For decades, real estate commissions have been somewhat standardized, with most home sellers paying 5% to 6% commission to cover both the listing agent and the buyer’s agent.
On Friday, everything changed.
A landmark agreement from the National Assn. of Realtors paved the way for a new set of rules that will probably shake up the entire industry, affecting sellers, buyers and the agents tasked with pushing deals across the finish line.
The most pivotal rule change pertains to how buyers’ agents are paid. Traditionally, home sellers have paid the commission of both their agent and the buyer’s agent, which critics argue stifled competition and drove up home prices.
AdvertisementThe new rule prohibits most listings from saying how much buyers’ agents are paid, removing the assumption that sellers are on the hook for paying both agents.
The other new rule requires buyers’ agents to enter into written agreements with their clients, known as buyer brokerage agreements. These agreements outline exactly what services will be provided — and for how much.
The changes will take effect in July, pending court approval, and will have major implications on how real estate deals are done. Here’s how buyers, sellers and brokers will probably be affected.
AdvertisementThe most obvious takeaway is that if buyers end up paying for their real estate agents instead of sellers, sellers are set to save a lot of money.
In February, the average Southern California home sold for $842,997. Under the old system, in which sellers pay both agents’ commissions, they’d shell out $50,580. But if they only have to pay one agent 3%, they’d save $25,290.
AdvertisementBuyers, then, would be the ones footing the bill for their agent. The added expense might seem pricey, but Michael Copeland, a real estate agent in Palm Springs, said the final numbers might ultimately shake out the same under the new rules.
“Buyers were often told by their agents that they didn’t have to pay anything and that services were free,” Copeland said. “But that’s not necessarily true.”
Copeland said when sellers pay a 6% commission to split between both agents, they pad that number into the purchase price, so buyers actually end up paying more for the home, and thus, pay for their own agent.
So under the new system, buyers may end up paying their broker 3% commission, but the price of the home might be cheaper since the seller is only paying for their own agent.
One of the biggest complaints about the current system was that it left buyers out of the negotiation process. Sellers paid each agent’s brokerage 3% or so, and that was that.
AdvertisementLawsuits filed against the National Assn. of Realtors alleged that the practice kept commissions artificially high and incentivized buyers’ agents to “steer” them toward properties that offered them higher commission rates.
But under the new system, more buyers will be negotiating directly with their own agents — not just how much they’ll pay them, but what services they want the agent to provide. And those expectations will be specifically outlined in the buyer brokerage agreements, which are now required.
“Some buyers may just hire an attorney and pay a fee to handle the transaction,” Copeland said. “Or they’ll want to hire an agent as a consultant. Someone they can ask questions.”
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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 bedrooms, bathrooms and square footage, but also the home’s previous sale price and the asking prices for similar homes in the area.
Buyers can also receive alerts to know exactly when a house in their price range hits the market, so some savvy shoppers might opt for an agent who leaves the touring process to them, but can help them look over an inspection report and file the right paperwork in the closing stages of the deal.
If a buyer wants a robust, hands-on agent who’s available 24/7, they can offer 3% or even more. If they want an agent who can just handle the more technical elements of the deal, they could offer 1% or 2%.
AdvertisementSome buyers might try to handle the process themselves and not pay an agent at all.
“Good agents will be able to show their value,” said Compass agent Michael Khorshidi. “Agents who aren’t able to show their value won’t benefit from this.”
For many agents, representing buyers can be rewarding since they get to help someone find their dream home, but the process is often more time-intensive. Agents might spend weeks or months setting up tours for clients, and there’s no guarantee that they’ll even buy a property in the end.
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 buyers’ agents, those agents might try to switch sides and only represent sellers. Or if they’re not able to make enough money representing buyers, they might exit the industry altogether — a trend that’s already taking place in Southern California’s cold 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 landmark properties, a new group of agents will emerge who specialize in helping buyers with highly competitive properties,” Chang said.
AdvertisementHe said agents who have a proven track record of winning properties for their clients will be able to demand higher commissions.
Or their deals can be performance-based. For example, an agent could represent you for 3%, and if they get the property for you, it’s 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’ll be a while until we understand the consequences of these changes.”
