Special Report
New Rules, New Opportunities and Challenges
for Homebuyers and Sellers
August 17 was the first day of the rest of the real estate industry’s life. In the wake of a March 15 court decision in a Missouri class action suit, the new rules that went into effect on August 17 will change the real estate industry forever in fundamentally important ways. And no matter how hard some real estate professionals may try to convince their potential clients – and themselves – that nothing has changed, it has. The quick overview is that sellers will save money and buyers will have to pay for services that previously had been free to them. Most of all, agents and clients alike will need to understand and agree on options in the new landscape.
More Transparency, More Negotiation
In terms of commission rates, the new rules most affect how buyer agents are compensated. As a result of the court decision, buyer agents will be required to sign an agreement with their clients before they can show them any houses. I have referred buyers to agents in the Southeast for the last 17 years, and I have never heard of one insisting on a buyer’s agreement. That is because, prior to the lawsuit, sellers were assessed a commission rate of between 5% and 6% that was split evenly between the listing brokerage and the buyer’s brokerage. The buyer agents knew how much of a commission they would make because it was published with the house’s listing on the local MLS, the multiple listing service.
Buyer agents will now be required to sign an agreement with their clients before they can show them any houses.
But the court’s decision, citing unfairness to the seller in compelling payment to the buyer’s agent, put the kybosh on the MLS’ future ability to publish compensation. No longer will sellers be obligated to provide a commission for buyer agents. (However, they can kick in extra dollars if they are persuaded it will help sell their homes; see below.). Also, the court ruled, that offering a straight percentage rate commission to buyer agents encouraged them to show their clients only the most expensive homes in their price ranges. So, in essence, the old ways of doing business in the real estate industry – encouraged and supported by the one-million-member National Association of Realtors – was deemed unfair to both sides of the transaction. (The NAR settled for a payment of $418 million dollars after the court judgment assessed $1.8 billion.)
How the New Rules Affect Sellers
Sellers traditionally have paid a commission rate of between 5% and 6% to their listing brokerage. The dirty little secret in the industry was that commission rates have always been negotiable – but brokerages, aided and abetted by the NAR’s silence on the issue, were under no obligation to mention that to a seller. The listing brokerage simply indicated its standard commission rate; all but a few sellers agreed. The irony of the new rules is that most sellers will be tougher negotiators now that they understand they are not on the hook for a payment to the buyer’s agent. In most cases, expect the seller’s commission rate to land somewhere between 2% and 3%. If an agency is especially hungry for a commission, the rate could be a little lower. In other cases, a savvy agent with excellent marketing skills will be able to persuade a seller that an extra percent or two will attract more buyer agents and, therefore, more potential buyers. Those sellers in a particular hurry to sell might consider supplying a little extra “candy” for the buyer agents.
Expect the seller’s commission rate to land somewhere between 2% and 3%, a bit higher if they are persuaded to add an incentive for buyer agents. Before the new rules, the rate fell between 5% and 6%.
The restriction on publishing a buyer commission rate in the MLS does not extend, for example, to a real estate agency’s website. If a seller is offering a piece of their commission rate to entice a buyer agent to show their house, the listing agency is free to advertise that on their website and other non-MLS media. But if sellers balk at anything more than, say, 2%, the listing brokerage may have no choice but to work only with buyer agents who are compensated by their clients. (See below)
How the New Rules Affect Buyers
Buyers have rarely paid any buyer agent commissions in the past; those were covered by half the seller’s commission of 5% to 6%. But those days are gone and, in their place, buyers will now be required to sign a buyer’s agreement with the brokerage whose agent represents them. That buyer’s agreement will be negotiable, with customized arrangements between the parties. The buyer and agent can decide, for example, on a flat fee for services, an hourly rate for services or a percentage of the final purchase price. This last approach, with echoes of what caused the Missouri sellers’ lawsuit in the first place, could encourage a few unscrupulous agents to steer their buyer clients toward the most expensive homes. Savvy buyers will steer clear of the percentage option unless they have unwavering faith in their agent and have their eyes on one specific must-have home.
All potential buyers and browsers continue to be free to wander into any open house, for example, and tour it without an agent. But if they want a tour, they will be required to sign an agreement with a buyer agent and expect to pay a fee.
More than ever, buyers will ask themselves why they need an agent at all. According to the NAR, 89% of homebuyers in 2023 worked with an agent; but that was then and, from now on, that number will drop, perhaps significantly, because many buyers will want to avoid the payment of any commission or fee, or at least pay a deeply discounted fee. All potential buyers and browsers continue to be free to wander into any open house, for example, and tour it without an agent. They are free to respond to any listing on the Internet, in the local paper or from one of those homes-for-sale booklets that are often stacked out in restaurant or hotel lobbies. If, however, they engage an agent to show them a house, a signed buyer’s agreement that includes how the agent is compensated by the buyer will need to be in place before the tour. On the other hand, the buyer might opt to work directly with the brokerage that has the listing. In that case, what is known as “dual agency,” the buyer would be well advised to insist on representation by an agent in the brokerage who is not the listing agent. The listing agent’s first duty is to his or her client, the seller.
There are risks for a buyer who searches for and eventually purchases a home without an agent’s assistance. Those risks include potentially overpaying for a house; qualified agents understand fair market values in their local areas better than buyers do. Unless you are a lawyer, a labor negotiator or someone used to negotiating contracts, a qualified real estate agent will ensure there are no surprises in the agreement to purchase. And, finally, if you have purchased a home in the past, you know how much paperwork, legal mumbo-jumbo and other headaches are involved with the purchase of a home, and how important it is to have a qualified real estate attorney working in your behalf. Local real estate agents should be able to recommend not only a good local attorney, but also a home inspector, mortgage officer and other suppliers of services that you will need.
