The real estate industry is experiencing one of its most significant shifts in decades with the introduction of new rules that alter the way real estate agents are compensated. The National Association of Realtors (NAR) reached a historic legal settlement earlier this year regarding commission structures, which will affect nearly 1.5 million members of the association. These changes are set to take effect by August 17, bringing about the most substantial changes to the industry’s commission practices in over 30 years.
Current Compensation System and New Regulations
Traditionally, in real estate transactions, the seller has been responsible for paying the commission for both their own agent and the buyer’s agent. Typically, the total commission is agreed upon at the time the home is listed, usually ranging between 5% and 6% of the sale price. The seller’s agent then splits this commission with the buyer’s agent. When a home is listed, the Multiple Listing Service (MLS) would indicate how much the seller is offering to pay the buyer’s agent.
Under the new rules, two major changes will occur. First, MLS listings will no longer disclose whether the seller is offering to pay the buyer’s agent or the amount being offered. This means that the specifics of the buyer’s agent’s compensation will not be visible in the listings. Second, buyers will be required to enter into agreements with their agents before they begin viewing homes. These agreements will detail how much the buyers will pay their agents, shifting the responsibility for negotiating the agent’s fee directly onto the buyers.
Implications for Home Prices and Agent Compensation
The new regulations do not inherently lead to a reduction in real estate agent commissions. Instead, it will be up to buyers to negotiate their fees with their agents. The actual impact on home prices will depend on how these negotiations play out. In a competitive market, if commissions are reduced, buyers might see lower home prices, or sellers might retain a larger share of the sale proceeds. The extent to which these changes influence the market will vary based on local conditions and individual negotiations.
Settlement Payouts for Sellers
If you have sold a home in the U.S. within the past decade, you may be eligible for a payout from the settlement. The settlement is expected to provide compensation to a substantial number of sellers, potentially around 50 million. Eligibility for these payouts and the process for claiming them can be found on dedicated pages providing details about the settlement.
Choosing to Use an Agent
Home buyers are not required to use a real estate agent. While nearly 90% of buyers in the year ending June 2023 opted to work with agents, some buyers might choose to navigate the home-buying process on their own or with the assistance of an attorney. The decision to use an agent depends on how much time you want to invest in searching for a home and your confidence in negotiating deals.
Costs of Hiring an Agent
If you decide to work with a real estate agent, you will need to negotiate the terms of their compensation upfront. Traditionally, buyer’s agents are paid a percentage of the sale price, usually between 2.5% and 3%. Stephen Brobeck, a senior fellow at the Consumer Federation of America, suggests that buyers should aim to pay no more than 2% of the sale price or consider agents who offer alternative pricing structures, such as flat fees or hourly rates. Buyers can also choose to sign a non-exclusive agreement, which allows them to work with multiple agents if they wish.
Touring Homes and Open Houses
The new rules require buyers to sign agreements with agents before they can tour homes. This agreement can be specific to a single home or cover multiple properties. If you are not ready to commit to an agent, you can still attend open houses, which are organized by the seller’s agent. Additionally, you can request private tours from sellers’ agents, though they will not represent your interests unless you have an agreement in place.
Payment Responsibility
As a buyer, you will be responsible for negotiating the compensation for your agent. While you can request that the seller cover this cost, you may need to adjust your offer accordingly. If the seller offers a higher commission than what you have agreed upon with your agent, you can negotiate with the seller to receive the additional amount, either by lowering the purchase price or as a concession. Conversely, if the seller offers a lower commission, you might need to renegotiate with your agent or adjust your offer.
Selling a Home and Commission Offers
For sellers, the new rules provide greater flexibility regarding whether to offer a commission to the buyer’s agent. It is important to note that it is unethical for an agent to insist that you must pay a commission or that agents will not bring buyers to your home if you do not offer one. Sellers can choose to disclose the commission amount upfront, offer concessions to buyers, or decide not to offer a commission initially. Buyers may request commission compensation in their offers, and sellers should negotiate these terms with their agents.
Handling Lower Agreements
If a buyer’s agent has agreed to a lower commission, the contract should specify how any surplus funds will be handled. This could involve returning the surplus to the buyer, using it to cover other expenses, or keeping it as part of the agent’s compensation. In cases where a buyer does not have an agent, the seller’s agent traditionally keeps the commission offered to the buyer’s agent. Sellers should discuss additional compensation with their agents in such scenarios and consider whether dual representation is permissible in their state.
Addressing Agent Misconduct
If you believe that your agent is not adhering to the new rules or engaging in unethical practices, you have several options. You can seek a new agent, report the issue to your state’s real estate commission, local Realtor associations, or the MLS. Additionally, contacting plaintiff attorneys involved in the settlement or consumer advocates might provide further recourse.
These changes represent a significant evolution in the real estate industry, bringing both opportunities and challenges. Buyers and sellers must stay informed and understand how these new rules will affect their transactions to navigate the real estate market effectively in this new landscape.