The day I was scheduled to fly home from my visit to the wild, wild west, the news broke that the National Association of Realtors had settled legal claims relative to real estate commissions. When I finally returned home very early the next morning, I was faced with an avalanche of real estate information which I will attempt to boil down.
In a nutshell, everything about the way we buy and sell homes is in the process of changing. Traditionally, real estate agents’ commissions were paid by the seller out of the proceeds of the sale when the property closes and split between the selling and listing agents. Starting this summer, that long-standing model is being shaken to its core.
The NAR reached a nationwide settlement claiming that the industry conspired to keep agent commissions high. They agreed to abandon longstanding industry rules that have required most home sale listings to include an upfront offer telling buyers’ agents how much they will get paid. As a result, the commissions most home sellers have paid real estate agents for decades, generally between 5% and 6%, among the highest in the world, will be more negotiable. A note here, real estate commissions could be negotiable between the homeowner and the listing agent in the past, however, they always had to be stated on the listing agreement so the buyer’s agent knew what the split was.
Starting in July, most homebuyers will have to sign agreements saying how much their agents will be paid. If sellers don’t want to cover those costs, buyers might have to agree to pay their selling agent. If this arrangement stands, it will be particularly difficult for first-time buyers or buyers who don’t have a surplus of cash to pay agents out of their own pockets.
Most sellers at the outset will opt to continue paying the commission for the buyer’s agent, recognizing they need the buyer’s agent to help with their home sale. It is possible and likely that little will change for buyers and sellers in the immediate future. Sellers are accustomed to including the cost of a buyer’s agent in their sale price, but over time new brokerage business models could emerge as everyone settles into a different reality.
The entire real estate industry is based on the spirit of cooperation between buyer’s agents and seller’s agents. A lot goes on behind the scenes between these two brokers since it’s to their advantage to make the negotiations come together. I would hate to see this new world order create an adversarial relationship between the buyer and seller agents. I do believe that after the dust settles and agents begin to develop methods to work together to their benefit and the benefit of their clients, everyone in the transaction will find a way through it.
Remember that real estate transactions also affect mortgage brokers, title companies, inspectors and closing agents who are carefully watching what’s going on. The paperwork at the beginning will be confusing and may be difficult to explain to the buyers and sellers, but this is the hand the industry has been dealt. Next week, we’ll look at the effect on real estate brokers as a profession and some of the future possibilities.
The day the news broke about the first serious change to the real estate industry in decades happened to be St. Patrick’s Day. I’m still not sure if the industry had the luck of the Irish that day or just a wake-up call to the confusion it left in its wake. To be continued…
