Big changes for buyers, sellers and real estate agents regarding commissions and touring homes
Buying and selling a home has become a bit more complicated and confusing following a landmark settlement that went into effect nationwide in August.
But it could save buyers and sellers money. A lot of money.
It will also affect how brokers and real estate agents conduct business, get paid and maybe even how many remain in the fast-changing industry.
Missouri home sellers filed a lawsuit against the National Association of Realtors, alleging the massive organization had violated antitrust laws by requiring the seller’s agent – also known as the listing agent – to offer a commission payment to the buyer’s agent and, in turn, set up a nationwide standard commission. NAR, without admitting guilt, agreed to a $418 million settlement.
As part of the settlement by the NAR, buyers and sellers are in more control of the compensation paid to real estate agents.
‘BOTH OPPORTUNITIES AND RISKS FOR CONSUMERS’
The belief is that the cost of buying and selling a home – often the largest transaction in the lives of many individuals – could drop with the disclosures and negotiations as part of the settlement. But there is a learning curve for everyone involved, including real estate agents.
“The new rules provide both opportunities and risks for consumers,” says Stephen Brobeck, a senior fellow for the Consumer Federation of America in Washington, D.C. The organization has long been a proponent of more disclosures and lower commission rates in the housing industry. “Knowledgeable home buyers and sellers will be able to take advantage of the opportunities and avoid the risks.”
In a nutshell, the new policy means that home sellers will no longer have to cover the cost of a buyer’s agent, which can take several thousand to tens of thousands of dollars out of their own pockets. Buyers will now negotiate with their agent about compensation and how they will pay. They can also enter a deal without representation.
It’s an about-face from the decades-long practice where a listing agent – the person who represents the home seller – established a 5-6% commission rate as part of the transaction, often dividing the proceeds with the agent for the buyer.
For example, a 5% commission on a $900,000 home would generate $45,000 in compensation, divided between the agents for the buyer and the seller. (Important to note that California allows dual-agency, where an agent can represent the buyer and the seller, if both parties agree to the arrangement, then the listing agent pockets the entire commission.)
A BILLION DOLLARS IN SETTLEMENTS PROMPTS CHANGES
The Missouri lawsuit, which included numerous real estate brokerage companies, challenged the NAR practice of the commission rate agreed to between the listing agent and the home seller and disclosed in the Multiple Listing Service, leaving the buyer with little – or no – negotiating power. Attorneys for the plaintiffs claim that the deal inflated fees and home prices.
As part of the settlement, NAR has agreed to pay affected home sellers. More than 20 brokerages have also agreed to settle, raising the overall payout to more than $1 billion.
While the dollar figure grabs headlines, the changes to commissions and the necessary are the real shakeup.
Under the new agreement, agents are required to ask buyers – or potential buyers – to sign a form before they can see a home on the market. The form outlines how the buyer will compensate the agent, from a flat fee or a percentage of the sale price, the most common practice for several decades.
A LIST OF POSSIBILITIES. BUT CAREFULLY REVIEW BEFORE SIGNING DOCUMENTS
Several attorneys in numerous online stories – including Douglas Miller, one of the attorneys in the NAR lawsuit and executive director of Consumer Advocates in American Real Estate (CAARE) – are urging buyers to carefully review before signing forms. Miller says buyers should sign a so-called “showing agreement” and pay a small fee to view the house. A seller’s agent could also just open the door without an agreement for compensation.
Then, if buyers want full brokerage services from the agent, they can detail compensation. Or they could hire another agent to represent them.
“These changes help to further empower consumers with clarity and choice when buying and selling a home.”
Kevin Sears, president of the National Association of Realtors
But how much should buyers pay?
Some housing advocates are encouraging buyers to pay a flat fee. Perhaps a $25 fee to tour the home and $10,000 if they move forward with the purchase. Others believe an agreement that details services the agent will perform and sets an hourly fee – perhaps $200 per hour with a maximum cap – is the preferred route for buyers.
“The broker’s fee should be clearly stated, always as a dollar figure or as an hourly rate,” Brobeck says.
Of course, there is also the decades-long practice of a flat commission rate based on the sale price, if the agent and buyer agree to such a pact. The Consumer Federation of America advises buyers to pay a maximum 2% commission rate, or $18,000 based on a $900,000 home, about the median-priced home in recent months in California.
“The dollar value of today’s percentage commissions is often underestimated by buyers,” Brobeck says. “Moreover, buyer agents should not have a financial incentive to be paid more the higher the sale price.”
‘THERE WILL BE SOME PRESSURE ON COMMISSIONS’
The argument against broker commission rates based on the sale price has been around for decades. Some critics say real estate agents will often show buyers more expensive homes – sometimes even stretching or going well beyond their comfortable price range – to generate more income for themselves. Others say brokers are quick to encourage buyers to make an offer as soon as possible even though the home may not be the best choice or financial deal just to get paid.
Realtors, many who have been in the business for decades, strongly push back on those claims, arguing that long-term relationships and steady referrals – and not necessarily big paydays – keep them going.
With the new policies, those relationships and referrals will be needed. The commission payouts under the settlement will likely get smaller. How much is uncertain.
Real estate brokerage Redfin says the average home seller paid 2.55% to the agent representing the buyer in June, down slightly from 2.62% at the start of the year. Such a small drop could be an anomaly rather than evidence of a trend.
“Agents are calling one another to find out what the seller is willing to pay, ” said Redfin CEO Glenn Kelman in a recent earnings call. “The answer is usually the amount is negotiable. Our belief is that there will be some pressure on commissions.”
COMMISSION RATES HAVE ALWAYS BEEN NEGOTIABLE BUT MANY CONSUMERS WERE NOT AWARE
The California Association of Realtors has been busy drafting easier-to-use forms that help agents, buyers and sellers meet the requirements of the settlement for the past several months. “CAR supports the goals of the settlement and is working to help members have clear conversations with their sellers around compensation options,” CAR said in an online post.
Again, those “compensation options” will likely be less than the previous commission rates.
It’s important to note that Californians have always been able to negotiate commission rates and some have embraced the power. The state has the second-lowest commission rate at 4.29%, according to Home Bay.
Many homeowners are not aware that commission rates are negotiable, according to a recent LendingTree report. About two of every three home sellers who are aware get a lower commission.
The change in commission rates and the new forms come as the housing industry continues to evolve. Numerous brokerage companies, such as Opendoor and Redfin, have been offering lower commission rates for several years. And some buyers are hiring real estate lawyers, who may be cheaper than commissions paid to real estate agents, to oversee their purchase.
But housing experts agree that real estate agents will remain and play a critical role in the home buying – and home selling – experience. However, the number of brokers and agents could decline if incomes slide following the settlement.
“NAR members are dedicated, intelligent and highly adaptable experts in their fields, and that’s why Realtors are such an integral part of the home buying and selling process,” says NAR president Kevin Sears. “These changes help to further empower consumers with clarity and choice when buying and selling a home. I am confident in our members’ abilities to prepare for and embrace this evolution of our industry and help to guide consumers in the new landscape.”
