Real Estate Commission Changes Coming

For decades, it’s been a well-known and accepted truism. Anytime you plan to sell your home with the help of a real estate agent, you are expected to pay a 6% commission on the sale. Sure, there have been discount brokers and ways to get your home listed on the Multiple Listing Services (MLS) on the cheap, but deep down, you knew that if you didn’t pay at or near 6%, your property might not get the same attention as others who did.

That’s about to change.

In March 2024, the National Association of Realtors (NAR) reached a landmark $418 million settlement after losing an antitrust lawsuit filed by a group of home sellers. As many as 50 million people who paid commissions on homes sold in recent years could receive a small amount from the class-action settlement. The powerful industry group also agreed to change long-standing practices related to sales commissions. (1)

Background

For decades, many real estate agents have had little choice but to join NAR and follow its rules regarding local MLS — the databases most brokers use to list information about properties for sale. Listing brokers typically cooperated with buyer's agents and split the commission paid by the seller, with the amounts communicated via the MLS in data fields that were only visible to agents.

Plaintiffs claimed that NAR (and brokers that require agents to be NAR members) conspired to artificially inflate commissions through an industry-wide practice requiring the seller to pay commissions to brokers on both sides of the transaction. They believed this helped to uphold a nationwide standard of five to six percent of the sales price, which is significantly higher than the commissions paid in many other countries. (2)

Practice Changes

Effective August 17, 2024, NAR will implement the following new policies related to how real estate brokers are compensated to handle transactions. (3)

1. Commission offers for buyer's agents can no longer be required to appear in the MLS, though they are still permitted. Listing agents can advertise specific commission offers on brokerage websites and over the phone, text message, or email. Home sellers and their agents will negotiate directly with buyers and their agents regarding compensation.

2. Buyers must discuss and set compensation directly with their agents before touring homes, as sellers do with listing agents. They will be asked to sign written representation agreements that outline the agents' services (e.g., showing property, negotiating offers, transaction management) and how much they charge. This is to help ensure that buyers are fully aware of the costs they could be responsible for paying.

Implications for Buyers and Sellers

These changes are intended to allow more room for negotiation and spur competition, which could help lower sellers' costs. Commissions have always been baked into transaction prices, so home prices would likely be reduced in markets where sellers' costs fall.

Some economists believe commissions could drop as much as 30% if buyer's agents face pressure from potential clients to discount their fees, but savings of this magnitude aren't guaranteed. (4) The impact on real estate commissions will ultimately depend on market conditions, which can vary greatly by location and how sellers, buyers, and agents respond to the new practices.

Like other businesses, brokerages have overhead that includes rent, liability insurance, marketing, and other operating costs. Most individual agents must split sales commissions with their brokers (from about 60/40 up to 80/20 for the most productive agents) or pay fees to the company.

A buyer's agent sometimes shows property to clients over days to months and may write numerous offers for deals that never come together. Many experienced buyer's agents — long accustomed to receiving the same commission as the listing agent — may be reluctant to work for less, even if they must justify their value more regularly.

Buyers will determine the commission for their agents, but the money may or may not come from their pockets. For example, an offer could be made contingent on the seller paying the buyer's share of the commission or include a request for a general credit toward closing costs in the amount needed to pay the buyer's agent. Current lending guidelines and regulations prevent most buyers from adding commission costs to their mortgages. A rule pertaining to Veterans’ Administration (VA) loans, which specifically prohibited borrowers from paying agent commissions, has been temporarily suspended. (5)

In some cases, sellers might agree to cover buyers' commissions, as it has long been customary and could still be in their best interests. Nationwide, home prices have risen more than 50% since 2019, and high interest rates have made mortgage payments much less affordable. (6) This means sellers with equity tend to be in a better position to pay commissions than potential buyers, many of whom may struggle to come up with enough cash for the down payment. For these reasons, a seller willing to pay all or some of the buyer's commission may receive more offers and a higher final price than one who refuses to do so. This assumes, of course, the current cooling of the housing market continues.

Online sites have made it easier to shop for a home without using an agent, so more buyers might brave the market on their own if they think they can pocket the savings. Yet buying a home is the biggest financial transaction many people will make in their lifetimes, and the issues that arise during the process can be unexpected. There are many situations in which buyers could benefit from having their own representation, especially if they are inexperienced or unfamiliar with the local market.

First-time buyers, responsible for 31% of existing home sales in May 2024, may have more confidence and make more informed decisions if they work with a trusted professional. (7) However, many will need help from sellers to pay their agents' fees, putting them at a bigger disadvantage than ever against buyers with more access to cash in competitive markets.

Negotiating commissions among all parties is likely to make it harder to strike deals in general, so buyers may have to search longer and write more offers before they are successful. It's also possible that sellers will see little change in commission costs in the coming months while the market is in flux. But in time, the new rules could spark innovation that creates new business models and expands lower-cost options.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

1) The Wall Street Journal, March 15, 2024

2, 4) The New York Times, May 10, 2024

3, 5, 7) National Association of Realtors, 2024

6) The Wall Street Journal, June 27, 2024