Industry rules governing real estate agent commissions will change on Saturday, a shift that some experts say could ultimately lower costs for consumers buying and selling a home.
However, the changes are complicated and create uncertainty among agents, buyers and sellers who must adapt to the new system that will come into force on August 17.
Here's what you need to know.
How do commissions currently work?
Typically, at the close of escrow, the seller uses their profits to pay a 5% to 6% commission, half of which goes to their agent's brokerage and half to the buyer's agent's brokerage.
Agents get a portion of the commission paid to their brokerages.
Was there any 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 remained relatively stable for decades.
In other countries, commissions are typically half of what consumers pay in the United States, according to research by Norm Miller, professor emeritus of real estate at the University of San Diego.
In a series of antitrust lawsuits, home sellers have alleged that a major reason for the disparity is the National Association of Realtors' industry standards.
Under those rules, selling agents had to publish an offer of compensation to the buyer's agent when they listed homes on NAR-affiliated multiple listing services, or MLSs.
Real estate agents were allowed to offer zero dollars in compensation, and real estate agents have said commissions were always negotiable. But the lawsuits alleged that 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 group of real estate agents agreed to reach a settlement and make changes.
What will be different?
If you are a seller, your agent can no longer make a compensation offer to buyer brokers on the MLS.
Buyers will need to negotiate their own representative's compensation directly and sign an agreement before working with an agent that details how much their broker will be paid.
If I am a seller, does this mean I no longer need to pay commissions to the buyer's broker?
Not really. As a seller, you can always opt out of paying a commission to the buyer's agent.
However, real estate agents didn't always explain that. When they did, they often encouraged sellers to pay to ensure that buyer's agents would bring buyers to open houses.
Sellers may still want to pay commissions to the buyer's agent for the same reason and are free to do so under the new rules, as long as their agent does not advertise the listing on the MLS.
If I am a buyer, do I need to have more cash on hand to pay my broker?
Not necessarily. Although, as mentioned above, before you hire an agent, you'll need to agree on how much your broker will be paid. The seller can later agree to pay that amount, but the buyer's broker can't be compensated more than what the buyer agreed to.
Does this mean that buyers are worse off?
Maybe. Maybe not.
If sellers choose not to pay real estate agent commissions to the buyer, this could force buyers to come up with additional money to pay those fees. If they don't have it, buyers may choose not to have representation or lose the home altogether.
But in reality, buyers have always paid their agents' commission. That's because sellers typically paid buyers' agents in cash for the sale of their home, meaning the commission was built into the sales price and paid by the buyer through their mortgage.
Sellers can continue to pay commissions to real estate agents this way, because they can make a higher profit if financing the commission allows the buyer to offer more for a home than someone who pays their agent out of pocket.
Even if a seller says up front that he or she won't pay, buyers can, as a condition of their offer, say that they need a certain amount of concessions to close the deal.
For example, a buyer might offer to pay $850,000 for a home if the seller returns $30,000, which the buyer would then use to pay his or her agent and other closing costs.
Will these new rules really reduce commission rates?
Andra Ghent, a finance professor at the University of Utah, said the changes alone are unlikely to have a big effect. However, if publicity surrounding the new rules makes consumers aware that they can negotiate, commission rates could come down.
The Consumer Federation of America recommends that buyers and sellers set a goal of negotiating commissions of 2% of the sales price or less for their agents and that they carefully review all contracts that agents ask them to sign, especially documents with items already completed.
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 home for less and supply could increase as homeowners discover they don't need as much equity to make a profit.
However, any decline in house prices is likely to be small.
Ted Tozer, a fellow at the Urban Institute think tank, estimated it at about 1%.