The website Bankrate does a good job of listing the pros and cons of purchasing a house with or without the help of a buyer’s agent. Here’s the link to Bankrate’s overview: https://www.bankrate.com/real-estate/should-i-buy-house-without-realtor/#faq
Who Benefits Most from the New Rules
The financial firm T.D. Cowen estimated, after the March court decision, that real estate commissions in the U.S. would fall between 25% and 30%. Most of that will hit the buyer side of the equation. Obviously, the biggest beneficiaries of the new rules are home sellers who, thanks to that class action group of sellers in Missouri, have had the balance of power shifted their way. They will now keep half of what they would have paid as a commission under the old rules; that amounts to as much as 3% of their home’s selling price. No listing agency will refuse their business at a 3% commission rate, and some agencies in competitive markets will accept less. Some sellers might be compelled to lower the prices on their homes compared with how they might have priced them before the commission relief.
Sellers’ agencies should do fine, but they will find themselves on the horns of a dilemma. If they cannot convince sellers to kick in an extra percent or two to incentivize buyers’ agents to bring them purchasers, and if buyers’ agents might turn away business because buyers are not willing to pay a flat fee or hourly rate, then sellers’ agents may have to contemplate kicking in a bit of their commission to gin up traffic for the sellers they represent.
Online agency Redfin should benefit from the new rules; Zillow not so much.
Non-traditional online brokers stand to benefit as well. For 18 years, the online brokerage Redfin has touted the benefits of lower commission rates for its clients and offered both flat fee and discount rates for buyers. In a letter to Redfin’s customers last week, the company’s CEO wrote, under the title “Change is Good,” that “our goal has been to offer a lower price than roughly 80% of our competitors. We can still deliver the best service at this price because, by pairing Redfin.com customers with Redfin agents, we avoid the primary cost of being a traditional agent, which is the hunt for new customers.” Redfin, which receives about 8 million visits to its website each month, maintains a tech-heavy infrastructure that provides ample support to buyers at a comparatively low price.
Although the new rules will challenge buyers’ agents the most, the best of them will rise to the occasion and thrive. Real estate is obviously a people business, and those practitioners who have honed their marketing and communication skills will do more than just survive. Those who work for the most aggressive and organized real estate agencies will be backed by upgraded agency websites that tout their ability to support buyers’ needs at a price somewhat below the traditional 3%. Communication between brokerages will solidify as pressure builds to encourage sellers to kick in a little extra to motivate the buyer side; the most consistently successful buyer agents may find the listing brokerages themselves might add extra incentives for the best buyer agents over time.
Agency organization and efficiencies will rule the day. Those brokerages that can operate, say, like my favorite retailer, Costco – with a wide range of products offered at minimal operating costs and, therefore, at the lowest possible price to the client – will thrive in a more complicated industry. (Yes, I know, Costco offers products first and foremost, but the model seems suitable to the “new” real estate industry.)
Who Will Benefit the Least from the New Rules
When I attended an 11-week real estate licensing course in Connecticut 17 years ago, I was surprised at how many of my classmates seemed to be sleepwalking through class, a few of them actually sleeping. When I reported to the broker who held my license that I had passed the exam, his surprised response was, “Your first attempt? That doesn’t happen often.” In California, 50% of those who take that state’s exam fail. In Connecticut, you can take the exam as many times as necessary to pass. Some eventually do pass, but the failure rate on the job is high. Investopedia, an online information service, estimates that 75% of agents fail and leave the industry in their first year. Imagine you run a business in which you spend time and money training new employees, and 75% leave before the end of the first year. Yikes. And that was before the job of buyer agent became even tougher with the August 17 rules changes.
Investopedia, an online information service, estimates that 75% of agents fail and leave the industry in their first year. That number will accelerate as the revised practice of real estate puts more and more demands on agents, especially on the buyer side.
Suffice to say the real estate industry attracts a fair number of practitioners who are not especially motivated to succeed in a challenging environment. These are the folks who will benefit the least from the new rules, the ones who basically sit by the real estate office phone when it is their turn, waiting for some potential buyer to call up and ask for assistance. Those calls are likely to slow down, and the only way for buyers’ agents to find clients – except for recommendations from family and friends – will require hustle and savvy communication and marketing. Tens of thousands of agents won’t be able to keep up.
The online giant Zillow may also be a victim of the new normal in the real estate industry. Zillow, whose model is to match buyers with buyer agents, has relied on agent advertising for a large part of its revenue. But as buyer commission rates become slimmer, marketing budgets will slim down as well. Zillow’s reliance on agent advertising will suffer. However there is a silver lining; given Zillow’s immense online presence — its website attracts 51 million visits per month, according to the online date firm Statista — the company should still attract listings from sellers (and their agencies) eager to show their homes to the largest possible audience.
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As a referral agent, I work exclusively with potential buyers before I refer them to a buyer’s agent. The buyers’ agents I have spoken with recently do not seem worried about the revisions to procedures in the industry. I understand. Most of them are high energy experts in their markets and good communicators. They will encounter few problems convincing potential clients of their value. I will have no reservations in referring to them folks looking to move to a Southeast golf community. These agents all recognize that the new normal will open up new opportunities.
If you or someone you know is looking for a golf community home in the Sunbelt,
Thanks for reading,
Larry Gavrich
Founder & Editor
Home On The Course, LLC
