Real Estate Compensation Facts by the National Association of Realtors

May 18, 2023 By A Danielle

Real Estate Compensation Facts

We have received questions about why brokers representing home sellers often pay the compensation of brokers representing home buyers. Here are answers to those questions and basic information every buyer and seller needs to know.

This practice has worked so well for so long because it provides the greatest economic benefits for both buyers and sellers, creates greater access and equity for first-time, low- and middle-income and all buyers and enables small business brokers to compete with larger brokers.

In fact, listing brokers paying the compensation of buyer brokers underpins local broker marketplaces, which are the primary source of information for home search sites, and serve as the driving force behind America’s efficient and accessible real estate market.

How Real Estate Compensation Works

In order to understand how real estate compensation is paid, it’s necessary to first understand the tool used in the vast majority of all home purchases: a Multiple Listing Service.

Multiple Listing Services, or local broker marketplaces, are essentially databases of all the homes for sale in a given market, maintained in most cases by local REALTOR® associations. Local REALTOR® associations also make most of this information publicly available for free, and each database often feeds home search sites.

When a seller lists a property on one of these local broker marketplaces with a listing broker, they get access to the largest pool of possible buyers that have been brought to the marketplace by buyer brokers. Meanwhile, buyers can work with any broker and see ALL homes for sale.

So where does compensation come in? “It is typical for brokers representing home sellers to compensate the buyer broker for finding a willing and able buyer which often times means the buyer does not pay their broker, resulting in more available funds for buyers to use towards the purchase of the home.” This creates a larger pool of buyers for sellers and saves sellers time and money by working with an established group of brokers. For buyers, it saves them money at closing and enables the buyer to receive professional representation.

The practice of listing brokers paying buyer brokers enables efficiency, effectiveness and accessibility for first-time, low- and middle-income and buyers of all walks of life. This practice also has been the driving force behind a thriving American real estate market. From 2010 to 2020, this approach to compensation:

Enabled 88% of home buyers to purchase their home through a real estate broker
Contributed to an $8.2 trillion increase in total housing wealth
Helped 6.3 million more new buyers become homeowners

For the 90% of sellers who use a broker, they sell for 30% more on average than homes sold off the local broker marketplace as for sale by owner. That means someone working with a professional could get $390,000 for their home versus $300,000 if they tried to do it on their own.

If this practice changed and sellers’ brokers stopped paying buyers’ brokers, what would be the likely outcome?

No centralized source of available homes for consumers or brokers
Buyers would have to visit every broker in town to see all available homes
Outdated home status information
Fewer homes for buyers to choose from on real estate sites
Unverified, inaccurate and unreliable property information
Sellers would likely have to pay to list and advertise their properties on websites
Buyers unable to afford brokerages would have fewer options
Inconsistent broker information in listings across the marketplaces
Markets would be controlled by the largest brokers

Facts About Compensation

Compensation is always negotiable.  The seller decides what fee they are willing to pay for their broker’s services and how much that listing broker should offer a broker who brings a buyer to close the transaction. Compensation is always negotiable and consumers are encouraged to talk to their broker to understand and agree upon how they expect to be compensated.

The U.S. broker compensation model benefits consumers. The practice of listing brokers’ offering compensation to buyer brokers leads to brokers sharing their inventory with each other. In turn, that means sellers have access to the largest possible pool of potential buyers, and buyers have access to the greatest number of housing options in one place.

Compensation cannot be included as part of a mortgage. The vast majority of mortgage lenders do not allow compensation to be added to home loans. Listing brokers’ offers of compensation to buyer brokers gives first-time and low- and middle-income home buyers a better shot at affording a home and professional representation in the home-buying process. For many buyers, saving for a down payment is difficult enough, if buyers had to pay real estate compensation out-of-pocket on top of closing costs, it would push the dream of homeownership even further out of reach for countless people.

Compensation rates are determined by market forces. Compensation fluctuates over time and have notably decreased steadily in recent years. In fact, in 2020 the average real estate compensation in the U.S. fell to a new low of 4.94%, according to Real Trends.

You get what you pay for. Local MLS broker marketplaces allow small brokerages to compete with large ones and provide for unprecedented competition among brokers, including different service and pricing models. So, you can choose from many compensation models. Those are choices to consider as you prepare to make likely the single most significant investment in your lifetime.

U.S. real estate market is the world standard. The U.S. real estate model has long been viewed as the most consumer-friendly around the world. Buyers abroad are forced to wade through complex markets that require consumers to work with multiple brokerages to access fragmented inventory because listings are not shared freely in the marketplace. The result is more time consuming, impersonal and costly.

FAQs

Is there a “set compensation rate” real estate brokers charge consumers?
No. The market decides compensation rates, and compensation is always negotiable. Consumers have the choice of who they want to pay and how they want to pay them. Because of the pro-consumer local MLS broker marketplace model, and options like a success fee, there is unprecedented competition among real estate brokers, especially when it comes to the service and compensation options available to consumers.

Why not require buyers to pay compensation directly to their broker instead of the historic practice of listing brokers paying the buyer broker?
Forcing buyers to take on the additional out-of-pocket expense would cause them incredible hardship and would freeze many, particularly first-time and low- and middle-income home buyers, out from an already competitive market. That could also force home buyers to forgo professional help during what is likely the most complex and consequential transaction they’ll make in their lifetime.

