Maybe you've heard a headline or read an article about upcoming changes to how the real estate business is going to change starting in July 2024 - specifically how real estate agent commissions are going to be paid in the future. There are a lot of misleading headlines and talking points out there, so I want to share what this new change means.

This change stems from a lawsuit that was filed back in 2019 from home Sellers that were suing alleging that real estate agents were colluding and keeping commissions high by requiring Sellers to pay for the commission of an agent that represents a buyer. The fact is that real estate agent commissions have always been negotiable.

Nobody ever forced anyone to use a real estate agent - there is always someone willing to do it for less money. How much money a Seller paid a Buyer's Agent was always negotiable, and there are good reasons why paying a Buyer's Agent makes sense in a lot of cases. If a home seller didn't want to go the "traditional route" or didn't want to pay an agent, they could always sell By Owner, which many people attempt.

While I disagree with the verdict and the ruling of the case, the National Association of Realtors (the Defendant in the case) was found guilty by a jury of our peers, and that is how our justice system works in America. Real estate agents that want access to the MLS, which is a vital tool for us to do our jobs, MUST be members of the National Association of Realtors (NAR). I'd be safe in saying that 90% of agents or more would leave NAR if we weren't required to be members to get access to the MLS.

Will Real Estate Prices Come Down?

Many headlines state that these changes will lead to a decrease in home prices. I don't buy it. Just because a Seller doesn't have to pay as much in commission, doesn't mean the price of the home will be reduced. The whole lawsuit was about home sellers not wanting to pay as much for commissions. I don't see a world where a seller paying less commissions means they will pass that savings to buyers. They'll just keep more money from the sale.

The Old System

In the old system that is still in place until July 2024, Sellers would sign a listing agreement with a Seller. This agreement specified a TOTAL commission that the Seller would pay to that listing agent in exchange for whatever services that agent provides. The agreement would also state that out of that TOTAL commission, a certain percentage would be paid out to an agent that represented the Buyer.

This system came to be in the early 1990s because before this system, all agents technically worked for the Seller, even if they didn't have an agreement with that particular seller, and Buyers got frustrated that they didn't have any representation and were getting screwed over in their real estate purchases. Buying real estate is not like buying groceries or even a car. This is the largest investment most people will ever make, on average people do it 3 times in their life, and they do it so infrequently that they forget how it's done and don' t fully appreciate the nuances of a sale and how many things can go wrong and cost them thousands of dollars.

The commission offered to a buyers agent was a unilateral offer of compensation, meaning that no matter what the final sales price or terms of the sale was, the agent that represented the buyer was getting paid that same amount. Real estate is one of the few professions where a brand new agent that has never sold a house before can get paid exactly the same as an experienced agent that has been selling 50+ homes a year for 30 years. Those 2 people, in theory, have way different levels of experience and value, and should likely have different fees. 

The New System

In the new system that will take place starting July 2024, offers of compensation will no longer be published in the MLS. This means agents will have no idea how much they will be getting paid up front. It does not mean that sellers will not be able to pay commissions to agents that represent buyers if they choose to do so. Here are the important facts in the settlement:

  • NAR has agreed to put in place a new rule prohibiting offers of compensation on the MLS. The change will go into effect in mid-July 2024. 

Implications for Realtors

  • There will continue to be many ways in which buyer brokers could be compensated, including through offers of compensation communicated off MLS, but using the MLS to communicate offers of compensation would no longer be an option.
  • The types of compensation available for buyer brokers would continue to take multiple forms, depending on broker-consumer negotiations, including but not limited to:
    • Fixed-fee commission paid directly by consumers
    • Concession from the seller
    • Portion of the listing broker’s compensation
    • Compensation would continue to be negotiable and should always be negotiated between agents and the consumers they serve.

Implications for home buyers and sellers

  • This settlement would preserve the choices consumers have regarding real estate services and compensation.
  • After the new rule goes into effect, listing brokers and sellers could continue to offer compensation for buyer broker services, but such offers could not be communicated via the MLS.
  • The settlement expressly provides that sellers may communicate seller concessions — such as buyer closing costs — via the MLS provided that such concessions are not conditioned on the use of or payment to a buyer broker

Implications for members and home buyers and sellers

After the new rule goes into effect:

  • MLS participants acting for buyers would be required to enter into written agreements with their buyers before touring a home.
  • These agreements can help consumers understand exactly what services and value will be provided, and for how much.

How does this affect me?

