What Realtor Commission Changes mean for you
Two recent legal settlements related to realtor commission changes have been in the news recently. How these will impact my clients' home equity, interest rates, and financial decisions is unknown. My interpretation (spoiler alert) is that only a little will change once the dust has settled.
Disclaimer: I am a real estate agent, not an editorial staff member, at Corcoran (parent company Anywhere Real Estate Inc.) These opinions are wholly my own and do not represent the company in any way. I am not a lawyer; I have a fiduciary obligation to work in my client's best interest. This post is my read of the legal settlements and how my fiduciary responsibility to a client is impacted– as of July 2024 while writing.
Background on the Realtor Commission Lawsuits
In 2019, a group of home sellers in the State of Missouri filed a class action lawsuit: Moehrl et al. v. National Association of Realtors. This suit alleged that anti-competitive practices were used to determine the percentage of commission rates that were set with agents; sellers were not informed about their ability to compare and negotiate commissions.
The first round of settlements occurred in October 2023 with Anywhere Real Estate Inc. and many others.
Another settlement related to the lawsuit was reached with the NAR (National Association of Realtors) in March 2024.
The key tenants for these settlements relate to the policy to set and negotiate buyer’s agent commission rates.
De-Coupling of buyer’s and seller’s commission: The buyer’s broker commission will be listed separately in an exclusive listing agreement, and the seller should know they can negotiate both.
The buyer’s broker commission will not be included in the MLS, and agents cannot sort it by commission rate.
Buyers will sign an agreement with their buyer’s broker confirming commission preferences.
Read on for more background on commission rates, details about these three components, and how to compare what’s coming to the past.
Overview of Real Estate Agent Commissions
Real estate agents traditionally have not done a great job explaining the nuances of how a buyer’s agent receives compensation. Frequently, agents would say, “It’s free” or “It costs nothing to work with me.” That’s not the reality; the statement also doesn’t convey the value of the role to the buyer.
Spoiler Alert: Buyers have always paid commission because it is paid from the closing of a home and is, therefore, included in the price of the home.
Seller’s Experience
An individual selling their home would sign a listing agreement with a real estate agent. This agreement defines many terms, including the commission split between the buyer's agent and the seller’s agent.
A standard listing agreement in New York City with Corcoran or similar firms would have a six percent commission. The listing agreement stipulates that this commission would be split 50/50 between the buyer’s and seller’s agent. A buyer's agent would receive three percent, and a seller's agent would receive three percent.
At closing, the seller uses the sale proceeds from home equity to pay closing costs (as well as the remaining balance on their loan). Real estate commission is one of these closing costs. How does the seller receive proceeds from the sale? The price the buyer is willing to pay for the property.
Buyer’s Experience
A buyer would engage with a buyer’s agent without a formal written agreement. There was a policy that buyer’s agents could sign exclusive contracts, but they were not used often. As the legalese in real estate can be pretty confusing (the 10-minute read for this article is a lovely demonstration of that), many agents focus on building the relationship rather than executing specific agreements focusing on commission percent.
Throughout the negotiation, a buyer might ask the agent about payment, but they just as likely might not. The commission was never an itemized closing cost for buyers; it is out of sight, out of mind for a buyer. An offer is made, and a price is agreed upon for the cost of a home. The buyer’s agent works to get the client to the closing table with a loan to buy the house of their dream.
The buyer pays the purchase price, which is transferred to the seller, which pays both seller and buyer commissions. In summary, the buyer has been paying this commission through the direct price of a home this entire time.
Key Realtor Commission Changes & What to Know
De-coupling of Buyers & Sellers Agent Commissions
Commissions have always been negotiable. Now, they are negotiable and listed separately in an exclusive listing agreement. Instead of the default 50/50 split of real estate agent commissions, every agreement has a field stating the buyer's agent's percent commission and the seller's agent's percent.
This change is making the most headlines; pundits are curious if it will spur price competition for commission rates in the market. Many prospective sellers also ask what resources they have to understand the negotiation.
What I find interesting here is that the seller’s agent must negotiate for the buyer’s agent's commission. I’ve heard that close to 90% of deals in New York City happen with buyer’s agents. Anecdotally, I know that the best outcomes occur with buyer representation. I fully believe a seller should pay an equal share to the buyer’s agent. A seller’s agent is not acting in the fiduciary best interest of a seller when they take a larger split without market justification.
Buyer Agent Commission Visibility
Commissions will no longer be listed in an MLS (or Streeteasy or RLS—two common in the New York City market). Realtors should not be able to steer their clients to listings with higher or lower commission payments.
While this is the letter of the law, I think it’s common sense that incentives drive behaviors. This will be a crucial piece of information agents discover before a showing. While an agent might not compare the various rates directly in front of a client, I’m sure it will color an opinion (especially when a buyer has to pay commission out of pocket—more on that below).
