By Franklin Schneider
Wealth of Geeks
A settlement in a high-profile lawsuit accusing the National Association of Realtors (NAR) of fixing real estate commission stands to shake up the way commission is paid — and by whom.
The settlement, which requires the NAR to pay $418 million in damages, also includes a rule that forbids sellers from offering a buyer’s agent commission in home listings. This eliminates the longstanding convention of the home seller expected to pay both the listing agent’s commission and the buyer’s agent’s commission.
Going forward, sellers will pay only their listing agent, while buyers will pay their agent out of pocket. In the face of high home prices and mortgage rates, experts expect some buyers to forgo an agent entirely — or use a discount broker.
It’s unclear how this will affect home prices or the number of home sales. What is clear is that some will benefit from this new commission landscape, while others could be at a disadvantage.
• Winner: Home sellers
This monumental ruling gives buyers the upper hand. Previously, sellers paid 3% of the final sale price to the buyer’s agent and an additional 3% to their own agent. The settlement eliminates any obligation to the buyer’s agent.
Steven Brobeck, a senior fellow at the Consumer Federation of America, spoke on the newfound flexibility. “Given all the news coverage on the issue, I expect sellers will try harder to negotiate lower commission from listing agents.”
• Winner: Discount brokers
Discount brokers fare better following the settlement. Many house hunters, especially first-time buyers, find it challenging to pay a 3% commission fee alongside substantial down payments and other closing costs. As a result, flat-fee and discount brokerages stand to become more popular as buyers look for alternatives to full-commission agents.
Companies that offer homebuyer rebates or full-service buyer’s agent packages for a flat fee will entice consumers, especially if they already have an extensive network of experienced agents.
• Winner: Dual agents
This ruling may give rise to other, more unconventional arrangements. Dual agency, when a single agent represents the buyer and seller in a transaction, is generally frowned upon as it can facilitate unethical behavior.
However, a Consumer Federation of America study found that dual agency increased following the secession of several Brooklyn firms from the NAR and, subsequently, the organization’s commission requirements. The research found that around 46% of transactions in the breakaway listing service involved dual agents. Conversely, they comprised only 3% to 15% of sales in other markets.
In a market where commission is no longer unnaturally inflated, dual agents have less incentive to unethically play buyers and sellers off each other.
• Winner: Lenders
Beneficiaries of post-settlement rules could also include lenders. Presently, strict rules forbid buyers from rolling real estate commissions into most mortgages, but industry experts expect that will soon change. Buyers’ newfound ability to finance real estate commissions may lead to higher mortgages and increased lender profits.
• Winner: Real estate attorneys
Real estate attorneys could see an uptick in business from buyers who don’t want to pay for a full-service agent but still need professional guidance. Buyers who skip the agent may hire an attorney to review their purchase agreement and guide them through closing. Some states already require buyers to consult with a real estate attorney.
• Loser: Part-time agents
The post-settlement commission landscape will likely negatively influence novice and part-time agents. Industry analysts report existing real estate agent oversaturation, as prospective agents need only a few classes and a passed exam to enter the field.
A small portion of agents are responsible for selling many of the 5 million homes sold yearly in the U.S.; many part-time agents sell only one or two properties yearly. The number of agents, compounded by the industry’s competitive nature, drives additional pressure to maintain high commission rates.
Brobeck suggests that lower commission rates wouldn’t be worth the effort the career requires and may convince many existing agents to flee the field. Industry experts agree. They expect hundreds of thousands to leave the profession once commission rates come down. The winnowing of agents will leave mostly full-time, experienced agents, the best of whom may be able to negotiate higher commissions for themselves.
• Loser: Homebuyers
With buyers already struggling to juggle exorbitant interest rates and expensive home prices, a 1% to 3% commission fee on top of their other expenses might push a home purchase out of reach.
Buyers might be able to negotiate for the seller to pay their agent’s commission, but most sellers will likely decline. Until regulators change the rules to allow buyers to roll commission costs into their mortgage, most buyers will have to save extra cash to pay their buyer’s agent or delay their home purchase.
