Exciting news for homesellers and homebuyers! The National Association of Realtors (NAR) has reached a settlement in its lost $1.8+ billion lawsuit on price fixing and collusion, agreeing to pay $418 million in damages. This settlement marks a significant shift in the homebuying and selling business model, where sellers traditionally paid both their broker and a buyer’s broker.
With the settlement agreement, sellers' agents will no longer be required to make offers of commission to buyers' agents, a practice I believe was fundamentally flawed. With the decoupling of commissions, both sellers and buyers will have a greater ability to negotiate down their commissions. In addition, there will be less “steering,” the practice in which buyers' agents direct their clients to pricier homes in an attempt to earn a bigger commission check.
I highly recommend listening to my podcast with Mike Ketchmark, the lead trial attorney for the lawsuit, to gain insight into the implications of this settlement. While the NAR does not admit to any wrongdoing, the agreement represents a victory for both buyers and sellers of residential real estate moving forward.
With real estate commissions expected to decrease, we can anticipate improved price discovery and increased transactions in the market. Ultimately, the consumer wins by saving or making more money.
The Seller Paying The Buyer Agent's Fee Made No Sense
In my personal experience selling a house in 2017, I faced challenges during escrow over a $25,000 concession for “repairs” to some rear windows. The actual repair cost would have been between $2,000 and $5,000, but the buyers insisted on replacing all the windows, hence the hefty $25,000 request.
It was evident to me that this was simply a tactic by the buyer's agent to negotiate a lower price. As veteran homebuyer of many homes since 2003, I'm aware of all the tactics buyers use to try and get a better deal or delay the close of escrow.
At that moment, I couldn't help but question why I was paying a 2.5% commission to the buyer's agent, who was pushing for a price reduction on behalf of their client. I was close to canceling the deal after the 40th day of escrow, but I didn't because I just had a newborn and wanted to focus on being a full-time father.
After closing the deal, I made a vow to myself never to sell another property as long as real estate commissions remained so high.
I had paid a 4.5% commission at the time, which had been negotiated down from 5%. 4.5% still felt like 1.5% too much for the service that I received and the work my agent did. If you are buying or selling a home, please know that everything is negotiable.
How The NAR Settlement Will Impact Real Estate Commission Rates
TD Cowen Insights projects a substantial decrease in real estate commissions, ranging from 25% to 50%.
For instance, if the standard rate stood at 6%, this would lead to an average commission rate of approximately 3% to 4.5%. In cities where the standard rate was 5%, which is common in many high-priced markets, the average commission is anticipated to fall between 2.5% and 3.75%.
I anticipate an immediate decline in real estate commission rates following the NAR settlement, contrary to the expectation of some that it will take years to materialize. The rapid jury decision against the National Association of Realtors, Keller Williams, and Homesellers of America in under two hours, coupled with the $418 million settlement, expedites the process of lowering real estate commissions.
Even prior to this settlement, I observed instances of real estate agents willing to charge 3.5% in total commission. For example, in January 2024, an experienced husband and wife team offered to earn a 1% commission while allocating 2.5% to the buyer's agent when I was considering selling my old home. Although I initially perceived this arrangement as unfair to them, they were content with compensating the buyer's agent more.
This disparity in commission distribution underscored the significant role of financial incentives in motivating buyer's agents to advocate for listings to their clients (steering). What a sobering reality given that most buyers independently discover listings and do their pricing research online. With online real estate websites like Zillow, buyers have an incredible amount of information on for sale and recently sold properties.
The Commission Rate Sellers Should Target Paying
Following the NAR settlement, if you intend to sell your property, I recommend negotiating for a maximum 1.5% commission to the listing agent. This is down from 2.5% – 3% (half of 5% – 6%).
Whatever the buyer's agent will receive will be up to the buyers and buyers' agents to decide. While many agents may resist this adjustment, it is within your rights to seek a lower commission rate now. Remember, in real estate, everything is negotiable.
If the seller also wants to pay a buying agent’s commission, that’s at the discretion of the seller. The listing agent just can't list the buyer's agent commission on the MLS anymore per the NAR settlement. But the listing agent can list the buying agent's commission on their website or tell them over the phone. The seller can also offer a “seller concession” to be paid to the buyer’s agent at closing.
Again, the idea is that the more you offer the buyer's agent, the harder the buyer's agent will work to try to convince their client to buy your home. But come on, does that sound morally right to you? It doesn't to me. Furthermore, buyers have all the public listings at their disposal online. If a buyer wants to see and buy a particular home, they will.
Homebuyers Will Not Have To Pay Their Agents 2.5% – 3% Of The Value Of The House In Commissions
There is a misconception among some that homebuyers will now be responsible to pay their agents 2.5% to 3% directly out of pocket given the homeseller is no longer paying. This is not entirely accurate. Instead, buyer's agents will either receive a fixed fee or a significantly reduced commission percentage, determined by the MARKET.
The core issue addressed in the lawsuit was the alleged price fixing by the NAR and various real estate brokerage firms to maintain artificially high commission rates. With the seller no longer obligated to pay the buyer's agent commission, the market now has the autonomy to determine the compensation for buyer's agents.
