Real estate industry braces for commissions overhaul

But how much will really change on August 17?

Let’s say I want to buy a house in Denver, and I check out a listing on Redfin. Scrolling through the property information, along with the year the house was built and its square footage, I spot another detail: a 2.5% buyer’s agent fee. That’s the commission my agent would get if I buy that house.

“If you’re a buyer agent, you have a real incentive to care about that number, because that’s what you get paid,” said Jordan Barry, a law professor at the University of Southern California. 

Traditionally, home sellers agree to pay a commission, typically around 5%, that’s split between their agent and the agent representing the buyer. 

The problem with that, Barry said, is that when I’m looking for a house, my agent may be less inclined to show me ones that offer lower commissions. That’s called commission-based steering, and Barry co-authored a forthcoming study suggesting it happens. Looking at thousands of listings on Redfin, in more than 30 different markets, the researchers found that houses offering below-market commissions tended to attract fewer views on Redfin. 

“But more importantly, from a seller’s perspective, those homes take longer to sell, and they’re less likely to sell at all,” said Barry. 

The study also quoted training materials from major brokerages that coached agents to warn sellers against offering lower commissions, because they’d get fewer showings.

To address those concerns, the National Association of Realtors has agreed to make changes to its policies as part of a settlement with plaintiffs who successfully sued the organization and several large brokerages for conspiring to inflate real estate commissions. Starting Aug. 17, listing agents will no longer be allowed to offer a buyer’s agent fee on the multiple listing service, or MLS, which agents use to share information about properties for sale.

“What that means is that for both buyers and their agents, they will no longer know if or how much a seller is willing to contribute towards the cost of the buyer’s agent representation,” said Brad Twiss, who owns Neighbors Realty in Portland, Oregon.

So, no incentive to steer buyers toward one listing or another.

In another change, buyers who work with an agent will need to have a written agreement spelling out their agent’s commission before touring any properties. A seller can still agree to cover the buyer’s agent’s commission, Twiss said. They just can’t advertise it on the MLS.

“I’m starting to think that not a ton is going to change,” he said. “I think that, based on the conversations that I’ve had with buyers, they’re very keen on us asking sellers to cover my compensation as part of their offer.”

And he thinks many sellers will agree, to attract more offers.

Buyers have essentially been paying commissions all along, said Dureka Bonds with Plum Tree Realty in Cincinnati. They’re just rolled into the sale price, allowing buyers to cover those costs through their mortgage. The commissions are then paid out of the seller’s proceeds.

“So you think that the seller pays for it, but the money came from the buyer, and all of that was already in your price upfront,” she said. “So really, the buyer paid for it.”

Now, if sellers decide they don’t want to cover both commissions, buyers will have to pay their own agents out of pocket, Bonds said. And some worry that creates another upfront cost that could hurt people already struggling to compete in an expensive market. Buyers may be able to negotiate lower fees, possibly for fewer services, but some will likely decide to go it alone, leaving them at a potential disadvantage.

“I’m just really fearful that we could have some really bad outcomes for some buyers, potentially, during this transitioning,” said Ted Tozer, a longtime mortgage industry executive now with the Urban Institute.

The good thing about these changes, Tozer and many in the field agree, will be more conversation about commissions and more room for negotiation. 

“Right now, the commissions are so standardized,” Tozer said. “The transparency, I think, is really going to be great for the consumer, to be able to pick and choose what they want, and it also enables them to compare Realtor to Realtor.”