A settlement in a high-profile lawsuit accusing the National Association of Realtors (NAR) of fixing real estate commission stands to shake up the way commission is paid — and by whom.
The settlement, which requires the NAR to pay $418 million in damages, also includes a rule that forbids sellers from offering a buyer’s agent commission in home listings. This eliminates the longstanding convention of the home seller expected to pay both the listing agent’s commission and the buyer’s agent’s commission.
Going forward, sellers will pay only their listing agent, while buyers will pay their agent out of pocket. In the face of high home prices and mortgage rates, experts expect some buyers to forgo an agent entirely — or use a discount broker.
It’s unclear how this will affect home prices or the number of home sales. What is clear is that some will benefit from this new commission landscape, while others could be at a disadvantage.
• Winner: Home sellers
This monumental ruling gives buyers the upper hand. Previously, sellers paid 3% of the final sale price to the buyer’s agent and an additional 3% to their own agent. The settlement eliminates any obligation to the buyer’s agent.
Steven Brobeck, a senior fellow at the Consumer Federation of America, spoke on the newfound flexibility. “Given all the news coverage on the issue, I expect sellers will try harder to negotiate lower commission from listing agents.”
• Winner: Discount brokers
Discount brokers fare better following the settlement. Many house hunters, especially first-time buyers, find it challenging to pay a 3% commission fee alongside substantial down payments and other closing costs. As a result, flat-fee and discount brokerages stand to become more popular as buyers look for alternatives to full-commission agents.
Companies that offer homebuyer rebates or full-service buyer’s agent packages for a flat fee will entice consumers, especially if they already have an extensive network of experienced agents.
• Winner: Dual agents
This ruling may give rise to other, more unconventional arrangements. Dual agency, when a single agent represents the buyer and seller in a transaction, is generally frowned upon as it can facilitate unethical behavior.
However, a Consumer Federation of America study found that dual agency increased following the secession of several Brooklyn firms from the NAR and, subsequently, the organization’s commission requirements. The research found that around 46% of transactions in the breakaway listing service involved dual agents. Conversely, they comprised only 3% to 15% of sales in other markets.
In a market where commission is no longer unnaturally inflated, dual agents have less incentive to unethically play buyers and sellers off each other.
• Winner: Lenders
Beneficiaries of post-settlement rules could also include lenders. Presently, strict rules forbid buyers from rolling real estate commissions into most mortgages, but industry experts expect that will soon change. Buyers’ newfound ability to finance real estate commissions may lead to higher mortgages and increased lender profits.
• Winner: Real estate attorneys
Real estate attorneys could see an uptick in business from buyers who don’t want to pay for a full-service agent but still need professional guidance. Buyers who skip the agent may hire an attorney to review their purchase agreement and guide them through closing. Some states already require buyers to consult with a real estate attorney.
• Loser: Part-time agents
The post-settlement commission landscape will likely negatively influence novice and part-time agents. Industry analysts report existing real estate agent oversaturation, as prospective agents need only a few classes and a passed exam to enter the field.
A small portion of agents are responsible for selling many of the 5 million homes sold yearly in the U.S.; many part-time agents sell only one or two properties yearly. The number of agents, compounded by the industry’s competitive nature, drives additional pressure to maintain high commission rates.
Brobeck suggests that lower commission rates wouldn’t be worth the effort the career requires and may convince many existing agents to flee the field. Industry experts agree. They expect hundreds of thousands to leave the profession once commission rates come down. The winnowing of agents will leave mostly full-time, experienced agents, the best of whom may be able to negotiate higher commissions for themselves.
• Loser: Homebuyers
With buyers already struggling to juggle exorbitant interest rates and expensive home prices, a 1% to 3% commission fee on top of their other expenses might push a home purchase out of reach.
Buyers might be able to negotiate for the seller to pay their agent’s commission, but most sellers will likely decline. Until regulators change the rules to allow buyers to roll commission costs into their mortgage, most buyers will have to save extra cash to pay their buyer’s agent or delay their home purchase.