Homebuyers must consider how much they are willing to compensate their buyer's agent upon the successful completion of a home purchase. While some may agree to pay 2.5% to 3% of the home's value, particularly if the agent has diligently assisted them in their search and transaction process, most buyers will likely opt for lower payments.
My conjecture is that homebuyers will be reluctant to pay more than 1% of the home's value in commissions. For instance, a buyer may be willing to allocate up to $10,000 to their agent for closing on a $1 million property. It's either up to 1% or a flat fee. Of course, a buyer's agent and a buyer can agree to incentive commissions if the agent is able to negotiate a lower price.
The market will then adjust the supply of buyers’ agents accordingly. With declining commissions, there will likely be fewer agents over time.
The Need To Sign A Buyer's Agent Contract
One positive for buyers' agents is that signing an official agreement to represent a client will become more common. Too many buyers' agents have been toyed around by disloyal buyers. Despite showing many homes and submitting many losing offers, clients can sometimes end up going with another agent. The NAR settlement will discourage this practice.
Redfin CEO Glen Kelman writes, “All buyers’ agents will require their customers to sign a contract hiring that agent, which is already imposed by law in Washington state, and has been under consideration in California. These agreements, known as buyer’s agency agreements, can establish up-front how much the buyer’s agent will ask to be paid if in fact a listing doesn’t include an offer of payment.
But the settlement appears to go beyond current practice and law on buyer’s agency agreements, requiring a consumer to sign the agreement before going on a tour with that agent. A homebuyer should be able to see one or more agents in action before deciding which one to hire. No one asks a homeowner to sign a listing agreement before inviting agents into her home for advice on pricing, staging and marketing.”
What Does The Buying Real Estate Agent Do?
A buyer's agent can offer significant value to homebuyers, particularly those navigating the process for the first time. It's important to note that the settlement with the NAR does not reflect negatively on the dedication or work ethic of buyer's agents; rather, it addresses issues related to price fixing and market dynamics.
The role of a buyer's real estate agent involves several key responsibilities:
- Identifying suitable homes that align with the buyer's specific household and financial requirements.
- Assisting in managing a buyer's real estate FOMO (fear of missing out) by ensuring they don't overpay for a property.
- Facilitating connections with reputable lenders.
- Providing insights and expertise on the local real estate market and any upcoming developments.
- Offering an honest evaluation of the current state of the market and providing housing price forecasts for the short and medium term.
- Conducting thorough assessments of potential properties, highlighting both their strengths and weaknesses.
- Serving as the primary negotiator for the buyer, negotiating price, terms, and concessions during the escrow process.
- Guiding the buyer through disclosures and identifying any red flags or warning signs.
- Recommending qualified home inspectors to evaluate the condition of the property.
- Reviewing the property layout and verifying square footage to avoid discrepancies.
The value of a buyer's real estate agent tends to be higher for less experienced homebuyers and those purchasing in unfamiliar markets. Conversely, experienced homebuyers may require less guidance from a buyer's agent.
Buyer’s Agent Fee Schedule Example
Here’s a graphic that shows a proposed buyer’s agent fee schedule. It seems reasonable to me. What do you think?
The Listing Agent Cannot Lie Or Mislead A Buyer
Many emphasize the importance of having a buyer's agent to navigate the offer and escrow process, especially given that a home purchase is a major investment. I fully agree that having a knowledgeable buyer's agent can be worth it, as there are numerous potential pitfalls to watch out for when buying a home.
However, it's crucial to note that the listing agent is legally obligated to provide accurate information and disclosures during the home selling process. In other words, a listing agent cannot lie, omit, or misrepresent facts on purpose. If a listing agent were to lie or mislead a buyer, the buyer would have legal recourse and could seek damages if any undisclosed issues were discovered after the sale.
The listing agent is required to furnish an agent inspection and comprehensive disclosure statement about the property. This includes disclosing any significant issues such as structural damage, plumbing or electrical problems, fire damage, and roof leaks. It is then the buyer's responsibility to thoroughly review all disclosures and conduct inspections to verify the property's condition. This is why waiving a home inspection contingency is a risk.
While there may be gray areas regarding what must be disclosed, ultimately, it falls on the buyer to uncover any undisclosed issues during the inspection period. This involves not only examining the property for defects but also assessing neighborhood factors, safety concerns, HOA regulations, easements, and more.
A buying agent can certainly help in this discovery process, but it’s not like a buying agent has some magical powers to unearth withheld secrets about the property from the seller and listing agent.
What Does The Listing Real Estate Agent Do?
To be thorough, let's delve into the responsibilities of a listing real estate agent. With the NAR settlement, the competition to represent listings is expected to intensify. Why? Because listing agents have a higher likelihood of receiving payment and may command a higher real estate commission compared to buyer's agents.
Here are the key tasks handled by a listing agent, who is hired by the seller:
- Pricing the home appropriately
- Marketing the property effectively
- Facilitating the sale of the property
- Maintaining communication with both the seller and potential buyers
- Ensuring that prospective buyers are financially qualified
- Negotiating terms favorable to the seller
- Overseeing inspections and necessary repairs
- Coordinating with service providers for home repairs
- Representing the seller during home appraisals
- Arranging staging to enhance the appeal of the house
- Recommending title, escrow, insurance companies, and other essential vendors to aid in the escrow process
Being a listing agent entails extensive preparation and involvement. Once the property is in escrow, the workload for a listing agent is comparable to that of a buyer's agent. Therefore, it's widely acknowledged that listing agents deserve higher compensation for their services than buyers' agents.
