New rules for the residential property market mean that from Saturday onwards, anyone looking to buy or sell a home will encounter unfamiliar procedures and experience some confusion.
This “change in practice” stems from a 2023 legal decision regarding how real estate agents should be paid.
Traditionally, when a home sold, the seller paid a commission of roughly 5% to 6% that was split between the buyer’s and seller’s agents. This structure, the lawsuit alleges, kept commissions higher than normal. It also required the seller to pay a commission to the agent representing the other side of the transaction, a practice many observers considered improper.
“A lot of the industry just doesn’t make common sense,” said Steven Brobeck, a senior fellow at the Consumer Federation of America, which has advocated for real estate commission reform for decades. “The main argument is that it’s unfair for sellers to pay both the listing agent and the buyer’s agent.”
Going forward, sellers will have to decide whether to pay a buyer’s agent and, if so, how much. Whatever they decide, their information will no longer be included in what’s known as the “Multiple Listing Service,” or MLS, the official real estate data service used by local real estate associations.
However, a seller’s decision about compensation may be communicated privately via phone call or text message, or promoted on social media, lawn signs, or other informal means.
On the other hand, a buyer must sign a contract with his agent before he can start viewing properties. The buyer and agent must agree and state in writing the amount the agent can expect to receive from the buyer.
There’s some latitude as to what that means specifically: A recent explanation of the rules from the National Association of Realtors states it “must be objective (e.g., $0, X flat fee, X percent, X hourly rate) and open-ended (e.g., cannot be ‘Buyer’s broker’s compensation shall be the amount offered by the seller to the buyer.’)”
“Any time we have an opportunity to talk with the consumer about the value we bring to the transaction, the services we can provide in what is likely one of the largest financial transactions of their life, and the compensation we can expect to receive for it – which is fully negotiable – that’s a good thing,” said Kevin Sears, president of the National Association of Realtors.
The group is a powerful lobbying group in Washington with more than 1.5 million member real estate agents, accounting for about 85 percent of the country’s real estate agents.
“The more knowledgeable the consumer is, the more empowered they are, the more conversations we have with them, the better the outcome for everyone,” Sears said.
Many elements of the new practice will be familiar to many real estate agents, buyers, and sellers. Many states have long required buyers to sign a brokerage agreement before starting the process. With the rise of alternative brokerage models such as Redfin, many homeowners are finding that there are options beyond the typical formula of paying 3% to the seller’s agent and 3% to the buyer’s agent.
But questions are plaguing real estate agents across the country about what this change means in practice. What if a buyer has the money to pay an agent up to a certain amount, but falls in love with a home that costs so much that the agent’s commission isn’t enough? Conversely, what if it turns out that the seller of a particular home is also willing to pay the buyer’s agent?
Many real estate agents say a process meant to bring transparency is only creating more confusion.
“Now, buyer’s agents have to contact every property they show to figure out what their commission will be,” said Aaron Farmer, owner of Texas Discount Realty in Austin.
In Austin, where the pandemic has upended a booming market and left unsold inventory piling up, Farmer thinks it makes sense that sellers would want to compensate buyers’ agents to help close a deal. But that’s not the case everywhere, and Farmer worries that egos could get in the way of smart business decisions in some deals.
Andy DeFelice, owner of Exclusive Buyers Realty in Savannah, Georgia, believes first-time homebuyers will be the ones hurt the most by the rule change, as many of them already in financial difficulty will struggle to come up with agent fees and may have to negotiate on their own, DeFelice said.
“You should never force a client into the biggest transaction of their life without an agent,” DeFelice said. “If you’ve never done it before, it’s not easy. There are so many steps to buying a home. Do you know a good termite inspector, a good insurance agent, a good lender? There are so many aspects to the transaction.”
While DeFelice is confident the industry will get over the “temporary issue” of the Saturday deadline and adapt relatively quickly, some see bigger changes ahead.
“For consumers, things aren’t going to change dramatically in the near future,” Brobeck told USA Today, “but it’s like a dam has burst. I’m pretty confident that within five years the industry will look very different.”
Farmer of Texas Discount Realty agreed.
“You’re already seeing a lot of people saying, ‘I’m getting out of the industry, I don’t want to deal with the change,'” he said. “My view has always been that fewer agents would be good for the industry, because it would allow for lower commission rates and higher volumes.”
Andrea Riquier covers the housing market.