Why Are Real Estate Commissions So High?

[Will E.]

In a competitive market, you would expect real estate commissions to get competed down between brokers.   For reasons I don't understand, commissions stay high across all brokers at around 5% to 6% per deal.   Can someone help me understand why that happens?

Looking at a comparable process, consider selling a $3M business.   In this kind of deal, lawyers on both sides end up getting something like $30K to $50K.   So your closing costs are something between 2% ($60K) and 3.3% ($100K), but split between buyer and seller (each side pays their own lawyer costs).    What do you get for that $50K of legal services? Assuming lawyers are $300/hour, you are getting about 166 hours of service, which is enough to review the three inch thick document that a large buyer might create for such a deal.   

Looking at selling a $3M home, the seller is losing 5% to 6%, which $150K to $180K.   What is the seller getting for that fee?   Are the agents involved spending even 40 hours on the deal?   And does that 40 hours involve even a fraction of the skill and training required to negotiate and wordsmith a legal contract?    At the $150K commission level, assuming buyer and seller agents together spent 80 hours of time, the rate per hour is $1,875.   That might get split between the broker and the firm that hires him, but it is still many multiples of the closing cost when selling a business.

How did such a high fee system develop, and really the bigger question is why don't brokers compete amongst each other to bring these fees down.   There must be some sort of structural impediment within the system that prevents competition and maintains these high fee structures?   

[Dawn Brenengen]

People don't sell all the work we do that we don't get paid for. People think that the 3% figure they see on the HUD (in Raleigh it's more like 2.4 on the buy side) is what I get to put in my pocket. I work with a LOT of people who never buy anything. On the listing side, I pay for professional photography, floor plans, advertising, etc. If a home doesn't sell (fortunately that has never happened to me), I would be out all of the money I put into the marketing.

I am my own broker, so this doesn't apply to me, but there is usually a split between the agent and broker...sometimes as much as 50/50.  Average sale price where I am is around $240k, so that is a FAR cry from the $3 million listing you are quoting. The potential payoff has to be enticing enough to take all the risks in this job, otherwise no one would do it.  There is no guarantee you will have any clients, and there is a lot of competition for the buyers and sellers out there.