by
Kevin Atto
June 28, 2024
You may have heard in the news over the past few months about the big lawsuit settlement that the National Association of REALTORS® (“NAR”) recently made, which has started to change the way real estate commissions are handled here in our great nation. Our team here at Park Metro Realty is embracing our core value of “Staying Ahead of the Curve” by learning as much as we can about these changes in our industry, but the good news is we already have been doing things this “new” way for years, with a few minor differences. This topic has been a major question we’ve received from many of you, and we thought it would be nice to put things in lay terms for you here today!
First, please know that all real estate commissions are negotiable. An agent and brokerage should always agree in advance of transacting with each client on how the compensation will work. This has always been the case here at Park Metro Realty, and we hope it always will be.
A pretty common practice for decades has been that a Listing Agent has negotiated, directly with only the Seller, the commissions for the agents on both sides of the transaction before putting a home on the market to sell. In most cases, the Seller not only has paid his or her agent’s commission, but the Seller has also traditionally offered a cooperating commission for the Buyer’s Agent. The NAR lawsuit stemmed from the fact that, even though this scenario might appear to show on the surface that the Buyer doesn’t pay a commission, the Buyer does in fact pay the purchase price, and that is from where the commissions come. Putting it another way, the lawsuit dealt with fears that Buyers were being tricked into thinking they didn’t pay commissions when they sort of did through the purchase price paid for a home.
Now in the wake of the NAR settlement, what some Listing Agents and Sellers might opt to do is only negotiate the commission between them to pay only the Listing Agent, while opting to have the Buyer negotiate and pay the Buyer’s Agent commission directly to his or her own Agent, instead of the commission coming out of the Seller’s sale proceeds.
In today’s market, with prices historically high in the majority of US cities, a con to this proposed new way of doing things is it’s tough enough already for most Buyers to even be able to come up with enough cash to be able to pay a down payment and closing costs to purchase a home, let alone pay the commission for the Buyer’s Agent on top of all that. Lenders look at debt to income ratios as well as cash on hand to determine at what purchase price they could lend to a Buyer for a property purchase. If the Buyer must pay his or her own agent, then the Buyer will qualify for a lower loan amount, which results in the Buyer being forced to search for homes with a lower purchase price than the Buyer would be able to afford if the Seller was paying the Buyer’s Agent commission. The change of having a Buyer pay his or her own agent will also completely disqualify some Buyers from being able to make a purchase at all.
A pro to the Buyer paying the commission directly to his or her agent is that the Buyer and his or her agent can negotiate commission with each other instead of having the commission predetermined by the Seller and Listing Agent. Another pro to this way of doing things is it makes it appear that each party pays the commission of his or her own agent, which sort of makes sense on the surface.
A pro or con (depending on which side you’re on) to this change is that many Sellers had the commissions for their Buyer’s Agents paid by the person who sold their properties to them, and now when they sell their properties, they don’t have to pay the new Buyer’s Agent, so they’ll appear to be coming out ahead compared to a Buyer potentially in the near future if this potential new way of doing things becomes real life.
Here’s the thing though…it’s all smoke and mirrors. At the end of the day, the agent commissions come out of the sale price either way. If a Seller is paying the commission for the Buyer’s Agent, the Buyer will most likely pay a higher purchase price, and the Buyer’s Agent commission will come out of that price. If the Buyer is paying the commission for his or her agent, he or she will take that into account and make a lower offer to account for also paying the commission. With this understanding, either way you pay out the commissions, it all balances out in the end. Some might argue it could lower home prices slightly, but people owning real estate today who sell later will in fact come out slightly ahead of those who buy later and pay their own Buyer’s Agent commissions.
This debate starts to feel a little bit like the debate of student loan forgiveness. Our perception is that more folks than not in older generations think student loan forgiveness is unfair because they had to pay off their student loans, and there’s a chance young people today might not have to do so in the future. The inverse is true with this possible commission change; the younger generation could think it is unfair that they have to pay their agents’ commissions when the Sellers of the homes they’re buying didn’t have to pay their agents’ commissions when these Sellers originally purchased the homes they’re now selling.
If you take a macro view, current homeowners might have a slight advantage if these commission changes occur and they sell their homes down the road, while younger folks might come out ahead on student loan forgiveness, again resulting in a potential break even between older versus younger folks.
Another big change that is being pushed by the NAR settlement is that all Agents and clients (whether Buyers or Sellers) could soon be required to sign written agreements with each other in advance of transacting to pre-determine how much the Agent will be paid and who will pay him or her. This would be done whether an agent represents a Buyer or a Seller. We at Park Metro Realty have always done this, and in our humble opinion, it would be foolish not to do this. From what we’ve seen out there on the streets though, it is somewhat commonplace for agents representing Buyers to do so without signed agreements with the Buyers, depending on the Sellers to pay them according to the commission listed on the Multiple Listing Service (“MLS”).
This segues into another change coming down the pike with the NAR settlement, which is that Multiple Listing Services might be required in the future to stop displaying the amount of the cooperating Buyer’s Agent commission on the MLS. The reason for this is that Buyer’s Agents have been accused of steering their clients away from listings that pay lower percentage commissions.
Wherever you stand in the conversation, the bottom line is that the only thing constant is change. The real estate industry is always evolving, and we here at Park Metro Realty invariably promise to stay up on our game and “stay ahead of the curve” so we can strive to be the best client representatives in the industry, giving our clients the best possible outcomes and experiences, no matter who we represent.
We’d love to hear from you! What do you think about the above listed items? Please share with us your thoughts on the pros and/or cons of these new changes in real estate by emailing us.
