Real Estate Agent Compensation Set for Change
Thanks to a recent agreement between the National Association of Realtors and a lawsuit, the way real estate agents are paid is about to change significantly. Instead of a standard commission, compensation will now be genuinely negotiable.
Why This Matters
This deal could introduce real competition into a market that has traditionally been tightly controlled. In a business world often stuck in old habits, these shifts may allow for a more competitive environment. Much like the internet did for stock trading, there is a possibility it might reduce fees for real estate brokers.
Potential Outcomes of the Settlement
The lawsuit, filed as a class action by sellers, should lead to lower expenses. How this impacts purchasers is somewhat more complex. Currently, sellers typically pay a commission ranging from 5% to 6% of the home's sale price. This commission is traditionally split between the agents representing the buyer and the seller.
Conflict of Interest: The customary commission split has raised concerns about potential conflicts of interest. Since the buyer’s agent is paid from the seller's commission it implies they might be representing the seller more than the buyer.
(Agents, of course, refute this notion, asserting that their reputations hinge on effectively serving their buyer clients.)
Under current NAR guidelines, sellers must disclose the commission offered to the buyer's agent on the Multiple Listing Service (MLS), the online platform where brokers list properties.
- A specific field exists for this purpose.
- While buyer’s agents have access to this figure, buyers themselves do not.
Agents might prioritize deals with higher commissions, potentially steering clients away from more suitable properties. A real estate agent's incentive to secure higher commissions can overshadow a buyer's need to find a suitable home. Should the court give the green light to this settlement, this specific field will vanish, meaning sellers can no longer guarantee a commission to buyer’s agents.
- While a seemingly minor change, the repercussions could be substantial.
Key Question: How Will Buyer Agents Get Paid?
Several possibilities exist:
The buyer could make a one-time payment.
The buyer may opt to pay the broker an hourly rate or a percentage of the sale price or forego using a broker altogether.
The real estate sector suggests sellers could still cover the buyer agent's commission. However, this would emerge as a concession during deal negotiations, and could resemble a cash credit sellers offer for maintenance or other costs. A seller may provide a cash credit to cover maintenance or other costs during a transaction.
Keep an Eye on the Funds: Future home sellers are poised to benefit significantly. When a house is sold, the beneficiaries ought to receive a larger portion of its sale price.
TD Cowen points out that online and discount brokerages, which offer lower commission rates are expected to emerge as potential beneficiaries.
According to Dallas-based real estate attorney Marty Green, a wave of "raw Realtors" should emerge.
Caveat: Uncertainty looms for first-time and budget-conscious purchasers, with concerns these buyers may have to pay for the real estate agent out of pocket, affecting their down payment and other expenses. And It means they will no longer receive a real estate agent for free. Rolling an agent’s fee into a mortgage might require regulatory changes, and whether it is possible remains uncertain.
Nevertheless, one must ask: Did buyers even receive a free agent, though?
Overall, agents widely anticipate a dip in commissions. Steve Brobeck, a senior officer at the Consumer Federation of America, estimates a potential reduction to as low as approximately 1% to 1.5% per agent on both sides.
What's Next?
Although the settlement might take effect as early as July, significant changes will not happen immediately. Brobeck, a long-time advocate for similar reforms, stated, "A truly competitive marketplace will take a long time to emerge," adding, "The industry will resist this."