New home-sale rules could cut 5% commissions paid by sellers and buyers in half
Selling a home in the United States could be on the verge of getting more lucrative for sellers. The picture for buyers is not so clear.
In short, more of a home sale’s proceeds are likely to flow to sellers, and less to real estate agents, if a federal judge accepts a proposed settlement from the National Association of Realtors. This deal would allow buyers and sellers more latitude to negotiate down agent fees. Buyers will have the option to avoid all fees and go it alone, though that might mean making the biggest purchase of a lifetime without an agent’s experience and negotiation savvy.
Why We Wrote This
Real estate has long gotten most customers to accept paying agents generous and standardized fees. A new U.S. legal settlement means competition is coming – with ramifications for buyers, sellers, and agents.
The change won’t happen fast. But many real estate agents are likely to see revenues fall when the new rules take hold. Lower commissions may cause many to leave their jobs and fewer newcomers to enter the industry.
“The industry has long had way too many agents,” says Michaela Hellman, a longtime Boston-area agent. “I just hope the ones that leave the business aren’t the experienced, ethical veterans.”
Selling a home in the United States could be on the verge of getting cheaper for sellers.
Indeed, more of the proceeds of a home sale are likely to flow to sellers and less to real estate agents if a federal judge accepts a proposed settlement from the National Association of Realtors (NAR).
This deal would allow sellers more latitude to negotiate down agent’s fees.
Why We Wrote This
Real estate has long gotten most customers to accept paying agents generous and standardized fees. A new U.S. legal settlement means competition is coming – with ramifications for buyers, sellers, and agents.
Buyers would have the same latitude, and some could avoid all fees. But if they go it alone, buyers will likely be making the biggest purchase of a lifetime without an agent’s experience and negotiation savvy.
What specifically will change?
Since the 1990s, sellers wanting to list their homes in the NAR’s database – a key resource for homebuyers – have had to include up to a 5% or 6% agent commission in the sale price. Typically, their real estate agent would take half of that and give the other half to the agent representing the successful homebuyer. Under the new settlement, buyers and sellers will instead negotiate the agents’ fees upfront.
When will this change take place?
The NAR proposes to start the new process in mid-July. But it won’t happen fast. Industry observers expect an evolution as buyers, sellers, and agents adapt to the new environment.
Why is this happening now?
In a class-action suit by home sellers in Missouri, the NAR and two major real estate companies were found guilty last fall of keeping commissions artificially high. The companies agreed last year to change their commission practices in exchange for reduced fines.
Facing a huge fine, a similar suit in Illinois, and a U.S. Justice Department push to reopen an antitrust case about commissions, the NAR on Friday also came to terms, proposing to scrap the current system and pay $418 million in fines.
Who are the winners?
Home sellers should clearly come out ahead. Instead of paying a commission to both the seller’s and buyer’s agents, they will be better able to negotiate those fees upfront.
Some estimates suggest fees could come down by half. On a $400,000 home, roughly the median selling price of an existing home, that would amount to a savings of up to $12,000.
Another potential winner: discount real estate companies that already offer lower fees and may attract additional customers in the new landscape.
For homebuyers, the outlook is cloudier. With sellers no longer required to compensate the buyer’s agent, the buyer will have to cover their agent’s fees, or negotiate so that the seller will pay all or part of them. Or they can forgo a buyer’s agent and manage a transaction on their own. While saving on commission, they would be going without a professional’s help on a decision that will affect their daily lives and finances.
Agents point out that commissions have always been negotiable and that, as seller’s agents, working with buyers without a buyer’s agent will increase their workload.
Who are the losers?
Real estate agents are likely to see revenues fall as commissions for buyer’s agents drop when the new rules take hold. That will be particularly hard on the least experienced agents, who don’t have the client base to survive. Lower commissions may cause many to leave and fewer newcomers to enter the industry. Experienced agents also will likely face lower revenues if the buyers’ side of the business drops off. But the prospect of fewer real estate agents may mean that those who stay in the business get more listings.
In a study last fall, business professors Sonia Gilbukh of Baruch College and Paul Goldsmith-Pinkham of Yale constructed a theoretical model to see what would happen if fixed commissions for selling agents were scrapped. (They kept the fee for buyer’s agents constant.) They found that sellers’ commissions would fall to around 1.5% on average, and that just over half of the nation’s real estate agents would leave the industry.
“The industry has long had way too many agents,” says Michaela Hellman, a longtime Boston-area agent. “I just hope the ones that leave the business aren’t the experienced, ethical veterans.”
