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Changes to Real Estate Agent Commission Rules Could Benefit Home Buyers and Sellers
Starting this Saturday, significant changes in industry rules governing real estate agent commissions will take effect, a move that some experts believe could reduce costs for consumers buying and selling homes.
However, the new rules are complex and have created uncertainty among agents, buyers, and sellers who must all adapt to the new system, which takes effect on August 17.
Current Commission Structure
Under the existing system, when a property is sold, the seller typically pays a commission of 5% to 6% of the sale price. This commission is split equally between the seller’s agent’s brokerage and the buyer’s agent’s brokerage. Each agent then receives a portion of the commission paid to their respective brokerage.
Issues with the Current System
Critics argue that the current commission structure is outdated. Despite the ease with which buyers can now find homes online, commission rates have remained steady for decades. Research from Norm Miller, emeritus professor of real estate at the University of San Diego, indicates that commissions in the United States are often double those in other countries.
A series of antitrust lawsuits have claimed that industry rules from the National Association of Realtors (NAR) contribute to this disparity. These rules required seller agents to offer compensation to the buyer’s broker when listing homes on NAR-affiliated multiple listing services (MLS). Although listing agents could technically offer zero dollars, the lawsuits argued that the requirement to post an offer kept commission rates artificially high. This was allegedly due to buyer’s agents steering clients toward homes with higher commission offers.
In March, the NAR agreed to settle these lawsuits and implement changes.
What’s Changing?
Under the new rules, seller agents can no longer make an offer of compensation to buyer brokers on the MLS. Instead, buyers will need to directly negotiate their representative’s compensation and sign an agreement detailing how much their broker will be paid before working with an agent.
Implications for Sellers
Sellers still have the option to pay commissions to buyer brokers, but their agents can no longer advertise this offer on the MLS. While sellers are not required to pay buyer broker commissions, they may choose to do so to ensure buyer’s agents bring clients to view their property.
Implications for Buyers
Buyers will need to negotiate and agree on their broker’s compensation upfront. While sellers can still agree to cover this cost, they cannot pay more than what the buyer has agreed to. This might mean buyers need more cash on hand to cover these fees, but they can also negotiate for concessions from the seller to cover their agent’s commission.
Potential Impact on Buyers and Sellers
The new rules could potentially disadvantage buyers who may need to find additional cash for their broker’s fees if sellers choose not to pay these commissions. However, since buyers have always indirectly paid for their broker’s commission through the sale price of the home, the actual impact may be minimal.
Sellers might continue to cover buyer broker commissions to facilitate higher offers from buyers who can finance these costs as part of their mortgage.
Will Commission Rates Drop?
Andra Ghent, a finance professor at the University of Utah, suggests that the changes alone may not significantly impact commission rates. However, increased awareness of the ability to negotiate could lead to lower rates. The Consumer Federation of America advises buyers and sellers to aim for commissions of 2% or less and to scrutinize all agent contracts.
Potential Effects on Home Prices
If commission rates fall, home prices might decline slightly. Lower commissions could mean sellers are willing to accept lower offers, potentially increasing housing supply as homeowners find they need less equity to profit. Ted Tozer, a fellow at the Urban Institute, estimates any decline in home prices would likely be around 1%.
As these new rules take effect, the real estate market will closely watch how they influence commission rates and overall housing costs, potentially offering savings for both buyers and sellers in the long run.
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SOURCE: LA TIMES