The recent $1.8 billion verdict against the National Association of Realtors and several brokerages may change the way Americans purchase and sell homes.
A jury in the case found that these groups conspired together and used NAR rules to artificially increase real estate commissions, which caused home sellers to pay excessive fees.
The outcome of the court case will have a direct impact on real estate planning for both prospective buyers and sellers. While many sellers would be happy to see a change that allows them to avoid paying extra commissions, in reality the benefits may not be as obvious as they seem in theory. Some experts believe that the changes will have new disadvantages for both buyers and sellers.
Commissions Work Now
In the current commission system, the NAR’s rule on buyer-brokers requires that the home seller pay a commission both to their agent as well as to the buyer’s representative. Sellers were not allowed to list a property in the database called the Multiple Listing Service, or MLS without paying a commission to the buyer’s agent.
This system has two underlying principles. The first is that offering a commission to buyer’s agents as an incentive to bring their clients into a property will increase the number of eyes on it and drive the price up through the competition among buyers. The seller should pay the commission, as it is primarily in their interest.
The second principle is that requiring home buyers to pay for their own agents would add another financial obstacle to the experience of buying a home. This could reduce the pool and number of potential buyers, which in turn may lead to lower home prices through a reduced demand.
But discontent with this system has been growing for years. According to a 2023 study the biggest regret of recent home sellers is that they paid too many realtor commissions.
The same researchers discovered that 90% of home sellers stated that avoiding high commissions is a top priority. The numbers reveal how strongly U.S. home sellers dislike the current system. Around 55% of US sellers believe they should not have to pay any commission to the buyer’s agents. 31% of homeowners are willing to accept a lower offer than market value to avoid paying realtor commissions.
Potential Commission Changes
Some analysts believe that the commission paid by the buyer’s representative could fall from about 3% down to 1%. The analysts also claim that the number of real estate agents may decrease, from around 1.6 million to 300,000. Some agents believe that this is a long overdue correction.
The barrier to entry for becoming an agent is very low. This has led to an overabundance of inept actors who are only interested in a paycheck.
What could this mean for sellers?
The changes to commissions will have a dramatic impact on sellers. Some changes are obvious and some not so obvious.
Lower commission
Sellers’ commissions are essentially cut in half if they no longer pay for the buyer agent on top of their listing agent.
As it currently stands, the average home price in the U.S. is approximately $346,000 and the average total commission is 5.49%. Listing agents receive 2.83% and buyer’s agents receive 2.66% of the total commission. On average, the seller who uncouples from the buyer’s agents could save $9,220. Of course, sellers who use a 1 Percent Lists franchise to list their home already save thousands in commission.
Reduced home prices
In the opposite direction, prices of homes may fall. Some buyers may decide to stay out of the real estate market due to the cost of paying an agent, which could lower prices and soften demand.
One possibility is that in markets with some buyer leverage, the first thing they will negotiate is for the seller’s agent to pay their commission. This would bring us back to the beginning.
Buyers could potentially negotiate lower, knowing that they would have to pay a commission to their buyer agent. And so, sellers get the same price or even less.
It is important to note that, from a legal perspective, it would be a part of the agreement, rather than something mandatory.
What could this mean for buyers?
In the end, it is buyers who part with a large amount of money, or even all of it, in a real-estate transaction. In 2024, the introduction of new costs may change the calculations for potential home buyers.
The buyer may have to pay their agent out of pocket
The responsibility for the payment of the commission to the buyer’s representative would then fall to the buyers.
As mentioned, some buyers could negotiate an agreement where the seller would cover the buyer’s agent’s commission – just like some buyers can now negotiate with the seller to pay for other closing costs. In a sellers’ market, the seller could stand firm and let the buyer pay for the agent.
A 2.6% surcharge could be difficult to accept in a market with skyrocketing home prices. Some buyers may conduct their search for a home without the help of an agent, and run the risk of being scammed. A good buyer’s representative can negotiate a discount of 5% on the home price. That makes the 2.6% commission look like a bargain.
Buyer’s agent could offer a revised menu of services
It’s important to consider how the buyer’s agent will be compensated once the commission has been decoupled. Will they charge a fee up front? Will they charge a rate per hour or per showing? Some people have suggested that the buyer could include the commission in their mortgage. However, this would require a law change. Bundling commissions into mortgages would violate the law prohibiting kickbacks to agents from mortgage lenders.
Buyer’s agents may decide to offer a “la carte” menu of service options. Buyer’s agents could charge different fees for showings and negotiations and help with closing.
The industry has faced legal challenges before. The commission system may change its terminology, but remain largely the same.
Listing agents, for example, may pay the buyer agent a “referral” fee of 3% for bringing a buyer to a property. The requirement that sellers pay commissions is likely to disappear, but the incentives that helped create the current system continue to influence the way that stakeholders approach home sales.