Homebuyers Confront New Commission Rules

Homebuyers across the US who are working with real estate agents are starting to have uncomfortable conversations with their agents. 

Agents are informing clients that on August 17, 2024, new rules and guidelines on broker commissions will take effect. Buyers will be asked to sign a buyer agreement or amend an existing one. Buyers who agree to the new terms could be responsible for paying their agent’s commission. For a $500,000 home at the standard 3% commission, this would be $15,000.

What caused this change and how can homebuyers be prepared?

Lawsuits, a Settlement & New Rules

After a flurry of lawsuits by home sellers, a $1.8 billion jury verdict, and a settlement by the National Association of Realtors (NAR), real estate brokerages and their agents are scrambling to understand and comply with new rules and guidelines.

Although the settlement does not protect every brokerage and real estate agent in the US, the impact of the settlement and the resulting changes to the industry will be widespread.

The lawsuits were filed by home sellers who alleged that NAR and large brokerages colluded to artificially inflate real estate commissions. The plaintiffs cited the Participation Rule as evidence. This rule requires listing brokers to offer compensation to the buyer’s broker to list a property on the Multiple Listing Service (MLS). The MLS is a shared database of properties for sale used by agents.

Here’s how the Participation Rule works: When a seller meets with an agent who wants to list their home, the prospective listing agent will explain that the house will be listed on the MLS. This ensures that buyers’ agents have access to the property details.

The MLS also provides the property information directly to search portals such as Zillow, Realtor.com, Homes.com, and brokerage websites.

The property listing has a commission data field for buyers’ agents, informing them of their compensation if their buyer becomes the purchaser. The compensation fee is typically 2.5% to 3% of the sale price.

The Department of Justice opposes the Participation Rule because it stifles "price competition and innovation in the market for brokers’ services.”

In response to the $1.8 billion jury verdict and a flurry of copycat lawsuits, NAR announced a settlement to end litigation against the organization, its state associations, and NAR members. NAR issued rule changes and guidance, but these are not final until the court approves them on November 26, 2024. The DOJ is also expected to offer suggestions.

NAR tackled the thorny issues of buyer agent compensation. Here are five key principles that are new to the industry and will be required beginning August 17, 2024:

1.  Sellers may not include broker agent compensation on the MLS.

2.  Buyers must enter into a written buyer agreement with their agent before touring homes.

3.  The buyer agreement must specify the compensation and cannot be open-ended. For example, an hourly rate, a flat fee, or a fixed percentage is acceptable. An unacceptable statement would be “buyer broker compensation shall be whatever the amount the seller is offering to the buyer.”

4.  A buyer’s agent may not receive compensation that exceeds the amount specified in the agreement.

5.  The agreement must state that broker fees and commissions are fully negotiable and not set by law.

Impact on Homebuyers

These changes are going to have a major impact on homebuyers.

One positive impact will be greater communication between buyers and agents. Unlike today, where most buyer agents don’t enter into a contractual relationship with buyers before showing homes and don’t discuss commissions, beginning August 17, 2024, both are required. The buyer and their agent must sign a buyer agency agreement, and they must discuss agent compensation – how much and who pays.

The Buyer Agent Agreement

A legally binding agreement before touring requires a level of commitment between the parties.

Some buyers today feel no sense of obligation to a buyer agent and will tour homes with any agent who provides access. While that may feel convenient for the buyer, it ultimately does not serve the needs of a serious buyer.

Buyers who work with a great agent will gain a deeper understanding of the market and become more efficient with their home search.

Home touring educates buyers. They discover what resonates with them in a house and the surrounding neighborhood. When they see multiple homes with a great agent who is familiar with the area,  the buyer will learn about the pros and cons of the house and area. The agent will suggest other properties or neighborhoods that may also suit the buyer’s needs.

Some buyers may not feel ready to commit to an agent because they are too early in the home search process. Since a written agreement is now required before they tour a home, these buyers can see homes by either attending open houses or directly contacting the listing agent.

Financial Commitment

Most buyers don’t think about their agent’s compensation because buyers do not directly pay their agent. Instead, payment to the buyer agent’s brokerage is made during closing and is one payment among many from the seller’s proceeds. The commission payment is included in the sale price of the house.

Beginning August 17th, this will change. 

When a buyer meets with an agent to discuss representation, the agent will explain that sellers are no longer required to pay the buyer’s agent commission when a house is listed on the MLS. 

Here is where buyers will be blindsided. If a seller is unwilling to pay all, or part, of the buyer’s agent commission, the buyer will have to pay the agent the difference. This is a huge change from today, where buyers don’t even think about having to pay their agent.

The implications for buyers, agents, and others in the real estate industry are significant.

Guidance for Buyers

Understand the four key commission changes:

1.  Sellers who work with a listing agent are no longer expected or required to pay a commission to the buyer’s broker.

2.  If a seller is willing to pay a buyer broker’s commission, the fee will not be published on the Multiple Listing Service (the MLS shares property information to agents and listing portal sites like Zillow and Homes.com). This shifts the responsibility of determining the buyer agent’s commission to the buyer and their agent.

3.  Buyers’ agents may not show properties to a buyer unless the buyer and agent have entered into a written agreement.

4.  The Buyer Agency Agreement will detail how much the agent will be paid. For example, the fee may be a percentage of the sale price, a flat fee, or an hourly rate. It will also explain how the agent will be paid. For example, if a seller is willing to pay less than the amount specified in the Agreement, will the buyer pay the difference at closing?

If you choose to work with an agent:

●  Decide how much you are willing to pay the agent if the seller does not pay the full commission.

●  Screen prospective agents. If you are willing to pay for your agent, determine which agents are worth considering before meeting with them. Since you’re agreeing to the possibility that you’ll be paying their commission, take the consultation seriously and meet with three agents who have expertise in your market and whom you think you’ll work well with. You’ll have a much better experience if you respect your agent’s knowledge and enjoy working with them.

●  Contact the agents before you meet with them and ask if they are flexible on their compensation. Many top buyer’s agents will not consider being paid less than 2.5% or 3% of the sale price. If this is too high, you should know this before your meeting.

●  Consider a flat fee compensation. The brokerage industry has been wedded to compensation that is a percentage of the sale price. However, the changes mandated by NAR have opened the door to alternative compensation. Some buyers feel that commissions create a perverse incentive by rewarding agents to direct buyers to more expensive homes or not aggressively negotiating a lower sale price. If this resonates with you, discuss a fair flat fee instead of a percentage commission.

By understanding these changes and preparing accordingly, homebuyers can navigate the new landscape of real estate transactions more effectively.

Rich Hopen is the Founder of SmartBuyers AI, a community that empowers homebuyers. Join us.