Is the 6% Commission Really Dead?

I’m going to clear things up and share some tips that you, as a someone who might buy or sell a home, should definitely know

Lately, there's been a lot of buzz about how real estate agents are paid. You might have seen some sensational headlines, like the front page of CNN.com, which stated: "The 6% commission on buying or selling a home is gone after Realtors association agrees to seismic settlement". You might be wondering if that's really true. Well, the short answer is: nope, it's not exactly true.

I've seen lots of stories about this that are rushed, inaccurate, or completely wrong! That's why I think it's important to clear things up for you. Plus, I'm going to share some tips that you, as someone who might buy or sell a home, should definitely know.

WHAT EXACTLY HAPPENED?

On Friday, March 15th, news broke that the National Association of Realtors (NAR) had reached a settlement in a lawsuit. This lawsuit alleges that the NAR, real estate brokerages, and local Multiple Listing Services (MLS) - which provide data about properties for sale - worked together to keep commissions higher than they otherwise would be. It was argued that they did this by making sellers offer payment to buyer agents and their brokerages. In general, Sellers pay their listing agent and then make an offer of compensation to the agent that represents a buyer. The reason for this is that the buyer often uses ALL of their financial resources for their downpayment, to obtain a loan, and to pay all of the other expenses associated with a home purchase. In this lawsuit, all of the plaintiffs - who were homesellers - claimed they had no idea that they could offer whatever they wanted to a buyer agent. This case creates that clarity for sellers throughout the U.S.

WHAT IS CHANGING AS A RESULT?

•If the settlement is approved, a new rule will come into effect in July of 2024, which prohibits offers of compensation from the seller's agent to the buyer's agent on the MLS.

•There will also be a rule requiring all NAR members (Realtors) to have a signed buyer representation agreement in place before showing any properties to buyers.

•Finally, and in my opinion, most importantly, real estate agents must fully disclose that commissions are negotiable and not set by law. They must also inform their clients that their services are not free.

WHY THIS DOESN'T ACTUALLY CHANGE ANYTHING WHEN IT COMES TO COMMISSIONS

The headlines may suggest that the 6% commission is gone, but offers of compensation can still be made from the seller's agent to the buyer's agent as long as they are not in writing on the MLS. A brokerage can maintain its own website with a full feed of all the listings from the MLS and make offers of compensation on all of its own listings. Additionally, any buyer agent can simply call the listing agent to inquire about the commission amount being offered to the buy side.

Regarding the requirement to have buyer representation agreements in place, this may be a significant change in some parts of the country, but in D.C., Maryland, and Virginia, we have been using buyer representation agreements for over 20 years. Therefore, this change hardly seems like a seismic shift and, in some ways, actually codifies the buyer agent's right to compensation on a national level.

THE TRUTH ABOUT COMMISSIONS

You are not obligated to use a real estate agent when buying or selling, nor are you obligated to pay a certain percentage, and this has always been the case. As a seller, you have the freedom to find someone to list your home for 6%, 5%, 3.5%, or a flat fee. In places like the D.C. area, 5% commissions were already far more common than 6%. You have always had the right to negotiate the commission you are paying to the listing agent and the amount you are offering to the agent who brings the buyer. Plus, discount brokerages that provide a limited set of services have been around for a long time.

Any agent also has the right to set the price for their service, just like any other professional. This settlement does not de-couple commissions and clearly allows for buyer agent compensation to be offered by the seller. It also does not change the fact that a seller looking to market their home to the widest pool of potential buyers, in order to sell it for the most amount of money possible, is likely to continue offering a commission to a buyer's agent.

MY PERSPECTIVE AND THE POTENTIAL POSITIVES

Commissions have always been negotiable, but let's be honest, most agents haven't been very transparent about that and haven't done a great job of proactively explaining to clients what their rights are. I'm a huge proponent of greater transparency, and it has always been one of the guiding principles in my business and daily life. If this leads to more transparency in the industry, I'm all for it.

I also believe that real estate agents should be paid in correlation with the value they provide. There are a lot of agents who haven't done a great job providing as much in value as they take in commission, and consumers being more aware of their rights to negotiate could help change that. If this leads to sellers taking more time to consider their options and work with agents who truly go above and beyond to add value, it will benefit both the agents who take the job seriously and the consumers who work with them.

As I'll get into in the next section, there's also the potential for buyer side commissions to come down a bit as a result of what I hope will be increased transparency. While it's far from certain that it will happen as a result of this settlement, the more transparency in the industry the better, and I welcome any changes that come as a result of that.

