Changes in real estate rules may alter agent commissions, shifting costs to buyers and increasing price competition for services. While this could benefit sellers, buyers may face challenges covering agent fees alongside other home purchase expenses. This article will explain the changes in real estate commissions.
The National Association of Realtors has overhauled traditional rules on home sales commissions following a significant settlement regarding alleged collusion to maintain high agent fees. These changes signal a shift in the home buying and selling process and associated costs in the United States.
The impact on home sales remains to be determined, requiring adjustment from buyers, sellers, and agents to adapt to the new landscape.
The Story Behind Real Estate Commission Changes
In 2023, Missouri home sellers sued the National Association of Realtors (NAR) and major brokerages for antitrust violations. The NAR and RE/MAX settled before trial, paying $83.5 million and $55 million, respectively. The jury ruled against the industry, ordering NAR and two firms to pay $1.8 billion in damages. Keller Williams settled for $70 million. NAR agreed to pay damages and alter its practices, while HomeServices of America remained the last defendant.
Amidst an antitrust lawsuit, NAR faced internal challenges with a sexual harassment scandal prompting resignations in 2023. Subsequently, the CEO also stepped down, causing unrest within the organization. Redfin severed ties, leading to membership cancellations, and other brokerages followed suit. Meanwhile, the launch of a rival group, the American Real Estate Association (AREA), by two prominent agents added to NAR’s pressures.
In a settlement on Friday, the National Association of Realtors (NAR) agreed to policy adjustments following class-action lawsuits from home sellers nationwide. The NAR now prohibits brokers listing homes on affiliated databases from offering compensation to buyer’s agents, addressing inflated commission concerns.
The trade group also mandated written agreements between agents and homebuyers to clarify service fees upfront. Pending court approval, the NAR aims to enforce these changes by mid-July. Additionally, real estate firms like Anywhere Real Estate and Keller Williams have made separate agreements, enhancing transparency on agent commissions.
Stephen Brobeck, a senior fellow at the Consumer Federation of America, anticipates a gradual shift towards a more transparent marketplace, allowing consumers to compare and negotiate commissions freely.
The Cost of Commissions
Before, homeowners who would sell a property worth $400,000 usually pay a 5% commission, which could total a $20,000. This commission then is split between the buyer’s agents and the seller’s.
Over time, competition and regulation reduced the average commission to less than 5%, with the seller paying the full amount. Current data indicates their average commission side is now about 2.4%.
Despite brief increases during the Great Recession and in 2023, commission rates have declined steadily for decades. Realtors have seen a reduction in their percentage-based fee, balanced by the growth in home prices.
Numerous specifics still need to be solved. With the shift in commission structure, buyers may shoulder direct payment to their agents, averaging $10,000 for a $400,000 sale. This amount can’t be financed into mortgages, pending potential rule adjustments by the Federal Housing Finance Agency, anticipated by industry observers.
What Could Change?
Effective July 2024 (subject to federal court approval), sellers will no longer cover commissions for both their agent and the buyers. Instead, buyers will independently compensate their agents, possibly leading to heightened price competition. Vishal Garg, CEO of Better Mortgage, predicts a buy-side price war by next year. With the NAR’s agreed-upon changes, listing agents will no longer dictate the buyer’s agent fee; it will be negotiated separately.
Traditionally, real estate commissions were negotiable, but agents’ negotiation skills often led to a standard 5 percent rate. The settlement now allows buyer agents to market their fees competitively. Stephen Brobeck predicts commissions could drop below 4 percent, fostering a more transparent marketplace. Garg anticipates a consumer-driven competition among buyer agents akin to shopping for mortgage lenders.
How It Impacts Homebuyers
The proposed NAR settlement seeks to alter the traditional commission structure in real estate transactions. Sellers often cover the commission split with buyer agents, typically 5% to 6% of the home’s sale price. The settlement aims to eliminate blanket offers of cooperative compensation for buyer agents, discouraging any bias in property recommendations.
In the previous system, buyers had little say in negotiations, with sellers covering each agent’s 3% fee. Lawsuits argued this inflated commissions and incentivized agents to prioritize higher-paying listings. Now, buyers negotiate directly with agents, specifying services in required brokerage agreements. Some may opt for legal assistance or agent consultation.
Homebuyers might request a seller’s concession to help cover the buyer’s agent fee. If sellers refuse, buyers must find an affordable agent and agree on compensation terms upfront. This added expense could strain buyers with limited finances, complicating their home search. However, various factors influence home transactions, including parties’ motivation to finalize deals.
The Impact on Sellers
Home sellers may refrain from covering buyer-agent commissions, leading to significant cost reductions. For instance, a seller paying a 3% commission instead of double that could save around $11,373. This settlement may prompt sellers to negotiate listing agent compensation more actively, yet they might still feel pressure to cover buyer-agent fees.
A notable outcome is the potential for significant savings for sellers if buyers cover their real estate agents’ fees. For instance, in February, the average Southern California home priced at $842,997 would have saved sellers $25,290 if they paid only one agent instead of both.
The NAR proposed a rule change allowing buyer’s agents to view cooperative compensation offers from their brokerage. Analysts from Keefe, Bruyette & Woods noted this might encourage agents to favor listings with upfront compensation offers, pressuring sellers to offer competitive commissions.
Bottom Line
In the digital era, real estate information is readily available online, empowering buyers with extensive knowledge about properties. Some prefer agents for guidance during inspections and paperwork, while others seek minimal involvement. Agents’ fees may vary based on the level of service desired. Those who demonstrate value will thrive in this evolving landscape.
Representing buyers can be fulfilling for agents, though it often demands significant time investment with uncertain outcomes. Many seasoned agents favor seller representation for its efficiency, particularly in fast-paced markets.
With potential changes impacting buyer agents’ earnings, some may transition to seller representation or leave the industry, as seen in Southern California’s post-pandemic market.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