If You Are An Experienced Buyer, Consider Dual Agency
After the NAR settlement, I anticipate that dual agency will become more prevalent in real estate transactions. Dual agency occurs when the listing agent represents both the seller and the buyer. This practice is common in other places of the world.
While many real estate agents may be reluctant to engage in dual agency due to the increased workload without additional compensation, savvy agents will recognize the opportunity to expand their business and increase their earnings. Dual agency creates less economic waste.
My Good Experiences With Dual Agency
I have purchased my last three houses through dual agency. I took the initiative to find listings online, attend open houses, and establish rapport with the listing agents. Subsequently, I proposed that they represent me as well, provided we could reach a mutually beneficial agreement. All of them agreed, recognizing me as a credible buyer who understood the process.
Through dual agency, the sellers were able to save between 1% to 2% in commission fees, while I perceived savings ranging from 2% to 4% off the purchase price of the house.
Dual agency can streamline the buying process by eliminating an intermediary. Instead of communicating through a buying agent who then communicates with the listing agent, the buyer interacts directly with the listing agent. Moreover, since the listing agent also represents the buyer, they have a fiduciary duty to act in the buyer's best interest.
That said, a dual agent will likely have a stronger allegiance to the seller initially since they've had a longer relationship. Despite the unbalanced relationship, a homebuyer can still cultivate a meaningful relationship with the dual agent over time.
Thoughts From Redfin’s CEO Mimic My Own
“More listing agents will sell homes directly to buyers: in markets from Maryland to California, Redfin’s agents are already seeing more listings offering no commission to the buyer’s agent. By paying one agent instead of two, the seller can spend less overall in commissions, even if the listing agent earns more than before. A form of this is already common with newly built homes, with about 30% of unrepresented buyers working directly with a salesperson employed by the builder. Given the long-term shortage of homes for sale in the U.S., this trend seems likely to continue even in the absence of a settlement.”
More Transaction Volume, Better Price Discovery
Lower real estate commissions are expected to incentivize more homeowners to list their properties, resulting in higher transaction volume and enhanced price discovery. With a greater number of comparable sales, prospective buyers will have more reliable data points to inform their offers. This is great for first-time homebuyers or homebuyers who are overly emotional and sometimes get into bidding wars and overpay.
Initially, this surge in supply may exert downward pressure on prices if suddenly a surge of real estate agents agree to lower their commissions. However, homeowners will likely aim to retain a significant portion of the commission savings for themselves.
It's unlikely that sellers will reduce their asking prices by 1-3% simply because they are paying lower commission rates. Instead, they will likely list their homes at market value and aim to capitalize on all of the commission savings. Consequently, sellers stand to benefit with a larger sum deposited into their bank accounts after completing a transaction. At the same time, homebuyers will also vie to capture the 1-3% decline in commission rates as well.
Despite the downward trend in real estate commission rates, the enduring impact of homeowners with low mortgage rates is expected to overshadow any incremental increase in housing supply resulting from reduced commissions. The locked-in effect is more powerful. Therefore, the effect of lower commission rates on overall supply may not be readily apparent.
The Positive Case For Home Prices Due To Lower Commission Rates
One could argue that the NAR settlement is bullish for home prices for two reasons.
On March 15, 2024, firms like Zillow and Redfin experienced declines of 13.5% and 5%, respectively, following the settlement. While these losses may impact these real estate firms financially, they signify a financial gain for consumers. Essentially, the free market is indicating that firms such as Zillow and Redfin will see reduced profitability post-settlement, leading to more funds flowing into the bank accounts of both home sellers and buyers.
Ultimately, the trajectory of home prices will be influenced by the overall health of the economy and labor market. However, with sellers and buyers having more disposable income as a result of lower commission rates, there will be additional capital available for purchasing homes. Ultimately, more capital the more upward pressure there may be on home prices.
The Clearest Winner Is The Consumer
In a world where commission rates across industries are steadily declining, it was only a matter of time before real estate commissions followed suit. The NAR settlement marks a significant victory for consumers, empowering both homesellers and homebuyers who seek to save money by negotiating lower real estate commission fees.
Overall, residential real estate investors and owners will see a 1% to 4% immediate boost to the value of their holdings. Over time, residential real estate owners could see a 5% to 6% increase in their holdings as commission rates decline to 0%.
While lower real estate commissions may not be favorable for real estate agents, brokerages, and the National Association of Realtors, it reflects the reality of today's modern economy. Just as online brokerage firms thrive despite zero trading fees, small businesses like Financial Samurai remain profitable despite charging nothing.
The real estate industry must adapt to the changing landscape. Industry players will likely find innovative ways to remain profitable. However, if they fail to do so, it may be time to consider alternative occupations or business models.
Reader Questions
Where do you anticipate the average real estate commission rate will eventually settle? Do you foresee a rise in flat fees as an alternative? How do you propose compensating a buyer's agent? And how rapidly do you believe real estate commissions will decrease if both sellers and buyers begin negotiating?
