Realtor Commissions: Homebuyers should aim for 1.5%-2%

The changes in the agreement are technical in nature, revolve around documents completed by consumers at the beginning of the buying or selling process, and add new wrinkles to an already complicated process. Currently, agents charge a 5% or 6% fee that is split between both parties, but the rules are poised to shift power away from them and reduce commissions over time.

“Agents have such huge advantages over consumers in any negotiation,” said Stephen Brobeck, senior fellow at the Consumer Federation of America. “The average consumer doesn’t know what a reasonable fee is. Two percent is a good target, and in some areas it can go down to 1.5 percent.”

The US system for paying agents is a long-standing pain point for consumers, who have long complained that they pay higher fees than buyers and sellers in other parts of the world. However, the industry resisted change until a Missouri jury found the National Association of Realtors liable for colluding to keep commissions high. The Justice Department was also circling, arguing in a separate lawsuit that buyer and seller commissions should be handled separately.

NAR agreed to settle the Missouri lawsuit in March, sending shockwaves through the industry. Experts predicted the deal would cut costs for consumers by up to 30% and put armies of agents out of work. Others suggested that brokerages would simply find loopholes.

In an interview, NAR President Kevin Sears said that while it will take time to determine the impact of the changes, government regulators are paying close attention to how they are implemented.

“Anybody who wants to break the rules,” he said, “let me tell them the Justice Department will prosecute.”

For years, agents have set their fees on a path of least resistance. Typically, sellers would set commissions with their representatives, who would split the payment with the buyers’ agents. The tax was taken out of the proceeds of a sale, giving sellers little reason to haggle. The buyers, who ultimately bore the cost, had almost no say in the matter.

This framework does not disappear completely. Under the new rules, sellers can no longer specify the commission they are willing to pay a buyer’s agent on the forms they fill out to publish a listing. And buyer representatives must enter into written contracts with clients that specify the commission at the beginning of the relationship.

Some states, including New Jersey and Indiana, have already implemented the changes, providing a window into how they will play out on the ground. Before a buyer goes to look at a house they’re interested in, their agents call ahead to find out if the seller is willing to cover the commission, said Jake Johnson, a Redfin Corp. broker. from Indianapolis.

If the seller doesn’t step up, buyers are less inclined to visit the property, Johnson said, limiting the number of offers a home will receive and reducing the chance of getting the highest price. Additionally, sellers are generally focused on the final proceeds of the sale once closing costs are paid, so they are willing to cover the buyer’s fees if they generate better offers.

Forcing buyers’ agents to set their rates early in the process could have a bigger impact. All other things being equal, a buyer who offers $500,000 and asks the seller for a 2% discount on commission costs will be more attractive than one who makes the same offer but asks for a 3% concession.

“Now, buyers are the ones signing contracts,” said Ryan Tomasello, an analyst at Keefe, Bruyette & Woods. “A buyer who negotiates a lower fee with their agent will be more competitive.”

Fees are already trending lower, perhaps due to the attention the settlement has generated. For the four weeks to July 14, Redfin estimated average compensation for buyer’s agents was 2.55%, down from 2.62% earlier in the year. That drop came as existing home sales are near historic lows, and it’s possible that agents are simply willing to accept lower commissions to win business during lean times.

Brobeck said he doesn’t expect commissions to drop as a result of the deal. But over time, he envisions a system where buyers and sellers pay a base rate of 1 percent to 1.5 percent each, with additional fees for services like high-quality photography or showing a buyer a number sea ​​of ​​properties.

It’s not yet clear that buyers’ representatives would be willing to work for less compensation, aside from discount brokerages that have been around for years with mixed success. Top agents will not eagerly accept reduced commissions, especially since the settlement does not change the services they offer.

If taxes go down, it will probably be gradual. Growing pains will be visible immediately.

In New Jersey, which implemented the rule changes on Aug. 1, Farah Alli, a Hoboken broker with Story Residential at Compass, was frustrated by new parts of the process. If he wants to show five properties to a client in one day, he has to call each seller’s agent to find out what the commission would be, and if he doesn’t pick up the phone, he might not show that house. It is also inconvenient to set the commission on the form.

“A lot of times I connect with people on the phone — they haven’t met me, they don’t know what a fabulous person I am,” Alli said. “And I have to tell them I can’t help them until they sign the form.”

The extra work is a price worth paying for greater transparency, said Jennifer Johnson, who focuses on real estate transactions as an attorney at Flaster Greenberg PC in New Jersey.

“When I call to fix my refrigerator, the guy says, ‘I can fix it, here’s how much it’s going to cost,'” Johnson said. “Talking about money is always uncomfortable, but it’s also good.”

Recommended newsletter: CEO Daily provides the key context news leaders need to know from around the business world. Every weekday morning, more than 125,000 readers trust CEO Daily for information about – and from within – the C-suite. Subscribe now.