Agreements with Buyers’ Agents
Real estate agents will no longer be able to say they work for free or do not charge a fee (starting in August 2024). Buyers will have exclusive agreements specifically with their agents. These agreements will state the minimum commission a buyer’s agent will receive. Buyers can stipulate if they only want to see listings that pay this commission or if they are open to listings with a lower commission.
If a buyer purchases a listing with a lower buyer commission, they will pay this additional commission out of pocket at closing.
As I said above, the best outcomes happen when an agent represents a buyer. Talking through this new document will be a change, but the outcome will be positive. This is transparency, and buyers will look to compare agents and ensure they are making an informed engagement in a very important financial decision.
Impact on Home Sellers in New York City
This change should be primarily procedural for sellers in Prospect Heights and others throughout New York City. You will sign a slightly different listing agreement regarding how much commission you want to pay.
Realistically, if a seller is serious about selling their home, paying a buyer’s agent to represent the buyer in the transaction is an advantage. A successful sale is far more likely if a buyer is represented by a professional (especially in a co-op sale); it's not worth the risk. Note: The risk is an accepted offer without a signed contract or a close because the buyer is unprepared.
One thing I am seeing is that a seller is willing to pay a five percent commission, but the seller's agent now decides to take three percent instead of two-point-five and gives two percent to the buy-sdie. While, of course, I like to make more money, as I said before this is in the best interest of the sellers agent but not the seller.
Impact on Home Buyers in New York City
The changes in realtor commissions will have the most impact on buyers. This will be the case for two reasons:
Buyers Agreements:
All buyers' agents must have these read by their clients and signed very soon (effective August 2024). This transparency is good for the overall market; however, the documents can be cumbersome. Providing the information effectively and thoughtfully is an essential part of a buyer’s agent's role, albeit it's a new skill set for agents.
This will (and should) force buyers to do more of an “interview” for their agent. Instead of just a quick summary conversation with a review of resources, buyers should take the time to see if this individual is the right one to support their home purchase. Note: see my Buyers Agen’t Job Description here to start with that interview process.
2. Out-of-Pocket Commissions:
While most sellers will continue to pay the same rate to a buyer’s agent, some will not. For those that don’t, the buyer’s agreement contains a phrase regarding the minimum commission due to the buyer's agent. This amount will become a closing cost and factor into the buyer's decision regarding how much they can afford to pay for the home they are bidding on.
Note: since this is now a closing cost rather than something included in a loan, the price is a bit higher since it cannot be financed and is not included in the loan. There is exploration at the federal level to allow this to be mortgaged into a home loan.
Will this Spur Price competition for Agents?
Will there be Market Implications that impact the price of housing? If commission rates are lower, will this lower prices in New York City?
My belief is no for three reasons:
Financial Strength of Buyers
Buyers in New York City are in much stronger financial positions than in most other markets. Especially when purchasing co-ops (80% of inventory in the city), there are requirements for cash on hand. For example, Co-ops require a minimum 20% down payment for all home loans. Buyers here have substantial home equity and less likely to additional financial resources to cover housing costs.
While no one enjoys an additional cost at closing, these buyers have the savings to spend out of pocket if required; the buyers can afford the 1 percent commission.
2. Negotiability of apartments
In Brooklyn, the majority of inventory is selling at or above the asking price. Buyers will not jeopardize an accepted offer by a marginal (on a percentage basis) increase in cost.
3. Distribution of Work Amongst Real Estate Agents & Brokers
Work among real estate agents is far from even. The most successful producers know their worth and value. They will turn down the opportunity versus taking something “not worth their time.” Agents who are less likely to be successful will be the ones who accept work at lower commission rates. This increases the likelihood a home will take longer to sell or not sell at all, bringing a solid chance that the seller will bring in another agent at higher rates.
Advice for Working with Real Estate Agents Post-Changes
With these, my advice for finding the best representation hasn’t changed. Finding the best agent to work with you comes down to three points:
Communication
Your agent is your advocate. You rely on them to communicate on your behalf in one of the most important interactions of your life. How they communicate with you and your family is a preview into that world.
The best way to interview for this is to ask questions and see how they respond. Regardless of the content, did you like how they delivered the news? While you are discussing scheduling and meeting for the first time, was the process seamless, or was it confusing?
Note: I’m not downplaying the content and knowledge; that is just much easier to interview for. Communication will be the backbone of sharing changes throughout the process and working with various liaisons.
Trust
An agent is an extension of your eyes and ears in every interaction. Do you see their instincts aligning with yours? Do they have experience in navigating the landscape and terrain of New York City real estate?
To interview for trust, I think it’s helpful to start talking through the financials a bit. A real estate agent will see your credit and all your bank statements. They will learn all the nuances of your family's income and expenses. How do those conversations progress? Are they respectful? Do they have a grasp of the mechanics throughout this? What’s the last buyer challenge they faced and how did they solve it?