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The very large problem with Sam’s analysis is that he thinks that incentives in the current market dont matter. If you ask the listing agent to sell a home for 1.5% and then deal directly with 100 buyers then you are dreaming. You get what you pay for. He’s assuming that he well get the exact same result in this environment as he did before when there where incentives in the market to sell your home. Please tell me why you haven’t considered this. Unfortunately you cant sell your home twice at the same time to compare net dollars.
I thoroughly read Sam’s summation as well as others offering commentary on the impact of the NAR decision on the real estate players. However, I have found very little commentary on the ability of prospective Sellers to take action now rather than waiting until mid-July (when the NAR decision officially kicks in). My assumption is NAR will continue to enforce buyer agent disclosure in MLS up until the last minute.
Sure, the action a prospective Seller can take is to negotiate immediately and point out this post and the settlement verdict.
Ask the real estate agent what they can do. Don’t need to wait until July.
Realtor response: Much ado about nothing. Has not formally been approved and the only real change for is that the the MLS will no longer allow us to publish buyer commission in the MLS. That change does not take effect until mid July. So no impact on our current listing agreement at all.
Im in SoCal now. Gonna sell and buyer another soon in budget around $1.1 mil.
Should I buy before July so the buyer is paid for and I will have representation
And then Sell my house after July so I can save maybe 1% for buyer agent.
Right now, listing agent offer 4% for both side when selling my house
Thanks Sam. I’ve been reading and listening to your podcast for longtime.
Hi Tam – personally, I’m not selling if I can’t pay a 3.5% in total commission or less. And even still, I would rather hold onto my property as far as long as possible, and the maintenance along the way.
I wouldn’t let the taxes be a primary reason in your selling or purchasing decision. Just bargain aggressively if you do plan to sell and buy.
Thanks for listening to my podcast and reading. If you don’t mind dropping a review on Apple and Amazon for BTNT, I’d appreciate it.
I love reading your take on these things, Sam. Thanks for all the content you’re putting out and for the great interview with Mike Ketchmark.
For context, I’m a busy lender, licensed in all 50 states, with 30 years of experience. My lending office was embedded inside of real estate offices for 20 years of my career.
In your interview, Mike made an offhand comment about how readily accessible down payment assistance (DPA) programs are. He’s not wrong to say that there are a lot of them out there and that they are available in every state. What he either doesn’t know or doesn’t care to point out given the case he was building is that DPAs are very, very rarely ‘free money’.
There limited number of amazing programs out there where a buyer can score funds with no strings attached and at no additional cost elsewhere. These programs are almost universally limited to first time buyers who have a household income of no more than 80% of median income for the area in which they are buying — an income threshold that makes it pretty challenging to qualify a home. Affordability is a bear right now — it takes MORE than median income to buy a median priced home in virtually every US market right now. You can imagine how challenging it is to find a home that’s affordable to a family earning just 80% of that.
And the free money programs are also often limited in funding. They rely on state, local and federal grants, funneled through non-profit housing agencies. I got an email from one of these agencies last week saying they had 1 “slot” open for 20% down payment assistance… it was spoken for in hours. That particular program requires that the lucky homeowner split their equity with the agency providing the grant when they sell.
For a DPA to have a steady, reliable source of funding that won’t run dry almost immediately, it has to self-fund in some way. The mechanism for self-funding comes in the form of a higher interest rate. I can offer clients lots of programs (through state agencies, tribal governments and non-profits) that allow a homebuyer to finance 95% to 97% of the price of a loan at a rate that’s .5% to 1.5% above market rates and fund their down payment with a second mortgage of 3.5%, 4% or 5% of the price. The structures of the small second mortgage varies — some require repayment (usually at an even higher rate), some are forgiven over a period of years. But in essence the second mortgage acts as a back-door prepayment penalty that makes it very difficult to refinance. This traps them in an above-market interest rate loan for a while. The higher market value of the higher rate loan that is much less likely to pay off due to the existence of the second mortgage is where the “assistance” comes from.
So for Mike to suggest, blithely, that homebuyers tight on funds won’t be harmed by a requirement to pay their own BAC in cash is disingenuous at best.
And as a reformed hardcore libertarian, I understand the “if you can’t afford it, don’t buy it” argument. But as a human being who’s made it her life’s work to help people purchase homes and seen the life-altering benefits to individuals and families from the stability and wealth created, I can’t be so callous. Buying a home right now is HARD… this settlement is likely to make it that much harder.
(cont…)
I love reading your take on these things, Sam. Thanks for all the content you’re putting out and for the great interview with Mike Ketchmark.
For context, I’m a busy lender, licensed in all 50 states, with 30 years of experience. My lending office was embedded inside of real estate offices for 20 years of my career.
In your interview, Mike made an offhand comment about how readily accessible down payment assistance (DPA) programs are. He’s not wrong to say that there are a lot of them out there and that they are available in every state. What he either doesn’t know or doesn’t care to point out given the case he was building is that DPAs are very, very rarely ‘free money’.
There limited number of amazing programs out there where a buyer can score funds with no strings attached and at no additional cost elsewhere. These programs are almost universally limited to first time buyers who have a household income of no more than 80% of median income for the area in which they are buying — an income threshold that makes it pretty challenging to qualify a home. Affordability is a bear right now — it takes MORE than median income to buy a median priced home in virtually every US market right now. You can imagine how challenging it is to find a home that’s affordable to a family earning just 80% of that.