As a buyer, many people have gotten used to going to websites, clicking a button that says "tour now", and a Realtor shows up and shows you the house. This system only works because Realtors are guaranteed some form of payment if they sell the house. Now, before any agent can show you any house, you must sign an exclusive Buyer Broker Agreement stating exactly how much that agent will get paid if you buy the house. And if the Seller is unwilling to pay some or all of that commission, you as the Buyer, would be on the hook for the difference.

This is hopefully going to make Buyers think twice about the agent they work with, do their research on that agent, and interview multiple agents to see who is the best and provides the most value in relation to whatever fee that agent is charging. Now that brand new agent who got that lead and showed up to open the door and was in the right place at the right time may get less than an agent that was working with a buyer for 18 months trying to find the perfect home - as they should in my opinion.

What about open houses?

As of this time, there is no clarity on if you need to sign an exclusive buyer brokerage agreement with someone to walk into an open house. Real estate agents are just as confused as you might about this because it completely upends how business is done. What happens if you have already signed a buyer brokerage agreement with an agent and want to go to an open house? Does your agent have to go with you? Do you have to sign an agreement with the listing agent on that one particular house? We are all waiting for more clarity on this.

Do I need a Buyer's Agent?

NO!

You never did need a buyer's agent, and you were never forced to have one in the old system. But it doesn't mean that you shouldn't have one. Not everyone has the same needs, and this change in the industry is - in my opinion - good for some Buyers.  If you are the kind of person that has bought multiple homes over the last few years, you're well versed in the process, you know how to structure a contract, how to make your offer stand out, and if you know exactly what you want and which neighborhood you want to be in, you probably don't need an agent or at least don't need as many services from an agent.

But if you're relocating from a different area or state, you probably have more of a need for an agent. If you're a first time home buyer, you probably have more of a need for an agent. If you have to sell a property to buy a property or have other special contingencies, you probably have more of a need for an agent. If it's a very competitive market and you need to find off market inventory, you probably have more of a need for an agent than if its a buyers market and there are tons of great homes to choose from available on the market.

The internet has changed how people search for homes, but with so much information out there sometimes its hard to sift through whats true and not true and people often get overwhelmed. 

Real Estate Agents provide a service. You can cut your own hair. You can do your own landscaping or maintain your own pool. You can change your own oil in your car. You can do your own nails. But just because you can do something, doesn't mean you should. A GOOD real estate agent provides a service more than just opening a door. Some people might value that service more than others depending on their unique situation, and you should be willing to pay for a service. Maybe you value your time and convenience and are willing to pay slightly more for something than others. 

You can stay in a Holiday Inn or a Ritz Carlton - the choice is and always has been yours. How much you're willing to pay for a service could and should be a negotiation, and it's good to have options.

"My Real Estate Agent Sucked And Didn't Do Anything"

We hear this a lot from people and our question is always "Why did you hire them?" In the old system, a Seller hired an agent to represent them and signed a contract with them. That agent didn't sneak into the title company and put their name on the closing statement and steal a fee from the seller. They presented their value, negotiated that fee up front, and had a signed contract with the seller. If you as a seller think the agent didn't earn that fee, you likely should have done more research and chosen a better agent. You could have always called a flat fee service or a newer agent that was willing to do it for less.

As a Buyer, you brought all the money to the table so you were technically already paying for the agent when you really think about it. Without you, there was no commission to pay anyone. It had to go on the Seller's side of the transaction because they are usually the ones with the equity and in the position to pay for the commission.

But because of this you had the benefit of choosing ANY AGENT YOU WANTED to represent you. If you chose a bad agent and weren't happy with their services, why did you hire that agent? Why didn't you research the agent and see if they had recent sales or reviews? People will read 100 reviews on a small product on Amazon, but couldn't be bothered to research the person helping them with the biggest financial transaction of their lives? Seems like we need to take a little personal responsibility in my opinion.

Should Real Estate Commissions Be Less?

Probably.

With the internet making home buying a little easier for the consumer, the job of both agents is a little easier as well meaning the fees should probably come down slightly. But a good agent provides a good service and they can charge whatever they think they are worth and whatever someone is willing to pay. Holiday Inn vs Ritz Carlton. 

Why shouldn't I go directly to the listing agent?

You can. But that agent is going to have a contract to represent the seller. The whole reason the previous system existed is because Buyers got tired of being ripped off and not having anyone who knows what they're doing look after their interests. The key to that sentence is "knows what they're doing". Not all agents are created equal and I've worked with excellent agents and awful agents who cost their clients a ton of money. A GOOD agent is easily worth their fee, but not everyone is going to see it that way. Caveat emptor - Let The Buyer Beware. 

Can I just hire a real estate attorney?

