This summer brought big changes to how real-estate agents around the country get paid — a sweeping shift that upends who pays the broker fees, how much they pay, and to whom. The changes, which will decouple the commissions for sellers’ and buyers’ agents, are the result of a $418 million settlement that the National Association of Realtors reached earlier this year, following a class-action suit brought by home sellers. The deadline to comply with the terms of the settlement was August 17, though many brokerages started rolling out new commission practices earlier this summer.
The new rules change a decadeslong industry practice in which sellers paid the commissions to both the sellers’ and buyers’ agents. Commission splits were also posted on multiple-listing services, the broker databases that are used to sell property in much of the country, spelling out what buyers’ agents could expect to be paid. Last fall, a jury found these practices to be in violation of antitrust laws, effectively inflating commission rates and making it difficult for sellers to negotiate fees. In the U.S., the commission rates have averaged around 5 or 6 percent of a home’s cost, split between the buyer’s and seller’s broker, which is much higher than in many other countries. With these rule changes, many believe commission rates will fall and hope the same goes for home prices, assuming that sellers are taking into account their reduced fees.
It’s still early, but those shopping for a new home will, understandably, have many questions, especially when their agents present them with legally binding forms obligating payment, potentially in the tens of thousands of dollars (or more). What should buyers and sellers know about the new rules? And what’s likely to happen as a result of the changes? To find out, we talked to brokers, brokerage heads, lawyers, and consumer-protection experts.
What does this mean for those looking to buy a home right now?
Before touring homes with an agent, buyers are now responsible for negotiating commission payments with their own agents, a change that will likely take time for them — and their brokers — to adapt to. “It’s going to be chaotic,” says Jason Haber, an associate broker at Compass, when we spoke during the first week of the new rules. “The brokerages did a good job of educating the brokers, but the buyers don’t know what’s going on.”
Buyers’ agents will now be asking buyers to sign agreements that specify compensation and the length and terms of the agent’s representation, among other things. The agreements may cover a single tour, a week- or monthlong exclusive touring agreement, or something more extensive, as well as what the broker will be paid for their services. (Previously, sellers paid both seller- and buyer-agent fees, which came out of the proceeds of the sale.) Buyers may negotiate a flat fee, a percentage fee, or different fees for different services. The buyer can also try to negotiate with the seller to cover all or some of their broker’s fees, but the seller can no longer advertise what they will pay the buyer’s broker. “Within the new framework, there’s a lot of choice. It’s a choose your own adventure,” says Evian White De Leon, chief legal counsel at the Miami Association of Realtors.
So … is this good for buyers? Do they have any leverage over the process?
Whether buyers will be able to use those choices to their advantage is another matter. Stephen Brobeck, a senior fellow at the Consumer Protection Federation, which published a consumer alert about the commission changes earlier this month, recommends buyers try to negotiate fees of no more than 2 percent with their real-estate agent. He adds that they shouldn’t dismiss out of hand brokers who ask for 3 percent, if their experience and track record really are exceptional. What’s important is that buyers do their due diligence when selecting a broker and negotiate a fair rate for what they’re getting. He also cautioned that some of the buyer-broker agreements he’s looked at are opaque and difficult to understand, even for lawyers. Brokers should be able to explain what all the terms are, and if it’s still unclear, buyers may want to find a different broker or consult a lawyer. Buyers can also forgo using a broker altogether and hire a lawyer to draw up the necessary documents.
Can’t buyers just cut out the buyer’s agent altogether?
While buying without an agent was always an option, buyers previously had little incentive to do so, since they weren’t the ones paying for the service. It was also common for sellers’ agents, at least in New York, to persuade buyers without representation to let them work both sides of a deal, keeping the entire commission themselves.
Many experts believe that the new system will encourage more buyers to go it alone, potentially to their detriment.
Another wrinkle is that buyers can’t use financing to pay commission fees, at least not under current law. For first-time homebuyers, this could be yet another hurdle to entering the housing market — 66 percent of first-time homebuyers say they can’t afford to pay a broker’s fee in addition to the down payment and closing costs, according to a recent survey by the real-estate data firm Clever.
