Real estate agents and U.S. housing market experts have been marking this day on their calendars for months: August 17. That is the day on which the terms of a settlement in a class action lawsuit over the industry’s compensation practices will take effect.
The changes laid out in the agreement are technical in nature and affect the paperwork consumers must complete at the start of the buying or selling process, adding new intricacies to an already complicated endeavor. Currently, brokers charge a 5 or 6 percent fee that is split between both sides, but the new rules will take away their power and reduce commissions over time.
“Agents have such a big advantage over consumers in any negotiation,” says Stephen Brobeck, senior fellow at the Consumer Federation of America. “The typical consumer doesn’t know what a reasonable commission is. Two percent is a good goal, and in some areas they can push it down to 1.5 percent.”
The U.S. system for paying realtors is an old sore spot for consumers, who have long complained that they pay higher commissions than buyers and sellers in other parts of the world. But the industry resisted change until a jury in Missouri found the National Association of Realtors guilty of colluding to keep commissions high. The Justice Department also objected, arguing in a separate lawsuit that buyer and seller commissions should be treated separately.
The NAR agreed to settle the Missouri lawsuit in March, causing an uproar in the industry. Experts predicted the deal would cut consumer costs by as much as 30% and put legions of brokers out of work. Others said brokers would simply find loopholes.
In an interview, NAR President Kevin Sears said that while it will take some time to determine the impact of the changes, state regulators are closely monitoring their implementation.
“Anyone who tries to circumvent the regulations,” he said, “should be told that the Department of Justice will be watching them closely.”
For years, realtors have set their fees by the path of least resistance. Typically, sellers negotiated commissions with their agents, who split them with buyers’ agents. The fee was deducted from the sale proceeds, giving sellers little opportunity to haggle. Buyers, who ultimately paid the cost, had almost no say in the matter.
This framework will not disappear completely. Under the new rules, sellers will no longer be able to indicate the commission they intend to pay to the buyer’s agent in the forms they fill out to publish an offer. And the buyer’s representatives will have to conclude written contracts with clients in which the commission is specified at the beginning of the business relationship.
Some states, including New Jersey and Indiana, have already implemented the changes, offering a glimpse of how they will play out locally. Before a buyer looks at a home they’re interested in, their agents call ahead to find out if the seller is willing to take on the commission, says Jake Johnson, a broker with Redfin Corp. in Indianapolis.
If the seller doesn’t pay, buyers are less inclined to view the property, Johnson says. That limits the number of offers a home receives and reduces the chance of getting the highest price. Additionally, sellers generally focus on the final proceeds from the sale once closing costs are paid, so they’re willing to take on buyer’s commissions if it leads to better offers.
A greater impact could be achieved by forcing buyers’ agents to set their fees at the beginning of the process. All other things being equal, a buyer who bids $500,000 and asks the seller for a 2 percent discount on commission costs is more attractive than one who makes the same bid but asks for a 3 percent discount.
“Today, it’s the buyers who are signing the contracts,” says Ryan Tomasello, an analyst at Keefe, Bruyette & Woods. “A buyer who negotiates a lower fee with their broker will be more competitive.”
Commissions are already trending downward, perhaps because of the attention the settlement has attracted. For the four weeks ended July 14, Redfin estimated that compensation for buyers’ agents averaged 2.55 percent, down from 2.62 percent at the start of the year. This decline comes as existing home sales are near historic lows, and it may be that agents are simply willing to accept lower fees to win business during lean times.
Brobeck does not expect commissions to collapse as a result of the agreement, but over time it could lead to a system in which buyers and sellers each pay a base rate of 1 to 1.5 percent, plus additional fees for services such as high-quality photography or showing a large number of properties for the buyer.
It is not yet clear whether buyer’s agents would be willing to work for less compensation, aside from the discount brokers that have been around for years with moderate success. Top brokers will not gladly accept reduced fees, especially since the settlement does not involve any changes to the services they provide.
If fees do fall, it will probably be gradual. The initial pain will be felt immediately.
In New Jersey, where the rule changes took effect Aug. 1, Farah Alli, a Hoboken-based agent with Story Residential at Compass, is frustrated with the new parts of the process. If she wants to show a client five properties in one day, she has to call each of the seller’s agents to ask about the commission, and if they don’t answer the phone, she may not be able to show the home. Plus, it’s cumbersome to include the commission on the form.
“I often talk to people on the phone – they’ve never met me and don’t know what a great person I am,” Alli said. “And I have to tell them I can’t help them until they sign the form.”
The extra effort is worth the price of greater transparency, says Jennifer Johnson, an attorney at Flaster Greenberg PC in New Jersey who specializes in real estate transactions.
“When I call to get my refrigerator fixed, the guy says, ‘I can fix it, that’s what it costs,'” Johnson said. “Talking about money is always uncomfortable, but it’s also good.”