And the free money programs are also often limited in funding. They rely on state, local and federal grants, funneled through non-profit housing agencies. I got an email from one of these agencies last week saying they had 1 “slot” open for 20% down payment assistance… it was spoken for in hours. That particular program requires that the lucky homeowner split their equity with the agency providing the grant when they sell.
For a DPA to have a steady, reliable source of funding that won’t run dry almost immediately, it has to self-fund in some way. The mechanism for self-funding comes in the form of a higher interest rate. I can offer clients lots of programs (through state agencies, tribal governments and non-profits) that allow a homebuyer to finance 95% to 97% of the price of a loan at a rate that’s .5% to 1.5% above market rates and fund their down payment with a second mortgage of 3.5%, 4% or 5% of the price. The structures of the small second mortgage varies — some require repayment (usually at an even higher rate), some are forgiven over a period of years. But in essence the second mortgage acts as a back-door prepayment penalty that makes it very difficult to refinance. This traps them in an above-market interest rate loan for a while. The higher market value of the higher rate loan that is much less likely to pay off due to the existence of the second mortgage is where the “assistance” comes from.
So for Mike to suggest, blithely, that homebuyers tight on funds won’t be harmed by a requirement to pay their own BAC in cash is disingenuous at best.
And as a reformed hardcore libertarian, I understand the “if you can’t afford it, don’t buy it” argument. But as a human being who’s made it her life’s work to help people purchase homes and seen the life-altering benefits to individuals and families from the stability and wealth created, I can’t be so callous. Buying a home right now is HARD… this settlement is likely to make it that much harder.
Baking buyer’s commissions (BAC) into the price is the only way that lenders will allow buyers to finance this cost. And while I don’t disagree that in an optimal situation, homebuyers will have sufficient funds to pay a substantial down payment and also pay BAC in cash, that’s a meaningful additional burden to the average first time homebuyer — especially a first-generation homebuyer.
The cost of rent and other expenses are high enough that plenty of folks who can swing a mortgage payment, struggle to save up even a 3% to 5% down payment. And while they struggle to save, home prices are generally rising faster than their savings rate. Add even a 1.5% BAC on top of that, plus transaction expenses (closing costs and prepaids, which can be 3% to 5% of the price of a lower cost starter home), plus (in many states) transfer taxes, and folks on the margins will be shut out of the opportunity to purchase a home.
What nobody is talking about when it comes to the rate of commission is the insidious practice of referral fees.
As a lender, if I offer any item of value in return for a referral for my services, I would be breaking the law (RESPA). If I send a client a thank you card when they refer a friend or family member and include a measly $5 coffee card, I’m risking a $10,000 fine, a year in jail and loss of my license. (Aside: Real estate brokers are largely oblivious to the fact that this law applies to them too — it’s not hard to find brokers offering all kinds of gifts or drawings for prizes in exchange for a referral. Totally illegal.)
But what isn’t illegal are real estate brokers paying part of their commission to another real estate broker in exchange for a referral. RESPA, which roundly bans all other types of referral fees has an carve-out for this practice. I don’t know the history of the carve-out, but I would bet it was NAR who lobbied for it.
The upshot: there are way too many hands in the cookie jar. And THAT is what makes real estate commissions so high. An entire ecosystem of businesses are built on carving up the buyer’s agent commission.
Zillow is the most notable, but there are endless variations. Combine a clever marketing schtick and a real estate license and you have carte blanche to collect referral fees from any leads you can procure and refer to brokers. I recently stumbled on a website offering to help people navigate the intricacies of co-buying a home with a non-romantic partner (friend, family member) (and idea I LOVE to combat affordability challenges) — “free” to the homebuyer because participating agents pay a cut of their commission in return for referrals.
The actual buyer’s agent may only see a sliver of a 2.5% BAC.
Take a lead from Zillow that comes through their Premier Agent program: Zillow gets as much as 35% of the gross commission, then the brokerage where the team works gets their cut (transaction and/or franchise fees, plus a percentage of the commission or annual “desk” fee). The rest is generally paid to a team lead. The lead usually only works directly with sellers. They pass buyer leads on to buyer’s agents who show houses, write the offers, helps with inspections, etc.
If RESPA were applied to real estate commissions this ecosystem would go away and commissions could be less at what might be no reduction in net agent income.
Zillow and all of the other lead gen sites and business models would either need to become brokerages, hire agents and convince buyers to let them represent them buying and selling homes (like Redfin) or become an advertising platform.
And team leads would have to decide if it was economically viable to employ buyer’s agents as door openers or for other functions, but they would probably have to be on salary or paid at least minimum wage.
Brokerages would still exist (sales brokers and managing brokers serve a valuable function overseeing, training and coaching agents, plus they’re necessary from a licensing standpoint) and their fees to agents would continue to vary based on the services provided to the agents who chose to affiliate with their brokerage.
I agree that it’s going to be pretty awkward for a lot of buyer’s agents to get a contract signed before they show a home to an agent. My hunch is there will be a lot of extremely limited contracts signed… specific to a property or limited to a day or a weekend. Or the agreements will be written giving the buyer the unilateral right to terminate the agreement.
