A new report from the Washington, D.C.-based Consumer Policy Center (CPC) warns that the common practice of percentage-based real estate commissions may be a financial disadvantage for home buyers and sellers.
The report is titled “How Percentage-Based Commissions Can Harm Home Buyers and Sellers and What They Can Do About It.” The CPC points to commission structures that discourage price negotiations and cause consumers to underestimate the true cost of agent fees.
Incentives to keep prices high
The report highlights a key issue with percentage-based commissions. Buyer agents, who are supposed to advocate for their clients, may actually have a financial motivation to keep home prices high.
“This compensation structure gives buyers’ agents a direct disincentive to help their clients locate suitable homes with low asking prices posted by the sellers,” the report states. “Further, after a suitable home has been located, the buyer’s agent represents her client in negotiations with the seller over the final transaction price. Here, as well, the harder and smarter the buyer’s agent negotiates on behalf of her client, the less she gets paid at closing.”
The issue is backed by academic research. A 2015 study published by the American Economic Association found that real estate agents who purchased homes for themselves paid approximately 4% less than the prices their clients paid. This suggests that agents might negotiate more aggressively when their own money is on the line.
Another study by Federal Reserve economists in 2024 identified what they called the “backward incentive for buyers’ agents.” While some research suggests that buyers can mitigate this issue by switching agents, the report notes that recent changes that make buyer broker contracts mandatory weaken this argument.
Consumers underestimate commission costs
Another issue identified in the CPC report is that most real estate commissions are expressed as a percentage of the sale price rather than in dollar terms, which can lead to consumers underestimating the actual cost.
Many home sellers and buyers view a 6% commission on a $500,000 home as a smaller expense than $30,000 — despite these amounts being the same.
The report points to research indicating that many people struggle to understand percentages. A U.K. government study found that “one in five adults (or 20%) has forgotten how to work out either fractions or percentages.” Other studies suggest that consumers are more likely to react strongly to a large dollar figure than a percentage, even when both figures represent the same amount of money.
A survey of 1,013 adults commissioned for the report found that 55% of respondents preferred agent compensation to be listed in dollar amounts rather than percentages. Furthermore, 68% supported a requirement that commissions be disclosed in dollar terms, with only 13% opposing it.
Tips for buyers and sellers
The CPC offered several recommendations for buyers and sellers looking to navigate the commission system more effectively:
- Discuss commissions in dollars, not percentages: Buyers and sellers should always ask agents to express commissions as a dollar amount rather than as a percentage of the sale price. Doing so makes it easier to understand the true financial impact and may encourage agents to negotiate lower fees.
- Negotiate a flat fee for buyer agents: Instead of agreeing to a percentage-based commission, buyers should attempt to negotiate a fixed dollar amount for their agent’s compensation. This structure ensures that the agent’s fee does not increase simply because a home sells for a higher price. Some experts have suggested models where buyer agents are financially incentivized to negotiate lower prices, although these models have yet to be widely tested.
- Consider flat-fee brokers: Sellers, and potentially buyers in the future, can explore working with flat-fee brokers who typically charge lower commissions than traditional agents. But the report notes that flat-fee brokers may offer reduced customer service benefits or prioritize closing a deal quickly over securing the best possible price.
With real estate commissions now being partially “uncoupled” from traditional structures, the report suggests that consumers have more leverage than ever to negotiate lower fees.
“To the extent these consumers treat the fees as dollars, not percentage of sale price, they should be able to more effectively negotiate the fees,” the report states.