So is this change good for sellers?
For the most part, yes. Now, they’re only responsible for paying their own broker, not brokers on both sides of the transaction, a change that should save them money. For example, the seller of a $1 million home would now pay $25,000 or $30,000 in commissions to their agent, instead of the $50,000 or $60,000 they’d have coughed up before. And if they do offer to pay both sides, it makes their house more appealing to buyers, instead of just being a given. Brobeck, the consumer-protection expert, says that he also expects real-estate commissions will eventually fall from 5 or 6 percent to between 3 and 4 percent as a result.
Sellers, at least theoretically, are the ones who really stand to benefit from the new rules. As Leo Pareja, the CEO of eXp Realty points out, the terms of these changes were worked out by sellers’ attorneys who filed class-action lawsuits against the NAR and individual brokerages.
Weren’t broker fees negotiable before?
Yes, at least in theory. However, sellers who brought the lawsuits against NAR argued that in practice, they really weren’t, since most listings included information about what the buyer’s broker could expect to be paid on the deal, making it difficult to offer less than the going rate (i.e., a broker might steer their clients away from properties that offered a 2 percent rate, if most other listings were offering 2.5 or 3 percent, thereby encouraging everyone to pay the same artificially high fee).
How will this actually work in practice?
It’s still early, but brokers say a lot depends on how competitive the market is and who has the leverage. In a slow market, sellers may be more willing to pay the buyer’s broker or kick in other fees to offset the cost. In hot markets, however, the cost is more likely to be borne by buyers. Pareja says that as a result of the new rules, he expects to see more flat and reduced-fee services like Redfin catering to buyers instead of just sellers. It could also become standard for services to be offered à la carte — i.e., brokers could charge different rates for taking clients to showings, negotiating offers, drawing up contracts, etc.
It could also just revert to most sellers paying both commissions. “I think people will be saying, ‘Only show me properties where the seller is paying,’ ” says Frederick Warburg Peters, the president emeritus of Coldwell Banker Warburg. While listings can no longer advertise commission numbers, the seller can publicize that they’re willing to pay or at least open to negotiation on that front. Buyers’ agents might also try to pressure sellers’ agents into agreeing to a certain commission up front as a prerequisite of taking clients to their properties, something that would seem to run afoul of new Department of Justice rules governing broker commissions. That doesn’t mean it won’t happen, though. In fact, Brobeck told me, it already has. “It’s only been a few weeks, but there are some buyers’ agents saying to listing brokers, ‘If you don’t offer me 2.5 percent, we won’t show your house,’” he says. “I know because the listing brokers are complaining to me.”
What we really want to know is, will home prices drop?
“No, no, unequivocally no,” says Pareja, the brokerage head. While broker commissions are theoretically baked into home prices, in reality, no one I spoke with thought the new commission structure would necessarily lead to lower home prices, which are largely controlled by supply. “A seller will try to get every dollar they can,” Pareja says. In other words, sellers won’t factor in the $25,000 in broker fees they’re saving under the new rules and knock it off the price. They’ll ask for as much as they think they can get. One real-estate agent in Virginia told The Wall Street Journal that he’d recently sold three homes in Fairfax County without offering any upfront buyer’s broker commission. All sold quickly.
Will this drive some brokers out of business?
Probably. While several people in the real-estate business assured me that agents are known for their adaptability, lower commission rates will inevitably winnow out some agents, especially newer agents without the experience or track record to command higher commissions or the volume to make up for lower percentages. It may also deter some people from becoming agents. As the New York Times reported earlier this year, “Some analysts predict a mass departure” of “up to 1 million agents leaving the field as shared commissions vanish.” Historically, the number of agents has gone down with market upheavals. After the market crashed in 2008, the number of real-estate agents dipped by more than 10 percent.
How does this apply to NYC?
While most New York City brokers are not NAR members, REBNY, the real-estate trade group here, has laid out a similar set of rules, and brokerages across the country, most of which have reached settlements as the result of similar class-action lawsuits, have also implemented them.