Dual agency isn’t permitted in every state. Where it is permitted, there’s additional risk and many agents won’t take on the added liability. Remaining neutral and protecting both clients’ confidentiality is difficult. And a listing agent can’t “unknow” things they learned before the buyer came along. Most principal brokers advice their agents NOT to represent both the buyer and seller. And even for an agent willing to take on the risk, as soon as more than one buyer asks an agent to write an offer on their own listing things get untenable.
And I don’t see lower commissions stimulating more real estate transactions. The Fed kinda broke housing with Zero Interest Rate Policy and QE. If you have a reason to sell, you’ll probably enjoy a windfall. But without an external reason to move… ??? You’re probably happy chillin’ in your home with your ZIRP mortgage.
People historically real estate and other assets go up mainly due to inflation. They fall during deflation. This is a reflection of the price of ‘energy’. The boomers prioritized work over everything else and Chinese agreed to leave farms and work in the factories selling to the world; therefore prices were held relatively steady for decades due to massive productivity and efficiency during globalization. These effects can be seen in supply and demand. Supply of new cheap housing is GONE until we develop some amazing productivity miracle – i.e. not gonna happen for decades. Building materials along with other ‘stuff’ is permanently going up due to reversing globalization and aging of the world’s workforce. Real estate prices may go ‘down’ in real terms but not in nominal terms. Inflation will get worse, and when in the cycle there will be deflation it will be from much higher than where we are today.
Word to the wise and tell all your family – save save save, invest invest invest, in real assets bc things are going to get VERY expensive and that includes real estate. And that doesn’t even take into account the massive immigration and foreign investment buying American real estate – a trend which is likely to intensify. Thank you financial samurai for keeping us informed.
I can’t agree more with your message to save and invest in real assets. 25 years from now our children will marvel at how cheap asset prices were today.
Foreigners are coming to buy American real estate for sure. Look at how crazy Canadian real estate prices have gotten, partially thanks to foreign buyers.
Before the housing bull markets of the 1990s, a 6% broker commission was considered fair. However, in light of subsequent market shifts and the wealth of information now accessible to consumers online, this rate has become excessive for broker services. In many countries, the standard broker commission rate now hovers around 1-2%.
When considering the costs involved in hiring a stager, appraiser, photographer, inspector, and attorney separately, it often becomes evident that the combined fees are less than the traditional 6% commission. Additionally, expenses for services like staging, inspection, and legal representation are typically incurred regardless of the commission structure.
It is anticipated that there will be a significant reevaluation within the industry, potentially leading to a restructuring that favors qualified agents who consistently deliver value to consumers. This shift may help weed out unqualified agents and elevate those who prioritize client satisfaction and service excellence.
The biggest loser by far is the buyer. Adding a buyers agent fee to the list of expenses paid by a buyer will only push costs to the buyer higher making the dream of home ownership less achieveable. The result will undoubtedly be buyers purchasing homes without professional representation. Veterans who use VA guaranteed home loans are prohibited from paying a realtor fee. This settlement will force veterans to go without representation when purchasing a home.
Claiming that home prices will decline as a result of this settlement is not reality. Commission rates have no impact of home values. The market drives home prices. However, raising costs for the buyer may reduce demand by limiting the number of buyers able to pay the higher expenses. A decrease in demand for homes will lower home values which will then hurt the sellers. This settlement hurts the consumer.
Don’t assume that listing agents will reduce their rates for the privelage of doing more work. A listing agent who brings a buyer directly performs the duties for both the seller and buyer side of the transaction and keeps whatever commission the seller agreed to pay to sell his home. If a buyer is brought by another agent then the buyers agent performs the tasks for the buyers side of the transaction and is compensated by the listing broker for doing half of the work. Typically half of what the listing agent receives from the seller. I look at it as a marketing expense similar to new home builders. Home builders pay real estate agents who bring them buyers from their marketing budgets. If a buyer walks into a model home without an agent does the builder lower the price? No, they don’t. Why? Because it will affect neighborhood values and create problems with future appraisals. This is particularly the case when the builder has many more lots to build on.
Dual agency really means no agency (even the name is a misnomer). Agency is a fiduciary relationship between principal and agent. For a listing agent his principal is the seller. Since sellers and buyers have two opposing objectives one cannot have an fiduciary relationship with both parties. If a listing broker is the agent of the seller his job is to obtain the best possible outcome for the seller with terms in the sellers favor. In most cases this means striving to obtain the highest possible price. A buyer can buy the home without an agent by working directly with the sellers agent but will only be entitled to information that materially affects the value of the property. A listing agent is not going to help the buyer research values and come up with the market value of the home he intends to purchase. Just the opposite. In fact, as an agent for the seller, the listing agent is legally obligated to tell the seller anything he may learn about the buyers position or willingness to offer a price higher than the initial offer. Clearly the buyer is at a disadvantage in this scenario and the biggest loser in this settlement.
Great article. One element that I think might need consideration is that real estate is highly correlated to both local and personal relationships. In other words, most home sellers and buyers have a brother, sister, aunt, uncle, friend, etc. that is a real estate agent and it is difficult for that buyer or seller to not use that individual because of the relationship. Therefore, could make it hard for the home seller or buyer to negotiate the commission based on the personal relationship. Personally, I do think this is a victory for the consumer and the real estate market but I am also curious about your thoughts on this aspect and the chances of this element continuing to keep commission prices artificially high.
