A recent $1.8 billion verdict against the National Association of Realtors (NAR) and several brokerages could change how Americans buy and sell homes.
In the case, a jury found those groups conspired to artificially inflate real estate commissions through NAR rules that caused home sellers to pay excessive fees.
Although many sellers would welcome changes that free them from paying extra commissions, the benefits of industry changes might not be as clear-cut in practice as they sound in theory. Also, some experts maintain that changes would lead to new drawbacks for sellers and buyers alike.
How Commission Works Now
The commission system in place now through NAR’s buyer-broker rule requires the home seller to pay a commission to both their agent and the buyer’s agent. Sellers weren’t allowed to list their property on the database known as the Multiple Listing Service (MLS) without offering a commission to buyer’s agents.
The logic behind this system is twofold. First, offering a commission as an incentive for buyer’s agents to bring their clients to a home will get more eyes on the property and drive up the price through competition between buyers. Since this primarily benefits the seller, the thinking goes, they should be the ones to pay the commission.
Second, requiring buyers to pay their own agent adds another significant financial hurdle to the home-buying experience and would likely reduce the pool of prospective buyers — which could, in turn, lead to reduced home prices via lower demand.
Discontent over this system, however, has been building for years. According to A 2023 Clever Real Estate survey, the top regret among recent home sellers was that they paid too much toward realtor commissions.
The same researchers found that 91% of home sellers said avoiding high commissions was a priority. Digging into the numbers reveals just how strong an aversion U.S. sellers feel toward the existing system. About 55% of sellers think they shouldn’t have to pay the buyer’s agent’s commission, and 31% of homeowners would accept an offer lower than market value if it meant not having to pay realtor commissions.
How Commissions Could Change
Once commissions are “decoupled” — meaning that sellers and buyers will each be responsible for paying their own agent. According to the Houston Chronicle, some analysts think the typical commission paid to the buyer’s agent could drop from about 3% to 1%. They also say that the pool of real estate agents could decrease from about 1.6 million today to only 300,000 to 600,000. Some agents even think this is an overdue correction.
“The barrier of entry to being an agent is extremely low, glutting the industry with inept actors focused only on a paycheck,” explains Cindi Hagley, a Realtor based in the San Francisco Bay Area.
How Could This Affect Sellers?
These changes in how commission works could translate to dramatic changes for sellers — some obvious, and others not.
Lower Commission
If sellers no longer have to pay the buyer’s agent in addition to their listing agent, their commission has basically been slashed in half.
The average U.S. home value is $346,653, and the average total U.S. commission is 5.49%, with listing agents receiving 2.83% of that, and buyer’s agents receiving 2.66%. So, on the average sale, a post-uncoupling seller could save around $9,220 by not paying the buyer’s agent.
Lower Home Prices
Conversely, home prices may drop. The burden of paying a buyer’s agent could lead to some buyers staying out of the market, which would soften demand and lower prices.
Another possibility is that, in markets where buyers have some leverage, one of the first points they’ll negotiate will be for the seller to cover their agent’s commission — essentially bringing us back to square one.
Brett Rosenthal, a Philadelphia-area agent, thinks this is a likely outcome. “Buyers would negotiate low, knowing they may be paying their buyer agent a commission,” Rosenthal says. “And thus, sellers will get a similar price or possibly even less.”
The crucial difference, at least from a legal standpoint, is that it would now be a negotiated part of the deal instead of something required.
How Could This Affect Buyers?
Buyers are the ones parting with much, or even most, of their money in a real estate transaction. Introducing new costs could change the calculus for prospective home buyers in 2024.
Buyers Might Have to Pay Their Agents Out of Pocket
If sellers are no longer responsible for paying the buyer’s agent’s commission, that responsibility would fall on the buyers themselves.
As noted, some buyers could negotiate a deal in which the seller covered the buyer’s agent commission — just as some buyers can now negotiate for the seller to cover other closing costs. But in a seller’s market, sellers could simply stand firm, and the buyer would have to foot the bill for their agent.
In a market where home prices have skyrocketed, adding a 2.6% surcharge on top of the buyer’s other financial obligations could be a tough ask. Some buyers might conduct their home search without an agent and risk getting swindled. If a good buyer’s agent can negotiate a 5% discount on a home price, that 2.6% commission suddenly looks like a bargain.
Buyer’s Agents Could Offer a Revamped Menu of Services
There’s also the question of how buyer’s agents will be paid once commission is decoupled. Will they ask for a fee upfront? Will they charge an hourly rate or a fee per showing? Some have suggested that buyers could roll the commission into their mortgage, but that would require a change in the law. At present, bundling commission into a mortgage would run afoul of the law, forbidding kickbacks from mortgage lenders to agents.
One possibility is that buyer’s agents could move to an “a la carte” menu of services. They’d charge separate fees for showings, negotiations, help at closing, and other aspects of the buying process, and buyers could pick and choose which services to purchase.
But, the industry has weathered legal challenges in the past. It’s possible the commission system changes the terminology but the methods remain largely unchanged.
“I feel that commissions will effectively remain the same — they may just be renamed or approached from a different angle,” Hagley shares.
For example, listing agents may pay the buyer’s agent a 3% “referral fee” for bringing the buyer to the property. Although the requirement that sellers offer to pay commission is likely going away, the incentives that created the current system will continue to shape the way stakeholders approach home sales.
This article was produced by Clever Real Estate and syndicated by Wealth of Geeks.
