t Shrink the 6.0% commission