If you’ve ever sold your home, then you know that the closing process can be painful – not just because of the mountain of paperwork you have to sign, but because of all the money that gets deducted from your equity check after all is said and done.
Going forward, that’s about to change! As of this summer (pending court approval), homeowners may soon only have to share a much smaller portion of the sale of their home.
However, for every force, there’s an equal and opposite force – meaning that this good news for home sellers could possibly translate into bad news for home buyers … or not depending on the circumstances. In this post, we’ll discuss what’s going on and what this might mean the next time you buy or sell a home.
How Real Estate Agents Currently Get Paid
For decades now, real estate agents have relied on a simple payment structure. When a home is sold, the party selling the house pays their agent a fee of approximately 6 percent of the sale price. For example, if your house goes for $300,000, then your agent would receive $18,000.
The seller’s agent then splits that fee 50-50 with the agent representing the party buying the house – typically 3 percent for both. This was an agreement known as “cooperative compensation”. Following our example, that would be $9,000 for each agent.
This means that there is no out-of-pocket expense to the buyers. Instead, the burden of compensation falls solely on the seller, reducing the equity they should receive once the sale is complete.
What Changed?
If the arrangement described above doesn’t sound fair, then you’re not alone. Even though that’s how it’s been for some time now, a group of homeowners decided to challenge this practice. And surprisingly, they won!
According to the Sitzer-Burnett case, the NAR (National Association of Realtors) was found to be promoting anti-competitive practices among its real estate brokerages and listing services. As a result, there was a verdict in October 2023 to pay $1.8 billion in damages.
In March of 2024 after months of negotiation, the NAR reduced this settlement down to just $418 million. However, one important stipulation was made: No more cooperative compensation.
As was argued, this arrangement is anti-competitive because it basically fixes commission rates for all agents making it nearly impossible to shop around for a better deal. Essentially, it wouldn’t matter which broker you used because they would all expect this same 6% compensation.
If the proposed settlement by the NAR is accepted, then it would prevent listing agents from posting buy-side commissions in the MLS (multiple listing service). This would mean that the seller’s agent is no longer obligated to give the buyer’s agent a commission.
How This Change Affects Everything
This seemingly small rule change will be pretty influential – for both sides of the table.
Less Out of Pocket for Sellers
If sellers are only responsible for paying their listing agent (instead of both), then it would cut the amount they have to pay by half. In our previous example, that would mean an extra $9,000 of home equity that the sellers get to keep.
More Out of Pocket for Buyers
Buyer agents aren’t going to work for free, and if the seller’s agent isn’t compensating them, then they’ll be looking to their clients for payment.
For the already cash-strapped, especially first-time homebuyers, that’s likely to be a major hurdle. It’s already tough for most people to come up with the 20 percent they need for the down payment. Asking another 3 percent to pay an agent will make it even more challenging.
At the moment, buyers cannot roll agent commissions into their mortgages. However, the industry widely expects the Federal Housing Finance Agency, overseer of mortgage giants Fannie Mae and Freddie Mac, to change those rules.
Would Home Prices Decrease?
If sellers don’t have to shell out as much to agents, does that mean they’d be more willing to accept a lower amount? Thus, wouldn’t home prices go down?
Not likely. Most sales prices are established based on comps (i.e. comparable property listings). In other words, if everyone in your neighborhood has a comparable house to you and they sold for $350,000, then why wouldn’t you? Lower brokerage fees or not, most sellers are going to be motivated to get the top dollar they can get.
How Home Buying Might Further Change
No one knows how exactly the real estate landscape will look after this rule goes into effect. However, being such a significant update, there might be some new developments take shape that we haven’t seen previously.
Here are a few possible scenarios:
- Buyer’s agents could be willing to accept less than 3 percent. To be competitive, they may possibly be willing to take 2 percent or even 1 percent.
- Even though listing a commission on the MLS would be forbidden, this wouldn’t stop seller and buyer agents from negotiating rates offline. This would keep things essentially the same as they already are.
- If the market ever swings in favor from sellers to buyers, then shoppers might be able to bake their agent’s commission into the offer. This would again make it so that the seller pays for both.
- Given the popularity of sites like Zillow or Redfin, home buyers might skip real estate agents altogether. Instead, they could use these online platforms paying a discounted commission or nothing at all.
- Alternatively, home buyers who cannot afford an agent may have no choice but to use a self-serve website. Agents could become exclusive to the wealthy.
When Do These New Rules Take Effect?
If the judge signs off on the NAR’s settlement, these changes could occur as soon as mid-July. From there, time will tell how this will all play out and who really ends up paying for who.
In the meantime, mortgage rates don’t appear to be going anywhere soon. It’s been estimated that they’ll be relatively high until at least 2025 – possibly never going back down to where they were during the COVID pandemic.
Therefore, the best thing you can do is to be prepared. Plan your budget, allow for some flexibility in your cash flow, and stash away as much on the side as you can for a solid down payment. That way, when the right opportunity strikes, you’ll be ready – no matter what the real estate commission rules work out to be.
Featured image credit: Pexels
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