I called the listing agent on a “open house” sign, visited the house and got that house as first time buyer. The agent acted as dual agent. Remembered the agent told me the seller paid for all her work. However, I did go with her recommended lender with a mortgage rate I was okay with (3.5% for 30 years, started in 2015, in Southern California). So I guess she got commission from the lender too.
in the real world potential buyers look at a dozen or more properties and either decide not to buy or make a few offers and get beat out by other buyers… or some other issue arises that prevents the transaction from going through. in these cases the buyer would lose all money paid to their agent… you have not been accounting for this.. you also havn’t been accounting for the buyers agent is an independent contractor.. also you obviously have no idea of all the time that is spent that the client isn’t aware of…
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The new rules will backfire bigtime… as do all things that attempt to circumvent the fair market system.
“ in these cases the buyer would lose all money paid to their agent”
Buyers don’t pay their agent until the transaction closes.
How long have you been a real estate agent?
A buyer is allowed to “Pay” at closing. If the transaction fails to close the commission has still been earned and due to the buyers agent.
“Broker’s compensation is earned when, during the term of this Agreement and any
60 renewal or extension of this Agreement, Buyer or any person or entity acting for or on behalf of Buyer contracts to acquire real property regardless of the manner in which Buyer was introduced to the property.”
“Buyer will be responsible for paying Broker no later than at closing/consummation the amount specified”
Nowhere in the buyers agent agreement is it stated that the commission is only due if the transaction closes. BTW, I have been an agent for 26 years.
Everything is negotiable. And I don’t know any buyer who would be willing to pay a buyers agent who doesn’t help them close on a house.
It’s not a metter of willingness to pay. Once the have a contract in place they become obligated to pay.
Hopefully buyers aren’t foolish enough to sign a contract that requires them to pay without an outcome.
Does a football player only get paid if they win? No, they are paid to play the game. The buyer agent did there job once the buyer goes under contract. This is what the lawsuit achieved for buyers. By the same token, a listing agent has earned their commission when they produce a buyer ready and qualified to consumate the sale under the terms specified in the listing agreement. If the seller declines the offer they are still obligated to pay the agents commission since the agent performed the task he was hired to do. It’s a contract.
Sounds good. Have you personally been paid a buyer’s agent fee for not closing on the house? And if you have, what happens if the buyer wants to keep on searching for 100 houses and two years or whatever? You’re obligated to help him continue to find the house until purchase? Or are you just walking away from your client after submitting one offer?
Actually, I have never been paid by a buyer. The listing agent has always paid my commission. Now, the buyer will have to pay for my services.
Probably won’t be an Agent for long if you require people to pay without delivering the product. If the agent classifies his/her service as the “product”, I bet the buyer’s won’t see it that way.
Actually, I have been an agent for 26 years.
Yup one of things we are likely to see, particularly when the market is hot is the ala carte option where agents charge separately for showings, negotiation, for the contract, for repairs/price concessions due to inspection finds, for low appraisal issues ect. I guarantee in a seller’s market like we had at the peak of the pandemic, buyer pays their agent will push home ownership out of the reach of many buyers or at least push it that much further down the road.
I’ve bought 2 houses. Found both on Zillow. Got an agent to bring me and open a lock box. $20k seems like a lot for opening a lock box for me, especially since he kept pressuring me to offer more than I wanted.
Exactly!!!
So you researched the values to come up with your offered price, wrote your own contract, presented your offer to the seller, collected and assembled comparable sales information to justify your offered price, ensured all required disclosures were made, arranged the inspections, met with the appraiser, coordinated the closing with the title company, and whatever other activities may have been involved?
You say you were pressured to offer more than you wanted. Your agent was probably suggesting a price that the seller would likely agree to and not the low ball offer you were making that had no chance of succeeding. Your agent probably assumed that you wanted the home and was helping you get what you wanted.
Yes. I looked at sales the past two years and all the comps and decided on my own what to offer.
I actually had to fight him to put in my offer. Had I listened to him I would’ve paid an extra $75k.
As far as documents…
docusign auto templates take about 1 minute.
Yes. I hired my own inspector. Yes I hired my own appraiser. And yes I paid for all these services, read the reports and decided what needed to be fixed now and what I would take a concession on.
Still wondering how the realtor deserved $20k for that sale when all the did was open a lock box.
Sounds like you took it upon yourself to do your agents job. You should get a license and make that easy money.
“Homebuyers must consider how much they are willing to compensate their buyer’s agent upon the successful completion of a home purchase. While some may agree to pay 2.5% to 3% of the home’s value…”
So there is still the mis-aligned incentive for the buyer agent to keep the sell price high in order to get more commission. No?
So what motivates the buyer agent to negotiate down the price at all?
Wow that settlement came way faster than I anticipated. I’m glad to hear that change is in store that will help a lot of consumers. Since the average person doesn’t sell a property all but maybe once or twice in their life if at all, the process really has needed a lot of room for improvement. Too many people were getting tricked/forced into paying too much just to sell their homes due to NAR and lack of awareness. Change is due and will be great for the consumer.
