Big changes take effect this month that will mean seismic shifts in how most Americans buy or sell a home and could ultimately drive down residential real estate prices.
Starting on Aug. 17, agents who list homes for sellers on widely used realtor databases won’t be able to offer any payments to buyers’ agents.
That means the power to negotiate realtor commissions will shift away from agents in favor of buyers and sellers.
It also means sellers will no longer be on the hook to fund commissions for all realtors involved in the transaction — a fee that usually amounts to 5% to 6% of the home’s sales price. The seller’s agent commonly shared roughly half of that commission with the buyer’s agent.
Instead, buyers will be entitled to separately negotiate their own agent’s pay and get a signed contract formalizing the terms — all before touring any properties for sale.
“Under the old system, if you were a buyer and you had an agent, you didn’t get any say in what your agent got paid, unless your agent agreed to credit some of that to your purchase price,” said Venable LLP partner Jill Rowe, who represents real estate brokers and owners.
The new terms are far-reaching because they apply to properties listed on Multiple Listing Services (MLSs), databases controlled by the National Association of Realtors that host more than 90% of all US home sales.
These changes are designed to eliminate conflicts of interest in the real estate industry and make the process friendlier for consumers.
They could drive down real estate commissions and home prices, some said, while transitioning the business of real estate services to more of an à la carte industry.
The new rules came about as a result of a class-action lawsuit from home sellers who argued the old fee-splitting structure was unfair.
The core of their argument was that the old structure artificially fixed commission rates and influenced agents to steer clients to homes that paid higher commissions. That, in turn, inflated home prices.
The new rules were agreed to as part of a $418 million settlement with the National Association of Realtors and several large real estate firms last March, ending the first in a string of similar cases to go to trial.
Here is a closer look at what buyers and sellers now need to know:
‘What kind of commission am I paying?’
It will require some homework and patience to understand your rights and obligations under the new system and benefit from the new arrangement.
The “big change,” according to Rowe, is that agents who list homes for sellers on MLS databases won’t be able to offer any payments to buyer’s agents — as was the practice for decades.
The other significant change is that agents representing buyers will no longer be allowed to take a prospective client to tour any properties without first obtaining written consent about the fees and commissions that the client will have to pay.
All of these details can be negotiated by the buyer. The contract must explain if the agent’s compensation will be calculated as a flat fee, as a percentage of the home’s purchase price, as an hourly rate, or otherwise.
And under no circumstances can that agent’s commission be open-ended or dictated by a seller’s agent.
Plus, agents must disclose that their commissions are fully negotiable and not set by law.
“If I were a buyer or seller of a residential property right now, what I would say to my broker is: What kind of commission am I paying?” Rowe said. “What am I getting for that? And what would I get if I had a 1% lower commission, or a 2% lower commission?”
Jennifer Stevenson, a New York State Realtor and NAR regional vice president, said in the past agents could also use listings to offer compensation to other seller’s agents and to cooperating brokers.
“Now we’ll no longer be able to do that,” Stevenson said.
She noted that buyers and sellers were always permitted to negotiate commissions with agents and that under the new rules listing agents will still be allowed to negotiate commission splits, but only outside of the MLS.
A ‘different value proposition’
The ultimate effect on the residential real estate industry is not yet known, although some certainly expect commissions, and even home prices, to fall.
At minimum, it’s expected to place more power in the hands of clients, especially those already using residential real estate platforms like Zillow (Z), Redfin (RDFN), Realtor.com, and Trulia, to find homes and home details posted on MLS databases.
These platforms had already been disrupting the residential real estate industry by allowing sellers and buyers to efficiently search for information that only relators using MLSs once provided.
“You can just go online, and you can see everything that is available … what its price is, all of the different terms, look at the neighborhood, and see pictures of what it looks like,” Rowe said.
That technology has tremendously reduced the amount of time that agents, and particularly buyer’s agents, spend on behalf of their clients.
“Quite often, the buyers are finding something online and saying, ‘I want to take a look at that,’ and either going by themselves to the open house, or having their agents call the seller’s agent and arrange a look,” Rowe said.
“So it’s just a different value proposition.”
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
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