Paying the Agents: In “Post-Commission” Times, Buyers Finally Have a Say

Last year, the National Association of REALTORS® (NAR) settled a major lawsuit and agreed to change the way agents get paid. Buyers now know they’re covering their agents’ commissions themselves.

Once NAR agreed to new rules, as part of the $418 million lawsuit settlement, some people predicted a new wave of buyer-friendly competition among agents.

Were the results as impactful as expected? How has the industry, and today’s home buying experience, changed so far? Let’s look.

NAR Got Sued Because Sellers Were Exasperated

Traditionally, when homeowners have hired real estate agents to sell their homes, they would agree to cover both agents’ commission — if they wanted their homes to get vital exposure through the multiple listing services (MLS).

Normally, sellers would have to agree to pay the agents 5% to 6% of the value of the sale. Later, the listing agent and buyer’s agent would split that sum out of the sale proceeds.

Sellers sued because they didn’t want to keep paying for buyers’ agents. That said, the buyer winds up paying for everything in the end. But should the agents’ cut just be assumed and imposed on the parties? The seller would have to account for the commission money when setting the price in the first place, so that became part of the high cost of a home sale.

Perhaps the biggest change resulting from the lawsuit is a new level of transparency, especially on the buyer’s side. Today, both sides know exactly how their agents are paid. Agents will no longer split commissions without their clients’ permission. The prospective buyer signs a contract with their agent showing fees — before the agent can start showing the client homes.

Before the lawsuit, the precise breakdown of the fee-splitting arrangement was only visible to the agents on their MLS databases. Critics of this system called it collusion. They slammed real estate brokerages for keeping fees propped up, behind the scenes. And why, they insisted, are the costs so high? Fees haven’t gone down at all in the 21^st century, even though transaction costs have eased in the computer age.   

So, Are Agents’ Fees Any Lower Now?

The NAR lawsuit settlement does not lower fees. It doesn’t cap fees. It simply bars sellers’ agents from listing buyers’ agent commissions on MLS databases. (To be clear: The agents on the two sides of a transaction may still agree on fee amounts. A seller may still offer to cover the fee of a prospective buyer’s agent. Many do, to boost their listings. But this agreement may not be made through the MLS.)  

Commissions for buyers’ agents have dropped since the new rule came out last year. Nothing jaw-dropping to see here, though. A recent report from Redfin shows the average buyer’s agent commission at 2.37%.

The process of change is still unfolding. Many of today’s buyers have read about the commission lawsuit. They know that their sellers aren’t committed in advance to paying a set amount to cover all agent costs. And they know to shop for agents and negotiate before signing any contracts.

So, today’s buyers and their agents negotiate the fees (which is something they could always do — but now they know it). And yes, this can lower the overall cost of buying a home. But only if buyers get proactive and actually do keep their negotiation power in mind.

So it seems the change is happening gradually, not abruptly. The more buyers grasp how their buyer agents are paid, the more negotiating goes on, and the better deals they’ll get. Knowledge really is power.

Agents Who Aren’t on Board?

A recent article in the New York Times quotes a former agent who recently interviewed several brokers to help her sell a home. This Oregon home seller found them “skirting the new rule” — pressing her to cover both agents’ fees. Negotiation? No way!

The Times also discusses a homeowner in Pittsburgh, who knew about the new rule and asked his agent if he might sell his home without having to pay the buyer’s agent. His agent said no, basically. Sellers miss out on buyers, he was told, if they aren’t prepared up front to cover both agents’ fees.

Another seller echoed that experience. The seller was directed to agree to a 3% commission for the buyer’s agent. Or else! If the seller declined, said the seller’s agent, no buyers would be brought to the open house. 

It looks like some agents out there are not interested in adapting to the new legal framework. And so, in various places, the sellers’ struggle continues.

More Buyers Without Agents?

After NAR settled the case, some market watchers thought buyers would shift strategies completely. Now that they knew they were ultimately covering commissions through their offers, would some buyers just refuse to use agents at all?

That, too, could occur gradually. Brokerages that deal with an unrepresented buyer might ask for a slightly smaller overall fee. Total fees for real estate firms would shrink by a certain amount, then. But not by a lot. Because selling or buying without an agent is hard work. Going unrepresented just to save the cost of one agent’s commission probably won’t be worth it for most people.

Alternatively, more buyers and sellers could be moved to seek out the no-frills real estate firms that charge flat fees, or take no more than some 1.5% of a home’s sale price.

If you’re thinking of going it alone or deep-discount, consider these points:

• Financial researchers have found properties with lower commissions took 12% more time to get to closing — and proved slightly less likely to sell at all.

• Many successful real estate deals are successful only after pressing through unexpected hitches. Title problems, or costly repairs that inspections couldn’t reveal, can crop up some time after closing day. Agents can prevent many of those unpleasantries.

Agents know how to dig around for things most buyers don’t consider significant. A good agent’s value can be incalculable.

So, for most buyers, they key to success isn’t refusing to pay for representation — or even trying to pay the lowest possible fees. It’s all about hiring a professional worth the commission.

What to Watch Next

Most agents surveyed (54%) have noted a rise in fee negotiations. Clearly, a hefty segment of buyers “got the memo.”

But the new framework doesn’t let first-time buyers (or any buyers) roll the agent fees into their mortgages. But that could help many people who suddenly find themselves having to pay the costs at closing time. Watch for the possibility of federal rules evolving to allow such rolls.

Good luck out there, buyers and sellers!