See you later, 6% commission.
For decades, real estate commissions have been somewhat standardized: Most home sellers pay a 5% to 6% commission to cover both the listing agent and the buyer's agent.
On Friday everything changed.
A historic agreement of the National Association. of Realtors paved the way for a new set of rules that will likely shake up the entire industry, affecting sellers, buyers and agents charged with pushing deals over the finish line.
The biggest rule change concerns how buyers' agents are paid. Traditionally, home sellers have paid commission to both their agent and the buyer's agent, which critics say has stifled competition and driven up home prices.
The new rule prohibits most listings from saying how much buyers' agents are paid, eliminating the assumption that sellers are responsible for paying both agents.
The other new rule requires buyers' agents to enter into written agreements with their clients, known as buyer's brokerage agreements. These agreements describe exactly what services will be provided and for how much.
The changes will come into effect in July, pending court approval, and will have significant implications for the way real estate transactions are conducted. Here's how buyers, sellers and brokers will likely be affected.
Lower fees for sellers
The most obvious conclusion is that if buyers end up paying their real estate agents instead of sellers, sellers will save a lot of money.
In February, the average home in Southern California sold for $842,997. Under the old system, where sellers paid both agents a 3% commission, they would shell out $50,580. But if they only have to pay an agent 3%, they would save $25,290.
The buyers, then, would be the ones who would pay their agent's bill. The additional expense may seem expensive, but Michael Copeland, a real estate agent in Palm Springs, said the final numbers could ultimately be the same under the new rules.
“Agents often told buyers that they didn't have to pay anything and that the services were free,” Copeland said. “But that's not necessarily true.”
Copeland said that when sellers pay a 6% commission to split between both agents, they include that number in the purchase price, so buyers end up paying more for the home and therefore pay for their own agent.
So under the new system, buyers may end up paying their broker a 3% commission, but the price of the home could be cheaper since the seller only pays for their own agent.
More flexibility for buyers
One of the biggest complaints about the previous system was that it left buyers out of the negotiation process. Sellers paid each agent about 3%, and that was it.
Lawsuits filed against the National Association. of Realtors alleged that the practice kept commissions artificially high and incentivized buyer agents to “steer” them toward properties that offered higher commission rates.
But under the new system, more buyers will negotiate directly with their own agents, not just how much they will be paid, but what services they want the agent to provide. And those expectations will be specifically outlined in buyer brokerage agreements, which are now required.
“Some buyers may simply hire an attorney and pay a fee to handle the transaction,” Copeland said. “Or they will want to hire an agent as a consultant. “Someone I can ask questions.”
In the age of the Internet, access to real estate information is at an all-time high. Buyers can know virtually anything about a home on the market: not just the bedrooms, bathrooms and square footage, but also what the home has previously sold for and what similar homes are selling for in the area.
Buyers can also receive alerts to know exactly when a home in their price range comes on the market, so some savvy buyers may opt for an agent who leaves the tour process to them but can help them review an inspection report. and present the correct documentation. in the final stages of the agreement.
If a buyer wants a solid, hands-on agent who is available 24/7, you can offer 3% or even more. If they want an agent who can handle the more technical elements of the deal, they could offer 1% or 2%.
Some buyers may try to manage the process themselves and not pay the agent anything.
“Good agents will be able to demonstrate their value,” said Compass agent Michael Khorshidi. “Agents who are not able to demonstrate their value will not benefit from this.”
New dynamics (and roles) for agents
For many agents, representing buyers can be rewarding as they can help someone find the home of their dreams, but the process often takes longer. Agents can spend weeks or months arranging tours for clients, and there is no guarantee that they will ultimately purchase a property.
For that reason, many veteran agents prefer to represent sellers. The work is often more efficient, especially in a hot market, where deals can close in days.
So if the new rules leave less guaranteed money on the table for buyer agents, those agents could try to switch sides and represent only sellers. Or if they can't make enough money representing buyers, they could leave the industry altogether, a trend already happening in Southern California's chilly post-pandemic real estate market.
Brent Chang, a luxury agent active in San Marino and Pasadena, said the new rules could lead to agents who specialize in specific types of sales.
“Just as there are agents like me who specialize in selling iconic properties, a new group of agents will emerge who specialize in helping buyers with highly competitive properties,” Chang said.
He said agents who have a proven track record of winning properties for their clients will be able to demand higher commissions.
Or your agreements may be performance-based. For example, an agent could represent you for 3%, and if they get the property for you, it will be another 3%.
“Ultimately, if the ruling leads to buyers receiving better service from their agents, then it has merit,” he said. “But I suspect it will take some time until we understand the consequences of these changes.”