Sure, but will they do all the things a good real estate agent does? Probably not.

Attorneys will typically write up an offer after a buyer and seller have agreed upon everything. They get a fee for doing the closing so they're definitely being compensated on the backend. But they'll likely charge a higher fee if they are writing up the contract in addition to doing the closing. If you haven't already negotiated everything upfront with the other party, they're probably going to charge you an up front fee. You would potentially have to pay them that fee upfront regardless of if your offer gets accepted or not. A real estate agent typically writes up the contract for free because they only get paid when you close on the house. The attorney wouldn't really care if you get the house or not and potentially has more interest in charging you to write multiple offers so they get paid every time you write an offer. Is that really best for the Buyer?

An attorney is also only going to work 9-5 hours typically. Most real estate deals get done in the evenings and weekends. This "overtime" is part of why agents get paid what they do. They're taking time away from their families and personal lives to work odd hours. It's not an easy 9-5 job and thats part of why it needs to get compensated differently. 

If your attorney doesn't answer your call at 6:30 when you see a house after work or Saturday afternoon after an open house, you could potentially lose the house to another buyer in a competitive market like we're in currently.

They're also not "boots on the ground" seeing the house with you. They likely aren't as versed in insurance regulations (a huge issue in South Florida), inspection issues, and what's realistic or common in your market to expect. A good Realtor can spot issues that will come up in an inspection that could kill a deal so you can negotiate it upfront or at least be aware of it. This can easily save you easily $1,500 or more on inspections, appraisals, HOA applications, and other fees you pay upfront only for your deal to die for something that could have been prevented up front.

In some states like New York, an attorney always drafts the contract, but in Florida a realtor can fill out the standardized contract. At least in my experience, when dealing with a buyer thats used to having their attorney draft the contract and review everything, those deals are significantly more complicated and things go sideways more frequently.

Why couldn't I just copy a contract and do it myself?

You can! But every deal is very different. You'll need to be very well versed in the contract and how to structure it. Every sale is not the same so you'll need to study to become well versed in the contract's nuances, know which addendums are required in any particular sale, and how to fill them out properly to protect yourself. How much is your time worth and do you think you can become an expert in contracts in a short time?

This is part of what makes a good realtor worth their fee. We're not attorneys, but a good Realtor can write a very good contract because of their experience. I've seen SO MANY bad realtors write terrible contracts where half the spots are not filled out and they are really doing a disservice to their clients and jeopardizing their deposit money. 

This is one of the dumbest ways you can navigate these new changes in my opinion. If you're not going to hire a good Realtor, at least have a good real estate attorney (we recommend Capital Abstract & Title).

Predictions for the future

Nobody has a crystal ball, but here are my predictions for how this all shakes out:

Sellers will still pay similar commissions at first

Fear of change is real. I think at the beginning until people start seeing how this plays out Sellers will still be willing to offer a credit similar to historical normal commissions to a buyer to cover the fee for their realtor. If you really have to sell or want to sell on a certain time frame, the commission is just a cost of doing business. If that's what it takes to sell, it is what it is.

Listing commissions will stay the same or maybe increase

There will be a portion of buyers who want to go directly to the listing agent to "save money", despite the risks involved. I think Listing Agents will be able to command a similar or even higher fee than they previously did. Likely less than the full commission they were charging, but still more than what they would have made had they only represented 1 side of the deal. This means Sellers save money, buyers don't really get a discount on the house, but take on all the risk of being unrepresented.

Eventually buyer agent commission offers will go away

I think in the very near future the free market will speak. Sellers will agree to a certain fee with their listing agent and the buyers agents can ask for their fee to be paid by the seller in their offer, but there won't be an upfront agreed upon amount they're willing to offer. It will become a "let the best offer win" situation. That is the free market working its best. A good agent working for the Buyer makes the deal go smoother and I think Sellers will still be willing to pay something for that, but I think Buyer agent commissions will definitely get compressed more than listing agent commissions.

New models will pop up

Agents are going to be creative and come up with different options for different types of Buyers. I think you'll see a lot of flat fee or "pay for play" type of services. For those models to work, I think they require a retainer to be paid up front but people might be willing to do that if the overall cost is lower. This will be an experiment for everyone.

What should I do?

For now, it's business as usual. But even before the change in July you should be researching your agent and seeing what they provide for you besides being able to open a door and "provide good service". Buyers will pay for access to off market inventory and exclusive offers that not everyone has. Make sure you interview your agent to see what they do beyond the standard service. You deserve the best, don't settle for any random person that answers your inquiry from whatever website you're searching on!


Posted by Andy Mandel on
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