Market Disruptions Due to Broker Commissions

There is a sense of uncertainty in the residential real estate market due to the recent  settlement of the National Association of Realtors (“NAR”) in which NAR agreed to not continue a longstanding practice that required home sellers to indicate the amount they would pay a home buyer’s agent. Questions as to the timing as to when  prospective buyers or sellers should, respectively, hurry to purchase or sell have arisen. Why? The new commission rules go into effect mid-July; as a result, buyers and sellers are wondering if they should rush into deals before the changes take effect or wait to see what happens.

As we discussed in a recent blog, the NAR had been faced with a Federal Court ruling that held NAR and large residential brokerages liable for approximately  $1.8 billion in damages, finding that industry rules for how buyer’s agents are paid were keeping residential commissions artificially high. Other defendants have recently settled while another defendant in this litigation, HomeServices of America, a subsidiary of Warren Buffett’s Berkshire Hathaway, chose not to settle.

Why is there a sense of chaos in the residential market? 

Whenever there is change, there is an underlying sense of disruption in the market. Buyers who are deciding as to whether purchasing a home after July would provide them more of an opportunity to negotiate a lower commission. Sellers are considering whether the changes will make it more common for them to pay lower commission rates or no commission to the buyer’s agent at all.

These changes further add to high insurance costs, home prices and increased mortgage rates for buyers. The high home prices  are due to the fact that the inventory of homes for sale, up from a year ago, is still below prepandemic levels. Due to the lack of supply, buyers are still encountering stiff competition.

At the same time,  some sellers  choose not to sell, feeling that  they are locked-in place, because of their current home’s low mortgage rates. Such sellers would rather stay in place than try to purchase a home that may be more expensive and much smaller than the home they own.

What will happen in July to real estate broker commissions?

Home sellers are still able to choose to cover the cost of the buyer’s broker when the settlement takes effect in July. The settlement, however, could mean more home sellers experimenting with offering lower commissions to a buyer’s agent or no commission at all. While sellers have always been able to choose what commission to offer a buyer’s agent, listing agents warn that if sellers offer below the typical commission of 2.5% to 3%, buyers’ agents may steer a buyer  away from looking at their home.

As to buyers, many home buyers will be required to sign agreements with their agents as to the amount their agent will be paid. As we discussed in an earlier blog, a buyer’s agent may resort to flat fees or hourly rates for their commissions. Under the flat fee approach, a buyer would agree to pay the buyer’s agent directly but may still seek the seller to cover the cost. Alternatively, the buyer’s agent may determine the commission by how many homes the agent has shown to the buyer or use a variable as to the number of house showings and then a fixed rate for specific services related to the transaction such as finding home inspectors, appraisers, or other service professionals. In addition, some buyer brokers will ask buyers to sign exclusive agreements with them.

Sellers are still able to offer to compensate the buyer’s agent under the settlement but now the seller will be prohibited from placing the commission structure in a home listing. As a result, more buyers may simply ask the seller to pay the buyer’s agent. While the sale price of a residential home typically included the cost of the commissions, a buyer was able to include the purchase price (and hence the commissions) into the mortgage. With this ruling, the buyer will have a choice as to whether to negotiate commissions, use a different approach such as the flat hourly rate with the buyer’s agent, or even use no agent at all.

Some buyers may rely more upon real estate attorneys to assist in the preparation of the offer, contract, and overall negotiation of the real estate transaction. Buyers in general may start to use more on-line real estate searching, knowing that the images may be staged or digitally altered.

What does this all mean?

Both buyers and sellers, as well as the real estate brokers and agents, will adapt to the new rules coming this July concerning commissions. While many buyers look online before  contacting a buyer’s agent,  the question remains as to what commissions the seller will agree to pay, and ultimately what services the buyer will pay to have a buyer’s agent. Everyone can agree that the real estate industry disruption due to this settlement will bring change; however, change will allow for new opportunities to arise for all of those involved in real estate.

From the Trenches,

Roy Oppenheim