WHAT YOU SHOULD KNOW AS A CONSUMER

Sellers:

•Your agent should make it clear to you that everything is negotiable, including commissions. You can negotiate how much you are willing to pay them to list your home, and you can negotiate how much you want to offer the buyer side as well.

•The listing agent you're interviewing also has a right to determine their price, and they don't have to take less than they believe they're worth if they don't want to. However, if you don't think they are providing the value to warrant the amount they're asking for, there are plenty of other options in terms of agents and brokerages.

•If you are selling your home anytime soon you're likely still going to be offering at least 2.5% to the buyer side if you want to maximize exposure and sell your house for the highest amount possible.

•There is the possibility that as sellers become more aware of their right to negotiate both sides of the commission, some might test the waters with offering a buyer side commission of less than 2.5%, which could put some downward pressure on buyer side commissions.

•The question is, will buyer agents be willing to take less than 2.5% for their services, or will they expect buyers to make up the difference. If they expect buyers to make up the difference, it could mean that buyers choose not to see houses that are offering less than 2.5% so that they don't have to contribute to the buyer agent commission.

•If a seller isn’t offering an amount that a buyer agent is willing to accept, it’s also possible that we’ll start to see offers from buyers with a commission amount for their agent (from the seller) written into the contract, meaning the seller would have to pay in the end anyway if they actually want to sell their house.

Buyers:

•It's important that you carefully review how much your agent expects to be paid, and discuss with them what happens if the seller isn't offering the full amount. Most buyer agents have agreements for the more common 2.5% - 3% commission, and some may expect you to make up the difference if the seller is offering less than that.

•Some agents already only work with buyers for 3%, and if a listing is offering 2.5% they expect their buyer clients to pay them the difference. I believe in making access to homeownership as affordable as possible, and always make it clear that I'm willing to adjust my commission on the buyer side if the seller isn't offering at least 2.5%.

•My clients never pay anything to me out of pocket, not even an administrative fee, which virtually all agents charge their clients. My approach to buyer side commissions and not charging an administrative fee is not popular among the old guard in the industry, but I believe you should have options as a consumer, and I don’t agree with charging any added fees out of principle.

•If more agents adopt this approach and refrain from charging their buyer clients to make up the difference, it could lead to some downward pressure on buyer side commissions.

•I should also note that in practice I have not had to lower my buyer side commission below 2.5% to date, because the vast majority of listings in the D.C. area have offered at least 2.5% commission until now. While I’m willing to be negotiable to make things as affordable as possible for my buyers going forward, I also know what my time is worth and if a seller was offering less than I’m willing to work for, I would have that conversation with my client and discuss our options.

•With what I hope will be increased transparency about this, and buyer representation agreements now being required on a national level, it's possible buyers will start to negotiate the commission amount in the agreements they sign. This will be particularly important if we see sellers start offering less than 2.5% to buyer agents on a more regular basis. If your agent isn't transparent about any of this, I would recommend finding someone who is.

THE VALUE OF BUYER AGENTS AND MY CONCERNS

I support any change that leads to more transparency and consumers being aware of their rights. I also believe that buyer agents deserve to be compensated fairly for their time, hard work, and knowledge. Buyer agents provide tremendous value, both to sellers by bringing them more qualified buyers, and to their buyer clients by helping them submit winning offers in competitive situations, determining fair market value of listings and advising their clients to offer less when appropriate, protecting their best interests as opposed to the seller’s, preventing them from making costly mistakes, and using their years of experience to navigate nuanced and complex transactions that can easily fall apart without expert guidance.

My biggest concern is that these changes could make it even harder for first time buyers to own their first home, or choose to be unrepresented - both of which are bad outcomes. If they are expected to come up with money for a buyer agent commission in addition to saving for a down payment and closing costs, it will make it even more expensive to buy a home for the first time. If that causes some buyers to not have representation, it means that they will be relying on the seller’s agent for information and negotiating with them. The listing agent’s only duty is to their client, the seller, and this could lead to costly mistakes for buyers and spending more on properties than they need to. Until the early 1990s all real estate agents represented sellers, and the fact that buyers felt taken advantage of and wanted to have their own representation lead to the creation of buyer agents in the first place. It’s well established that when buyers have representation it leads to better outcomes for them, and in my opinion we should be making homeownership easier and more accessible, not harder and more expensive.

IN SUPPORT OF GREATER TRANSPARENCY

This lawsuit, at its core, is about transparency - making sure that all parties to a real estate transaction know how agents are being paid for their services and hard work. I am hopeful that this does lead to agents doing a better job of communicating with their clients and explaining their rights to them. There should always be a free market regarding compensation, and while there already is, many people selling their homes have not been fully aware of this. That needs to change and I'm excited to see what the future brings.