Another easy way is to explore trust is to compare referrals to a real estate lawyer or mortgage broker- did you connect with 1 or 2 of these? Did they seem like someone you would want to work with for 3 months?
Time
Buyers work roughly 80-100 hours on your behalf, and you will require physical time for an agent you’re working with. Make sure they are spending those hours on you, not chasing the next deal.
To interview for this, think about setting up some of the first showings. Is your agent available for what you need? How quickly do they respond to your requests? (Of course, everyone has multiple priorities, but do they communicate to you if there are times they are off the grid?)
Advice on Next Steps
If you’re reading this and looking to make a move in the next 1-12 months, here are what I think of as the first steps:
Understand your financial situation and start to speak with a mortgage professional.
There are many solvable questions that a mortgage professional could review and help you plan for. Examples like the ones below are things you can fix in 6-12 months. If you start exploring these now, you will be in a much better position when you are ready to make a move and have found the home of your dreams.
Is someone in your household in credit card debt? Would you be able to pay off or remove some of these balances in the next six months?
Is anyone in your family self-employed? Do you understand how this will impact your ability to get a loan?
How long have you been at your job? Discuss with family/partners/yourself if you’re making a job change and timing a new financial purchase like a home.
Start to ask your network for referrals for real estate agents.
This may intimidate some, but when working with real estate agents (at least the good ones), understand that it's about building a long-term relationship. We want to work on the timeline that is best for your household.
I like to start by asking friends and family or seeing if there is someone in your network who you know is an agent. Grab coffee with them. Even if you don’t talk about apartments, see if that’s someone you want to spend at least three months with.
Look at what is essential to your household.
Making a move is always a big decision. There are so many steps regardless of whether you rent or buy: finding appropriate housing, taking out new insurance, and so on. Start by discussing your priorities. Once you know that, do basic searches to see what you can afford.
-Katie Johnson
Frequently Asked Questions
What are direct deals? What happens then?
A direct deal is when a buyer does not have an agent, and they are buying “directly” from the seller’s agent. In listing agreements, there is a separate percent commission that is negotiated for a direct deal. The seller typically requests smaller commission rates if there is only one agent involved.
Can you provide an example of a buyer paying commission out of pocket?
Let’s say a buyer purchases a million dollar home that is offering a 1.5% commission to the buyers agent. This buyer has a buyer’s agreement signed with an agent stating that the minimum commission accepted to work with them is 2.5%. At the time of closing, the buyer would receive an invoice for $10,000. (2.5% of $1,000,000 is $25,000. The seller pays $15,000 and the buyer then pays the additional $10,000 at closing.)
What do these agreements look like?
As a policy, every brokerage will have slightly varying buyers exclusive and non-exclusive agreements. Make sure to read through these and ask questions. Expect that you have to receive one of these agreements to read starting in August 2024.
Are there any other policy changes expected?
Currently, it’s only “minimal” changes following a national settlement related to commissions. There may be more challenges in the future, but after the NAR settlement, resources have been distributed and accessed.
What about home loans and mortgage rates?
Home loans and mortgage rates are top of mind with many buyers right now. This is a key decision when determining the financial qualifications needed to make a purchase and how much home equity you have, but it's unrelated to the change in commissions.
How do I compare financial products for a loan?
The first step in looking for a home loan is to explore a preapproval with a qualified mortgage lender. This qualified professional will read through all of your financial documents, assess how much equity you have, run a credit check, and prove approval for a home loan. This pre-approval is required to make an offer on a home and is incredibly helpful in setting your budget.
What is the correct commission percent?
To me, the better way to phrase this question is how do I hire the right real estate agent? A payment rate is one factor to consider when hiring the best professional to work on your behalf. Compare a few different options, but I think of commission payout as an insurance policy. You want to drive as much traffic as possible to increase the price of your home. A higher commission helps spur price competition for the home you have!
Are homeowners insurance prices on the rise?
According to Bankrate, homeowners insurance is on the rise in every state. Insurance is required when taking a loan. If you’re curious about this cost, I’d recommend getting a quick quote and looking up the resources available in your state.
How important is my credit when looking at a home?
This is an essential factor but fortunately, there are steps you can change to improve. This is why I recommend reaching out early to a mortgage professional. They are licensed to provide credit advice and can view all your credit cards. If needed, that mortgage professional can make specific financial recommendations.
What resources do you have for first-time home buyers?
If you’re just starting the search for your first home, my team has several different resources to read. The is our buyer’s guide (very Manhattan and Brooklyn specific).
Where can I read about the Brooklyn market?
As with so much real estate, housing is all about supply and demand. There is currently very little inventory on the market. One of the biggest challenges is that buyers cannot find many apartments to compare in their search. You need to see a few before saying yes, I want to take out a million-dollar loan for a property.
How can I contact Katie with help making my next move?
You can get in touch in many different ways. Fill out a request here or send me an email at katie.johnson@corcoran.com
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