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The commission paid to the real estate agent is a significant amount of money and a concern in any transaction involving the sale of real estate. Where did this six percent commission come from?
The idea of paying a 6% real estate commission to the agent originated during the 1940s, when local real estate boards became openly involved in pricing to establish a standard rate. This process was a clear case of unfair practice, but the 1940s was a time when the country’s attention turned to some serious external issues and the idea took hold and quickly spread throughout the industry.
In the early 1950s, the Supreme Court ruled that an established 6% commission was illegal. Rather than open the commissions to a more competitive and free market system, the Real Estate Boards simply shifted gears with a bit of fancy linguistic footwork and began calling the 6% commission the “suggested” amount. During the 1950s and 1960s, they managed to get away with this practice without much trouble as most real estate agents complied with the suggestion.
In the 1970s, lawsuits against the Real Estate Boards put a stop to this practice. Real estate agent commissions were opened to competition without the Boards being able to impose or even suggest 6% as a rate carved in stone. However, the rate did not change much in the years after these brief cases. Although the rate may not have been set in stone, it did quite establish itself in the real estate market as a standard.
Competitive markets generally benefit consumers. As long as someone is willing to offer a discounted rate, it would appear that the consumer is willing to save money. However, proponents of a 6% standard rate commission point to things like healthcare to argue that the standard rate may actually be helping the consumer by keeping the commission at 6% rather than propping it up at that level. Although the cost of health care is not regulated, the general trend has exploded.
Real estate agents will be quick to point out that if you took a close look at almost any service or product that was offered or sold in the 1940s, you would find a very serious increase in cost to the consumer. With the exception of real estate commissions, which are still around 6%. The amount paid to agents has increased enormously simply because the value of the property being sold has increased. Today the internet has been responsible for some tokens on the rock of the 6% commission by offering some direct fee or reduced fee services that allow sellers to list their own properties. The results are still mixed and the 6% commission is still the standard.