For decades, if you wanted a real estate agent to help you buy or sell a home, the model was static.
At the close of escrow, the seller typically used their proceeds to pay a 5% to 6% commission, with half going toward their agent’s brokerage and half going to the buyer agent’s brokerage.
Now, industry rules that critics contend held commissions at those levels are about to change.
Set to take effect Aug. 17, proponents hope the changes will make it easier for consumers to negotiate and put downward pressure on commissions and even home prices. But there’s also concern buyers could be saddled with additional upfront costs at a time housing is wildly unaffordable for the masses.
Much is uncertain.
“I think we are in for a little bit of a wild ride,” said Tori Horowitz, a Compass real estate agent who specializes in the Hollywood Hills.
Indeed, what is changing is complicated and the results unknown.
Agents have spent countless hours talking with their brokerages on the ins-and-outs of changes that stem from a legal settlement between the National Assn. of Realtors and home sellers.
Under the old system, listing agents had to publish an offer of compensation to the buyer’s broker when listing homes on NAR-affiliated multiple listing services, or the MLS.
While listing agents were allowed to offer zero dollars in the compensation field and the Realtors have said commissions were always negotiable, several antitrust lawsuits alleged the requirement to post an offer reduced competition and kept commission rates artificially high. In large part this was because buyer’s agents “steered” their clients to homes that offered higher commission rates, according to the lawsuits.
Andra Ghent, a professor of finance at the University of Utah, recalls that when selling homes in the past, the contracts her agents handed her to sign were already filled out with a 6% commission, to be split with the buyer broker.
“I was never asked, are you OK with this?” Ghent said. “That was the default.”
Buyers had even less power to bargain — finding their own representative’s payment preset by the other side of the transaction.
In other countries, consumers pay far less, with total commissions often about half what they are in the U.S., according to research from Norm Miller, emeritus professor of real estate at the University of San Diego.
“It’s really surprising that real estate commissions [in the U.S.] have stayed as high as they have in the internet era,” said Jordan Barry, a professor at USC who has studied commission rates and steering. “It’s easier than it used to be for buyers and sellers to find each other.”
Come next week, things could start to change.
Prior to getting an agent, buyers will generally need to sign an agreement detailing how much their broker will be paid. Sellers can later agree to cover that amount for the buyer, but seller agents can no longer list offers of compensation to the buyer broker on a NAR-affiliated MLS.
Buyer brokers can also not later receive more compensation than the buyer agreed to in their contract.
Proponents of the changes, including plaintiff’s attorneys and consumer groups, say that by not setting the rules of the game at the outset, buyers and sellers will have more transparency into how their agents are paid and more power to negotiate commissions down.
With agents forced to compete more for business, it could also lead to better service, said Stephen Brobeck, a senior fellow with the Consumer Federation of America.
One concern among the real estate industry, as well as some outside it, is how all this affects buyers, particularly first-timers.
If sellers decide to not pay buyer broker commissions, that could save sellers money. However, it may force buyers to come up with additional cash to pay those fees. If they don’t have it, buyers may choose to go without representation or lose the home all together.
“It’s going to make it harder on buyers, for sure,” said Mark Schlosser, a Compass agent in the Los Angeles area.
Others say buyers will ultimately benefit. That’s because sellers have long paid buyer brokers through cash from their home sale — meaning the fee was baked into the sale price and paid by the buyer through their mortgage.
By directly negotiating their own agent’s compensation, buyers may find it easier to hire agents who will work for less or who demonstrate their service is worth today’s cost.
If sellers pay less in commission, they may be willing to part with their house for less too. Supply could increase as homeowners find they don’t need as much equity to turn a profit.
“There could be, in the long run, some reduction in home prices,” said Ted Tozer, a fellow with the Urban Institute think tank who previously served as president of government-owned mortgage corporation Ginnie Mae.
“It’s not going to be dramatic,” he said. “But if the average home in America sells for $400,000, you may be able to buy a home for $4,000 or $5,000 less.”
New business models could increasingly develop, with agents offering a flat rate to handle a part of a transaction — say touring homes or reviewing paperwork.
Several real estate agents also told The Times many sellers will probably still agree to pay some or all of the commission for buyer brokers. That’s because the seller may be able to net a bigger profit if financing the commission allows a buyer to offer more for a home than someone paying their agent out of their pocket.
“I have had a number of conversations with sellers and they are totally open to it,” said Tracy Do, a real estate agent with Coldwell Banker Realty who specializes in northeast L.A.
There are two ways this could happen, agents said.
One: As sellers do today, they can agree to pay a certain percentage of the home’s sales price to the buyer broker — the difference being they can’t advertise the offer on the MLS.
Two: If a seller says they won’t pay a buyer broker commission, the buyer can always write in their offer that they need a certain amount of concessions to close the deal.
For example, a buyer could offer $850,000 for a house if the seller gives them $30,000 back, which the buyer would then use to pay their agent and other closing costs.
Tozer said it’s important for buyers to understand these options exist, so they don’t feel forced to go it alone or be represented by the seller’s agent who may ultimately not have their interests at heart.
“It’s so difficult to be objective for both,” he said.
The Consumer Federation of America recommends buyers and sellers each set a goal of negotiating commissions of 2% of the sales price or less for their brokers and carefully review all contracts agents ask them to sign, especially documents with items already filled in.
On Sunday afternoon, Emmitt Hayes stood in an empty open house in Jefferson Park waiting for buyers. The listing agent said high interest rates have slowed the market and now some people still looking for a home have additional worries.
“Some buyers came in yesterday and they were asking ‘Do we have to pay our Realtor a commission now?,’” Hayes said.
Miller, of the University of San Diego, said he doesn’t expect much immediate change to commission rates, because the real estate industry appears to be preparing to maintain the status quo.
“I haven’t seen anybody advertise — either on TV, social media, magazines, newspapers — suggesting that they are going to compete on price,” Miller said.
Some agents are providing advice on how to maintain current compensation levels in the industry.
In an online video with more than 26,000 views, Baltimore real estate agent Andrew Undem told the popular YouTube real estate personality Jimmy Burgess that buyer agents should tell potential clients all the steps they can help with, such as researching loan options, making an offer and navigating a complicated escrow process.
“You have to be able to articulate the value proposition of buyer agency in a compelling way where they are going to agree to pay you 2.5%, 3%, over 3%,” said Undem, a managing partner of the SURE Group with Berkshire Hathaway HomeServices Homesale Realty.
Later, after Burgess asks Undem how he is teaching agents, Undem gives an example of a hypothetical conversation with a prospective client on commission rates.
“‘Just so you know, we can’t go under 2.5%’ and then I just leave it at that, you stop talking,” he said.
“Love this!” one commenter wrote. “Every realtor needs this NOW!!”
In an interview, Undem said agents have to be able to state their case for what they are worth and when he set a 2.5% floor that referred to his personal preference and he wasn’t recommending it to others, some who probably will go lower.
Undem also said 2.5% isn’t a hard floor for him and he may be willing to go lower depending on the circumstances, including if a buyer needs fewer services.
Asked why 2.5%, Undem replied:
“That is what we have been used to the last 150 years,” he said. “I am just trying to maintain the precedent.”
Ghent, the Utah professor, said real change won’t come from the new rules themselves. Rather, she argued consumer costs would decline if the publicity surrounding the changes help Americans realize they can actually negotiate.
“If you are not paying careful attention,” Ghent said, “you could end up with the same deal as before.”