New rules for the residential property market mean that from Saturday, anyone in the market to buy or sell a home will face unfamiliar processes, and possibly a little confusion.
The “practice changes” stem from a 2023 legal decision about the way estate agents are compensated.
Traditionally, when a home is sold, the seller pays a commission of about 5% to 6% that is split between the buyer’s and seller’s agents. The lawsuit alleged that this structure helped keep commissions higher than they would otherwise be. It also meant that the seller had to pay the agent representing the other side of the deal, a practice that many observers considered inappropriate.
“A lot of the industry doesn’t make sense from a common sense standpoint,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America, who has been advocating for the REALTORS Commission’s changes for decades. “The main argument has been that it’s not fair for sellers to pay both the listing agent and the buyer’s agent.”
Now, the seller will need to decide whether to pay the buyer’s broker, and how much. Whatever the decision, that information can no longer be included in what’s known as the Multiple Listing Service, or MLS, the official real estate data service used by local real estate associations.
However, whatever the seller decides on compensation, it may be communicated personally via phone or text message, announced on social media, through a lawn sign, or other informal means.
Meanwhile, buyers will be required to sign an agreement with their broker before they begin viewing homes. The buyer and agent must agree, in writing, on how much the agent can expect from the buyer.
There is some latitude in defining what this means specifically. A recent interpretation of the rules by the National Association of Realtors says it must be “objective (e.g., $0, X flat fee, X percentage, X hourly rate)—not open-ended (e.g., ‘the broker’s compensation to the buyer cannot be whatever the seller offers the buyer’).”
“Anytime we have the opportunity to have a conversation with a consumer about what value we bring to the transaction, what services we are going to be able to provide them in what may be one of the largest financial transactions of their lives, that we expect to be paid for and that is fully negotiable, that is a good thing,” said Kevin Sears, president of the National Association of Realtors.
The group is a powerful lobbying group in Washington and has more than 1.5 million member agents — about 85% of the country’s real estate agents.
“The more educated and empowered consumers are, the more conversations we have with consumers, and the better it is for everyone,” Sears added.
Many elements of the new practices are familiar to many real estate agents, buyers and sellers. Many states have long required buyers to sign a brokerage agreement before starting the process. And the rise of alternative brokerage models, such as Redfin, means many homeowners are realizing they have options beyond the typical 3% to the listing agent and 3% to the buyer’s agent.
But questions about what these changes mean in practice are stymieing agents across the country. What happens if a buyer has enough money to reimburse their broker up to a certain amount, but falls in love with a home that could cost more than the commission would yield? Conversely, what happens if a particular home seller turns out to be willing to reimburse the buyer’s broker as well?
Many real estate agents say a process that was supposed to bring transparency only creates more confusion.
“A buyer’s agent now has to contact every listing they intend to show to find out how much the commission is,” said Aaron Farmer, owner of Texas Discount Realty in Austin.
In Austin, where the pandemic market is booming turned sharplyFarmer believes it’s natural for sellers to want to compensate buyers’ middlemen, as a sweetener for the deal, which leads to a buildup of unsold inventory. But that may not be the case everywhere, and Farmer also worries that ego can get in the way of smart business decisions in some transactions.
Andy DeFelice, owner of Exclusive Buyers Realty in Savannah, Georgia, believes first-time buyers have the most to lose from the rule changes. She believes many people who are already struggling financially may struggle to come up with the money for the commission, forcing them to negotiate on their own.
“Don’t force our clients into a situation where they have no representation in the biggest transaction of their lives,” DeFelice said. “If you’ve never done it before, it’s not going to be easy. There are many steps to buying a home. Do you know a good termite inspector, a good insurance agent, a good lender? There are many aspects to the transaction.”
DeFelice says she is confident the industry will overcome what she calls the “bump” of the Saturday deadline and adapt relatively quickly, but others expect bigger changes to come.
“For consumers, things aren’t going to change much in the near future,” Brobeck told USA Today. “But it’s like a leaky dam. I’m pretty confident that the industry will look very different in five years.”
The farmer from Texas Discount Realty agreed with him.
“I’ve actually seen a lot of people say, ‘I’m going to get out of the industry, I don’t want to deal with the changes,’” he said. “I’ve always looked at it as if there are fewer agents, it helps the industry. You can lower commission rates that way and increase the volume of work.”
Andrea Riquier covers the housing market.
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