A “For Sale” sign stands in front of a single-family home for sale in southeast Denver on Wednesday, May 22, 2024. AP Photo
LOS ANGELES (AP) — If you’re thinking about buying a home with the help of a real estate agent, you can no longer assume that the seller will pay the agent’s commission.
Home sellers have traditionally offered a flat commission to the buyer’s agent when they put their home on the market, but that will no longer be allowed starting this weekend as several changes to U.S. real estate industry practices take effect.
A home buyer can still try to negotiate such an offer with the seller, but if the seller refuses, the home buyer is left with the cost of their agent’s services.
The US real estate association National Association of Realtors is behind the policy changes. They are based on a $418 million settlement that the association reached earlier this year in a class action lawsuit in a US state. The lawsuit alleged that homeowners in the US were forced to pay artificially inflated broker commissions when selling their homes.
Companies behind several major real estate brokerage brands, including Keller Williams, Anywhere Real Estate, HomeServices of America, Re/Max and Redfin, also agreed to pay millions and make policy changes to avoid lawsuits from home sellers.
The new rules, which take effect nationwide on Saturday, apply to brokers and agents who represent clients seeking to buy or sell a home listed on a NAR-affiliated multiple listing service (MLS).
Essentially, there are two major changes: Flat-rate offers for compensation on behalf of sellers to buyers’ agents will no longer be included in listings posted on the MLS, although they can still be made through other means. And home buyers will be required to sign detailed representation agreements when using an agent.
It remains to be seen whether the policy revision will result in lower broker commissions or fewer sellers choosing not to offer to cover the buyer’s broker fees.
But the changes are likely to have the biggest impact on homebuyers – especially first-time buyers who are already facing high mortgage rates, a shortage of properties on the market and record-high home prices. They must now factor in the cost of using an agent if the seller is unwilling to take it on.
“This will negatively impact the buyer’s ability to purchase a home, and therefore there will be some large-scale changes in the buying process,” said Bret Weinstein, CEO of Guide Real Estate, a brokerage in Denver.
Homebuyer representation agreements
Property buyers who want to work with an agent must first sign a contract that details the services the agent will provide and the amount of compensation. Among other things, it regulates whether the commission will be shared with the seller’s agent.
Generally, an agent representing a buyer receives a commission of about 2.5 to 3 percent based on the purchase price of the home. Agents pass a portion of their commission on to their brokerage firm.
Similar buyer representation agreements are already required in about 20 states. However, the new rules require buyer agreements to be completed before an agent begins working on behalf of a client. This also applies before the agent tours a home with a buyer, whether in person or virtually. A buyer can still go to an open house without signing a representation agreement.
“The big change now is that we have to ask the buyer to commit to us early and engage us early in the process,” said Andrea Ratcliff, a Redfin agent in Indianapolis, where the policy changes were implemented on July 1.
She said one property buyer was put off by the changes and the prospect of having to pay the estate agent’s fees.
“They were definitely not willing to engage with me – they were not willing to engage with any agent because they were not willing to bear those costs,” Ratcliff said.
Removing Buyer-Agent Compensation Offers from Real Estate Listings
Traditionally, a buyer’s agent’s commission was paid by the seller. Agents who work with homeowners to market and sell their home list the property on an MLS and indicate how much their client wants to pay the buyer’s agent. This practice is called offering a “cooperative compensation” deal. It involves a seller agreeing up front to offer a commission on the sale of their home that is split between their agent and the buyer’s agent. It’s usually about 2.5% to 3% between the two.
The home sellers behind the lawsuits against the NAR and others argued that the sellers had no choice but to offer to cover the buyer’s agent’s compensation to ensure their listing was shown to as many potential buyers as possible.
To solve this problem, homes listed on an MLS will no longer have a seller’s offer to cover the cost of a buyer’s agent’s services. However, buyers will still be allowed to advertise their homes virtually anywhere else, such as on the agent’s website, in an ad at an open house, or in direct communication with an agent representing a prospective home buyer.
While sellers can still choose to pay the buyer’s agent’s fee, they do so without the pressure of having to make a flat-rate public offer on the MLS. Some may choose to pocket the savings and only pay their own agent’s commission.
“If there isn’t a clear offer of cooperative compensation from the seller through their agent to the buyer’s agent, then it’s going to be part of the negotiations,” said Kevin Sears, president of the National Association of Realtors. “I think that’s going to change in the market.”
What does this mean for buyers and sellers?
How the industry policy changes affect buyers and sellers will depend largely on the situation of the local real estate market.
In a slow real estate market, where homes take longer to sell and sellers need to lower their prices, it’s more likely that a buyer can negotiate with the seller to cover the realtor’s commission. In a hotter market, where homes are selling quickly and multiple offers are coming in, sellers have the option to accept an offer from a buyer who doesn’t require them to cover the realtor’s fees.
While pre-owned home sales in the U.S. have been declining since 2022, years of underbuilding and other factors have kept the inventory of homes for sale at near historic lows. That has driven up prices and fueled multiple offers for many homes, giving sellers a clear advantage in most markets.
Nevertheless, real estate agents believe that sellers should continue to offer to cover the buyer’s brokerage commission.
“We have made the point that it would be wise for sellers to continue to be willing to cover some or all of the buyer’s costs, because the last thing you want to do when selling a property is to make it complicated for others or limit the number of buyers,” said Alex McEwen, associate broker at Selling Utah in Orem, Utah.
Homebuyers must be prepared for the possibility that the seller will not cover the agent’s fees. Those who cannot afford this may need to agree with their agent to only pursue listings where the seller offers the buyer an agent’s fee.
Will commissions decrease?
It is unclear whether the policy changes will encourage sellers or buyers to negotiate lower brokerage commissions, or whether they will be successful in doing so.
Realtor commissions have dropped somewhat this year: According to an analysis by Redfin, the average realtor commission nationwide fell from 2.62% at the beginning of the year to 2.55% through July 14. But as home prices have continued to rise this year, the average realtor commission has increased about 1.7% in dollar terms since January, to $15,377.
Stephen Brobeck, senior fellow at the Consumer Federation of America, expects more sellers to feel encouraged to negotiate with their agent to reduce their commission by at least half a percentage point.
“That represents a very large sum of money in the real estate market over the course of a year,” he said.
