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The real estate industry is on the cusp of significant changes that could reshape how buyers and sellers navigate the market. A series of policy updates and legal settlements are poised to alter longstanding practices surrounding real estate agent commissions, potentially shifting costs between buyers and sellers and influencing market dynamics.
What is happening
Traditionally, when a home is sold, the seller's agent and the buyer's agent split a commission, typically between 5% to 6% of the sale price, in what's known as cooperative compensation. This practice ensures both agents receive payment for their roles in the transaction.
The recent settlement proposed by the National Association of Realtors (NAR) seeks to change this dynamic. Under the new rules, sellers' brokers will be prohibited from automatically offering to split their commission with the buyer's agent for listings on NAR-affiliated Multiple Listing Services (MLS), which host the majority of U.S. home sales. The aim is to eliminate the temptation for buyers' agents to favor listings that promise them a share of the commission, encouraging a more unbiased selection of properties.
Despite these changes, the door remains open for sellers and buyers' agents to individually agree on commission sharing outside the MLS system, potentially maintaining the status quo through a backdoor. Additionally, buyers have the option to negotiate with sellers for contributions towards their agent's fees.
Should a seller decide against covering the buyer's agent's fees, it falls to the buyer to negotiate or cover these costs directly. This requirement to manage another financial aspect of purchasing a home may present difficulties, especially for buyers with limited funds or who are stretched thin by the initial costs of buying a property, complicating their journey in the housing market.
Understanding the Changes
For decades, the cost of hiring a real estate agent, whether buying or selling a home, has followed a predictable pattern, with sellers typically bearing the commission costs for both their agent and the buyer's agent. This practice is set for a shakeup due to policy changes aimed at spurring price competition among agents and reducing sellers' financial burden. However, this shift may introduce new pressures for buyers, particularly those stretching financially to cover down payments and other upfront purchasing costs.
The inability to immediately predict the impact of these changes on home sales underscores the uncertainty facing the market. An adjustment period is anticipated as all parties involved—buyers, sellers, and agents—navigate the evolving landscape. Greg Kling, an associate professor at the University of Southern California Marshall School of Business, notes in a Fortune article that it's too soon to determine the outcomes, suggesting a wait-and-see approach to understanding the full implications.
What's Driving the Change in Real Estate Agent Commission?
A settlement between the National Association of Realtors (NAR) and plaintiffs in multiple class-action lawsuits is at the heart of these impending changes. The lawsuits argued that current commission practices artificially inflate costs for homeowners. In response, the NAR has agreed to modify its rules, prohibiting brokers from offering compensation to a buyer’s agent through MLS (Multiple Listing Services) listings and requiring clearer agreements between buyers and their agents regarding service charges.
This legal settlement, pending court approval, along with separate agreements by major real estate brokerages for more transparent commission practices, heralds a move towards a more open and competitive marketplace. Stephen Brobeck, senior fellow at the Consumer Federation of America, predicts that these changes will encourage more varied compensation models and greater commission negotiation, though it may take years for the full effects to manifest.
Implications for Homebuyers
The spotlight is on who will bear the cost of commissions under the new rules. The tradition of "cooperative compensation" could become less common, challenging buyers to negotiate agent fees directly or ask sellers for concessions. This shift could complicate financial planning for buyers, especially those with limited savings.
Yet, the flexibility in negotiations and the potential for sellers to contribute towards buyer-agent commissions could introduce new strategies for both parties. Market dynamics, such as a seller's willingness to negotiate or the competitiveness of the market, will continue to play crucial roles.
What Sellers Need to Know
Sellers might see the most immediate financial benefit from the changes in real estate agent commission, with the potential to save significantly on commission expenses. This could empower sellers to negotiate more favorable terms with their agents or to challenge the need to cover buyer-agent commissions altogether.
However, the persistence of "steering" practices—where agents favor listings that offer cooperative compensation—could pressure sellers into maintaining traditional commission structures to ensure their listings are competitive.
The Future of Real Estate Transactions
The anticipated changes may lead to a diversification of real estate business models, including the rise of discount and flat-fee brokerages. These models, which negotiate or forego buyer-agent compensation, could gain popularity among cost-conscious sellers and buyers.
The real estate industry is at a turning point, with these shifts likely to influence how agents operate, how buyers and sellers approach transactions, and the overall transparency and competitiveness of the market. As these changes unfold, staying informed and adaptable will be key for all parties involved in real estate transactions.