Rules that helped set real estate agent commissions are changing. Here’s what you need to know

FILE - Key lock boxes for real estate showings hang on a fence outside a high-rise condominium building, Oct. 27, 2022, in Chicago. The cost of hiring a real estate agent to buy or sell a home is poised to change along with decades-old rules that have helped determine broker commissions. (AP Photo/Kiichiro Sato, File)

FILE – Key lock boxes for real estate showings hang on a fence outside a high-rise condominium building, Oct. 27, 2022, in Chicago. The cost of hiring a real estate agent to buy or sell a home is poised to change along with decades-old rules that have helped determine broker commissions. (AP Photo/Kiichiro Sato, File)

The cost of hiring a real estate agent to buy or sell a home may soon change, along with decades-old rules that have helped determine broker commissions.

The policy changes could help spur price competition for agents’ services and lower the cost for sellers who now typically cover the commission for the buyer’s agent, as well as that of their own.

In turn, more homebuyers could face pressure to pay for their agent’s commission out of pocket. That could be a challenge, especially for buyers already stretching financially to make a down payment and cover other upfront costs involved in buying a home.

Still, housing market watchers say it can’t be immediately determined how significantly any changes that potentially shift the cost of hiring an agent to a homebuyer will affect home sales. An adjustment period is likely as buyers, sellers and agents figure out how to navigate what comes next.

“I just think it’s too soon to tell,” said Greg Kling, an associate professor at the University of Southern California Marshall School of Business who has taught and written about real estate taxation. “We’re going to either see prices are going up for buyers, or the market is going to correct itself.”

WHAT’S DRIVING THIS?

As part of a settlement announced Friday, the National Association of Realtors agreed to make some policy changes in order to resolve multiple class-action lawsuits brought on behalf of home sellers across the U.S.

The trade group agreed to change its rules so that brokers who list a home for sale on any of the databases affiliated with the NAR are no longer allowed to include offers of compensation for a buyer’s agent.

This change is meant to address a central assertion in lawsuits brought against the NAR and several major real estate brokerages: that homeowners are being forced to pay artificially inflated agent commissions when they sell their home.

The trade group also agreed to require agents, or others working with a homebuyer, to enter into a written agreement with them. That is meant to ensure homebuyers know going in what their agent will charge them for their services.

If the court signs off on the settlement, the NAR would implement the rule changes in mid-July. Meanwhile, several real estate brokerage operators, including Anywhere Real Estate and Keller Williams, have reached separate settlement agreements that include provisions for more transparency about agent commissions for homebuyers and sellers.

“The residential real estate marketplace will take some time, perhaps several years, to fully process the implications of this settlement,” said Stephen Brobeck, senior fellow at the Consumer Federation of America. “But over time more, agents will feel free to offer different types of compensation and more consumers will comparison shop and negotiate commissions in a more transparent marketplace.”

WHAT THIS COULD MEAN FOR HOMEBUYERS

The key potential change centers on who foots the bill for real estate agents who represent homebuyers.

Currently, an agent or broker representing a home seller typically splits a commission — often around 5% to 6% of the home’s sale price — with the agent working on behalf of the homebuyer. Such an arrangement is known in the industry as “cooperative compensation.”

Under the proposed NAR settlement, a broker who represents a seller would no longer be allowed to include a blanket offer of cooperative compensation to a prospective buyer’s agent when they advertise the property on NAR-affiliated Multiple Listings Services, where a majority of U.S. homes are listed for sale. This is meant to remove any incentive from a buyer’s agent to steer their client away from home listings that don’t include a cooperative compensation offer.

However, the proposed rule change leaves it open for individual home sellers to negotiate such an arrangement with a buyer’s agent outside of the MLS platforms, essentially creating a loophole for agents to keep things as they are now.

Homebuyers could also ask the home seller for a concession that includes money to help cover the buyer’s agent compensation.

What happens if a seller doesn’t want to offer to pay the buyer’s agent commission? Homebuyers would be on the hook to shop around for an agent they can afford. They’d also have to sign a contract with an agent before they enlist their services, spelling out how much the agent’s compensation will be.

Having to factor in another expense into their homebuying budget could be challenging for homebuyers without a lot of savings or financial flexibility, making it tougher for them to navigate the housing market.

Still, many variables are at play when it comes to buying or selling a home, not the least of which is how motivated each party is to close the deal.

“If I’m a buyer and I know this seller is not going to reimburse my agent, then I may make a lower offer,” said Kling. “Now, obviously in a hot market, that strategy’s not going to work. But then in a hot market, I would have paid over listing price anyway.”

HOW MIGHT THIS AFFECT HOME SELLERS?

The biggest change for homeowners looking to sell is they could push back against paying for buyer-agent commissions, which could translate into considerable savings.

Consider a seller who agrees to pay a 3% commission for their listing agent — instead of potentially twice that to cover the buyer’s agent, too — and sells their home for February’s national median sale price of $379,100. That homeowner would save roughly $11,373 paying only their agent’s commission.

“The settlement will also encourage more sellers to negotiate the compensation of their listing agents,” said Brobeck.

Still, sellers may still face some pressure to cover buyer-agent commissions.

The NAR built in an exception to its proposed rule change that would allow a buyer’s agent to see offers of cooperative compensation on home listings being advertised by their own brokerage.

That workaround could tempt buyer agents to “steer” clients away from any listings that don’t come with an upfront compensation offer, which could prompt sellers to offer more competitive commissions to be split between their agent and the buyer’s, analysts with Keefe, Bruyette & Woods wrote in a research note Monday.

“So long as steering incentives still exist, home sellers may be compelled to offer supracompetitive commissions to buyer agents in order to avoid steering,” the analysts wrote.

HOW MIGHT THIS CHANGE THE REAL ESTATE INDUSTRY?

One concern is that by making it easier for sellers to opt out of making a cooperative compensation offer to buyer agents, some buyers will opt against hiring an agent or only doing so toward the end of the process after they’ve gone through most of the home hunt themselves. That could end up weeding out some “lower-performing brokers,” Kling said.

Another scenario is that alternative types of real estate business models will become more popular. This includes using discount brokers that will list a home for a flat fee of $500.

“They don’t offer any compensation to the buyer agent because the buyer agent negotiates their own conditions if they want more,” said Mike Downer, a broker associate with Coldwell Banker Realty in Naples, Florida. “That business model has been around for a long time.”

AP Business

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