On Saturday, industry rules governing real estate agent commissions will change — a shift some experts say could ultimately lower costs for consumers buying and selling a home.
However, the changes are complicated and creating uncertainty among agents, buyers and sellers who must all adjust to the new system effective Aug. 17.
Here’s what you need to know.
How do commissions currently work?
Typically, at the close of escrow, a seller uses their proceeds to pay a 5% to 6% commission, with half going toward their agent’s brokerage and half going to the buyer agent’s brokerage.
Agents get a share of the commission paid to their brokerages.
Was there a problem with that system?
Some observers say yes. Today, buyers can easily find homes for sale online and don’t need an agent to tell them about potential open houses. Yet, commission rates have stayed relatively steady for decades.
In other countries, commissions are often half what consumers pay in the United States, according to research from Norm Miller, emeritus professor of real estate at the University of San Diego.
In a series of antitrust lawsuits, home sellers have alleged a major reason for the disparity are industry rules from the National Assn. of Realtors.
Under those rules, seller agents had to publish an offer of compensation to the buyer’s broker when listing homes on NAR-affiliated multiple listing services, or the MLS.
Listing agents could offer zero dollars in the compensation field and the Realtors have said commissions were always negotiable. But the lawsuits alleged the requirement to post an offer reduced competition and kept commission rates artificially high. In large part this was because buyer’s agents “steered” their clients to homes that offered higher commission rates, according to the lawsuits.
In March, the Realtor group agreed to settle and make changes.
What will be different?
If you are a seller, your agent can no longer make an offer of compensation to buyer brokers on the MLS.
Buyers will need to directly negotiate their own representative’s compensation and sign an agreement before working with an agent detailing how much their broker will be paid.
If I am a seller does this mean I don’t need to pay buyer broker commissions now?
Not really. As a seller, you always could choose not to pay commission to the buyer’s broker.
However, listing agents didn’t always explain that. When they did, they often encouraged sellers to pay to ensure buyer’s agents would bring buyers to open houses.
Sellers may still want to pay buyer broker commissions for the same reason and they are free to do so under the new rules — as long as their agent doesn’t advertise the offer on the MLS.
If I am a buyer, do I need more cash on hand to pay my broker?
Not necessarily. Though as mentioned earlier, before getting an agent you will need to agree how much your broker will get paid. A seller can later agree to pay that amount, but the buyer broker can’t be compensated above what the buyer agreed to.
Does this mean buyers are worse off?
Maybe. Maybe not.
If sellers decide to not pay buyer broker commissions, it could force buyers to come up with additional cash to pay those fees. If they don’t have it, buyers may choose to go without representation or lose the home all together.
But, in reality, buyers have always paid for their broker’s commission. That’s because sellers typically paid buyer brokers through cash from their home sale — meaning the fee was baked into the sale price and paid by the buyer through their mortgage.
Sellers may continue to pay buyer broker commissions in this way, because they may be able to net a bigger profit if financing the commission allows a buyer to offer more for a home than someone paying their agent out of their pocket.
Even if a seller upfront says they won’t pay, buyers can, as a condition of their offer, say they need a certain amount of concessions to close the deal.
For example, a buyer can offer to pay $850,000 for a house if the seller gives them $30,000 back, which the buyer would then use to pay their agent and other closing costs.
Will these new rules actually bring down commission rates?
Andra Ghent, a professor of finance at the University of Utah, said the changes on their own aren’t likely to have much of an effect. However, if the publicity surrounding the new rules makes consumers aware they can negotiate, commission rates may fall.
The Consumer Federation of America recommends buyers and sellers each set a goal of negotiating commissions of 2% of the sales price or less for their brokers and carefully review all contracts agents ask them to sign, especially documents with items already filled in.
If commission rates fall, some experts say home prices could decline as well.
For example, if sellers pay less in commission, they may be willing to part with their house for less and supply could increase as homeowners find they don’t need as much equity to turn a profit.
Any home price decline, however, is likely to be small.
Ted Tozer, a fellow with the Urban Institute think tank, pegged it at about 1%.