How does the U.S. model compare to other, international broker marketplaces?
The U.S. approach is the most consumer-centric model. By consolidating fees and the overall process, our nation’s model simplifies the experience, provides greater certainty of success to both buyers and sellers, and provides guidelines that ensure the accuracy of housing inventory made available to real estate professionals and consumers, all at comparable or lower total costs than those in other countries.

Why should real estate professionals make the money they do in compensation when so much information is available online?
Real estate brokers provide essential guidance as consumers navigate the legal, financial and community aspects of a purchase, including everything from determining property value to negotiating the price. They also make local broker marketplaces, which online housing portals tap into, possible because of all the information they input into those databases. And REALTORS®’ annual income is just $43,330 and 88% are small businesses, a majority of which are women-owned.

How does the current approach to compensation benefit small businesses?
Access to inventory and free advertising as well as the practice of the listing broker paying the buyer brokers’ compensation incentivizes participation in these local real estate marketplaces and creates the largest, most accessible and most accurate source of housing information available to consumers. That levels the playing field among brokerages, allowing small brokerages to compete with large ones, and provides for unprecedented competition among brokers, including different service and pricing models for consumers.

Filed Under: Blog, National Association of Realtors

Healthcare Reform Bill Talking Points

January 21, 2013 By A Danielle

There is a 3.8 percent tax in the healthcare reform bill, however, much of the information circulating on the Internet is grossly inaccurate. The tax is not a transfer tax and it will not be imposed on all real estate transactions.
The new tax will apply to high-income households and their “unearned” investment income, including capital gains, dividends, interest, and rents minus expenses.
The tax could impact some real estate transactions, however it’s a complicated tax so we can’t predict how it will affect every buyer or seller.
The new tax would apply only to households with adjusted gross incomes (AGI) above $200,000 for individuals or $250,000 for cou;les filing a joint return.
The current capital gains tax law allows individuals to exclude up to $250,000 of profit from taxation and $500,000 for married couples when selling a personal residence. The tax would only be imposed on the gain over the threshold amount.
The 3.8 percent tax would apply to whichever amount is less; an individual or married couple’s total investment income or the amount that their AGI exceeds the high-income thrshold (of $200,000 for individuals or $250,000 for married couples).
For example, a married couple has an AGI of $325,000. They purchased a home in California many years ago for $350,000 and sold it this year (2012) for $900,000, making a profit of $550,000. After excluding $500,000 from their gain of the sale, they are left with $50,000 investment income. Since their AGI is $75,000 over the married threshold amount the lesser amount of $50,000 would be subject to taxation – at 3.8 percdnt they would owe $1,900.
Real estate investors are not affected at the time they acquire their investment. Their rental income could be subject to the tax, but only on NET rents (after expenses, including interest, taxes and depreciation).

Background

The legislation was enacted on March 23, 2010.
The tax was not introduced, discussed or reviewed until hours before the final debate on the massive health care legislation began. NAR (National Association of Realtors) expressed its strongest possible objections, but the legislation passed on a largely party-line vote.
Any revenue collected by the tax is dedicated to the Medicare hospital insurance fund, which is why the new tax is somtimes referred to as the “Medicare tax”.
The legislation also included a 0.9 percent tax on the “earned” income (salary, wages, commissions) of high-income taxpayers: those with AGIs over $200,000 for individuals and $250,000 for married couples. The tax is only imposed on the income over the threshold amount.
Examples and further analysis is presented in NAR’s brochure: The 3.8% Tax Real Estate Scenarios & Examples.
A video that explains the issue in further detail is posted online at http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is.

The above information was last updated July 2012 and is from the National Association of Realtors website at www.realtor.org.

Filed Under: Blog, National Association of Realtors

Real Estate Provisions in “Fiscal Cliff” Bill

January 21, 2013 By A Danielle

On January 1, 2013 both the Senate and House passed H.R. 8 legislation to avert the “fiscal cliff”. The bill will be signed shortly by President Barack Obama.

Below is a summary of real estate related provisions in the bill:

Real Estate Tax Extenders

Mortgage Cancellation Relief is extended for one year to January 1, 2014
Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012
15-year straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012
10 percent tax credit (up to $500) for homewoners for energy improvements to exisiting homes is extended through 2013 and made retroactive to cover 2012

Permanent Repeal of Pease Limitations for 99% of Taxpayers

Under the agreement so called “Pease Limitations” that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. These thresholds have been increased and are indexed for inflation and will rise over time. Under the formula, the amount of adjusted gross income above the threshold is multiplied by three percent. That amount is then used to reduce the total value of the filer’s itemized deductions. The total amount of reduction cannot exceed 80 percent of the filer’s itemized deductions.

These limits were first enacted in 1990 (named for the Ohio Congressman Don Pease who came up with the idea) and continued throughout the Clinton years. They were gradually phased out as a result of the 2001 tax cuts and were completely eliminated in 2010-2012. Had we gone over the fiscal cliff, Pease limitations would have been reinstituted on all filers starting at $174,450 of adjusted gross income.

Capital Gains

Capital Gains rate stays at 15 percent for those in the top rate of $400,000 (individual) and $450,000 (joint) return. After that, any gains above those amounts will be taxed at 20 percent. The $250,000/$500,000 exclusion for sale of principle residence remains in place.

Estate Tax

The first $5 million dollars in individual estates and $10 million for family estates are now exempted from the estate tax. After that the rate will be 40 percent, up from 35 percent. The exemption amounts are indexed for inflation.

The above information was taken from the National Association of Realtors website www.realtor.org/articles.

Filed Under: Blog, National Association of Realtors