A settlement reached this week threatens to strike an established standard in residential real estate: the 6 percent sales commission. It will also change who pays for it. The settlement, reached after a years-long legal battle originally brought by a group of Missouri home sellers, calls on the powerful National Association of Realtors, which has long regulated how homes are sold in the U.S., to amend its rules about how brokers for sellers and buyers are compensated.
In most real estate transactions in the United States, both the seller and the buyer have an agent who represents them. For decades, there has been a standard for paying these agents: a commission of between 5 and 6 percent of the home’s sale price, covered by the seller and split between the two agents.
Commission rates are significantly lower in many other countries. In Britain it is just over 1 percent, while in Singapore, the Netherlands and Denmark they range between 2 and 3 percent, according to a study by investment firm Keefe, Bruyette & Woods. Homeowners who sued in federal court in Missouri said NAR, through its agent compensation rules, conspired to artificially inflate commissions paid to real estate agents.
Now those rules are set to change as early as July, pending court approval of the settlement that includes NAR’s agreement to pay $418 million in restitution.
There could be more room for negotiation.
Estate agents argue that commissions have long been negotiable and the standard 5 to 6 percent is practical rather than mandated.
But an NAR rule that required sellers’ agents to clearly advertise compensation to buyers’ agents — effectively setting compensation for the buyer’s agent — stifled competition, the lawsuits argued. It also led to a practice called “directing,” in which buyer’s agents direct their clients to more expensive homes where the agents earn a larger commission.
Under the terms of the settlement, listing agents will no longer be able to advertise commission rates to buyers’ agents on most databases where homes are listed for sale.
This will allow for more negotiations.
When Joanne Y. Cleaver decided to sell her five-bedroom home in Mint Hill, NC, a suburb of Charlotte, in December, she knew a settlement was likely in the works. Ms. Cleaver, a former real estate editor for the Milwaukee Journal Sentinel, interviewed several agents to see if she could get them to lower their fee and got her own agent to drop her fee from 2.5 to 1.5 %. But the process stalled when he tried to pay the buyer’s agent commission reduced from 2.5 to 2 percent.
Agent after agent told her that if the rate went down, the buyers’ agents would turn their clients away from her home. “They laughed at me,” said Ms Cleaver, who posted it Kindle book “Negotiate real estate commissions and keep more money!” and started a Facebook club where buyers and sellers can exchange trading tactics.
Buyers are expected to pay their own agents.
At the heart of the proposed rule changes is the ‘uncoupling’ of commissions – buyers and sellers will now be responsible for paying their own agents rather than forcing sellers to cover the fees for both.
For buyers, especially those already struggling to raise a down payment on a home, this could sting.
“Most entry-level and low-cost buyers can find 3 percent down,” one broker, Stephen O’Hara, managing director of Common Ground Properties in Rancho Santa Margarita, Calif., wrote in a Facebook discussion thread. “They don’t have enough money for a can of paint, much less a $20,000 supply.”
The good news is that these supplies can be reduced. Most buyer’s agents currently earn 2.5 to 3 percent on a home sale (half the typical 6 percent commission). An overhaul of the system could spark more competition, with agents offering lower rates, said Ryan Tomasello, managing director of Keefe, Bruyette & Woods, an investment banking firm and author of a 77-page study on the impact of the fee changes .
Mr. Tomasello’s research predicts that supplies could fall as much as 2 percent — mostly on the buyer’s side, he said. At the same time, he does not believe that house prices will be affected. “We believe that ultimately this will reduce fees overall and therefore the frictional cost of one of the largest transactions in life,” he said.
Buyers are also more likely to be offered a written agreement with their agent, as are sellers.
Committees could be made more transparent.
Despite NAR’s guidance against the practice, many buyer’s agents advertise their services as free. But in real estate and in life, nothing comes for free – many home buyers simply didn’t know that their agent’s fee was covered by the seller.
Sellers were often unaware as well. A recent survey of 1,000 Americans found that 42 percent of home sellers didn’t know they had to pay a buyer’s agent commission. The five Missouri home sellers who sued NAR had the same complaint.
“Today’s consumers see the current commission system as confusing and unfair, which has made it difficult for many to trust their real estate agent,” said Luke Babich, co-founder of real estate education platform Clever Real Estate, which conducted the poll. He wrote in a blog post.
One possible outcome of the agreement is that homebuyers will become more aware of the process and mechanism by which the agent representing them is paid.
Some buyers might choose to do it themselves.
Today, 85 to 90 percent of homebuyers use an agent who represents them exclusively when shopping for a home, according to Keefe, Bruyette & Woods. Faced with the prospect of footing the bill for their own agents, some buyers — who already rely on sites like Zillow and Redfin to find listings themselves — may now choose to avoid a buyer’s agent altogether.
But buyers beware: Agents warn that do-it-yourselfers are more likely to fall victim to fraud or misunderstand the process.
Even agents who are not NAR members may be affected.
In most cities, access to databases where homes are listed for sale, called multiple listing services, is limited to dues-paying NAR members, which has helped boost the organization’s influence. But that’s not the case in all cities, including New York, where many agents only have membership in the Real Estate Board of New York, known as REBNY, the local real estate trade association.
Some major brokerages have already offered their agents an exit ramp from NAR As lawsuits against the organization piled up last year, several real estate firms, including Re/Max and Redfin, dropped the requirement that their agents have NAR membership.
In New York, where most agents are not members of NAR, the settlement will not directly affect most buyers and sellers. Not yet, though: Changes are expected to ripple across the industry. In January, REBNY described new rules allowing buyer brokers to reject a seller’s commission offer and negotiate the fee from the buyer.