Good timing for this article. Closing on a home at end of the month here in the midwest. Although price points on a solid starter home here in the midwest are nowhere near that of the east and west coasts, they are still tough to come by due to the supply being lower than the demand. Room to negotiate is still tough. A very good friend of mine is a real estate agent and is the one I have been working with over the past 4 years. He has shown us numerous homes over those 4 years only for us to either lose out to a quick cash sell or getting into a bidding war with forgone inspections, etc., which is not good for a person like me who is analytical and not impulsive. Long story short, he is the listing agent on the home we are buying. Prior to him listing the house, knowing I am a cash buyer with no contingencies he gave me an opportunity to see the house and if I like it make an offer. The house was selling “as is” but I wanted inspection and appraisal contingencies built into the contract. For a home built in 1966, the inspection came back with no major issues and some safety (electrical) … specifically within the breaker box and some outlets. A good “electrician” friend of mine said it would cost around $1,500 to fix the safety issues so I was able to negotiate that off the asking price. The appraisal has come back as I expected, market value = asking price (before $1,500 safety issue reduction). This past weekend, I called my buddy (real estate agent) asked him about this NAR Settlement, asked him if this impacts our sale. He said “no”. Without damaging a 40+ year friendship and understanding that business is business, I asked him if I was paying too much on this house, since I am not being represented by a “buyers” agent. He said, “no”. I obviously will never know :-) … maybe that’s a good thing between friends, especially as he gave me the inside track to a very competitive real estate market :-) and has been helping me and advising me along the way over the past 4 years.
Relationships definitely matter! I’m glad the listing agent is also, you’re buying agent who struck out after four years.
Agents deserve to get paid. The question is, will the free markets decide what the pay is or will collusion decide? The settlement is saying the free market should decide. I think most of us will agree.
1.8 billion I beleive would have been a 5.4 billion settlement as an antitrust suit. They settled for only 7% of that amount at $418 million…they settled way way too little.
Maybe. If you look at historical settlements, they are almost always lower than the initial judgment.
If they do not settle, this battle will drag out for years and cost a lot of money. From a consumers point of view, a rapid Settlement is the best case scenario as it starts the engines for aggressive commission rate declines.
Whatever the settlement amount is, from a consumer perspective, it doesn’t matter much. What matters most is change of practice.
It’s fascinating to see all the buyer agents on TikTok freaking out over this but none of them are able to clearly articulate what value they provide.
I’ll have to check it out.
One of the greatest advantages some people gonna have is going against Tik Tokers and those who take advice from Tik Tokers.
By being more thorough in knowledge and understanding, you can gain a huge competitive financial advantage.
The NAR settlement benefits consumers and NAR. All the Realtors who dutifully paid their NAR dues for their entire careers got screwed.
Why are assuming I haven’t read this post to understand the implications?
Voice message typo. You’re good. Thx
This a great article — thank you for writing it!
This change is long overdue for the real estate industry, and I agree this is a huge win for the consumer.
I think between this, permanently higher interest rates (relative to the last 15 years), commercial RE collapsing, population stagnation/decline, and the “silver wave” of boomers downsizing/dying will be a cocktail of variables that will cause home values to permanently shift downwards.
I do believe we are well behind the days of real estate being an assured appreciating asset. I could even see a “bank run” of sorts in some regions where sellers will read the writing on the wall and sell their investment properties en mass to cash in their equity before the great RE reset.
At least milennials will finally be able to afford a home now, but I do wonder how it will work out for boomers whose home equity is their largest asset by far. Scary times.
I really like your negative outlook. Thank you. How long have you been a renter and when did you sell, if you owned?
I wonder if the local economy where you live is giving you a more sour outlook than others? Where do you live?
What I’ve seen is people with means are buying up as many properties as possible given there’s less competition due to higher mortgage rates.
The people without means are not the ones who will be able to buy when prices dip. They will be shut out because banks are still stringent and they cannot compete with higher down payments or all cash payments.
Related: Past The Bottom Of Th Real Estate Cycle
Found a previous comment of yours on my 2024 Housing Price Forecast post where you bought near Pittsburgh, PA. Buying in 2007 and 2022 is tough timing. Sorry about that. At least Pittsburgh requires one of the lowest median incomes to afford a median priced home.
“ I don’t know, as somebody who purchased in 2007, and just purchased once again in 2022, I’m not convinced RE is the way to go.
Ad homen aside I could see a 20-40% drop on the horizon. It’s not a 2008 situation, but with inaffordability as it is I wouldn’t be surprised to see a 2008 style result as buyers have completely dried up, inventory is exploding, and the worsening economy will manifest forced sellers.
Furthermore, with cheap debt gone and demographics (family units specifically) collapsing at an alarming rate, I’m not entirely convinced RE will be a suitable means of building wealth within the next decade or so.
Of course I hope I’m wrong, and perhaps I’m jaded for having lost $70k on a house purchase I made 15 years ago, but I have to question if we’re hitting one of those economic turning points where assets being so large in value in addition to being expensive to borrow will cause a deflationary type event.”
You’re certainly right to say I have a negative outlook on the market given my past experiences, but generally speaking I was never much of a RE-head in the first place.
The amount of luck and uncontrollable variables that goes into obtaining property that will appreciate to a reasonable extent (where favoring it in a portfolio other than, say, stocks) is quite substantial. The fact is, even if my property hadn’t taken a dump in value I likely still lost our hard on the sheer amount of overhead costs such as maintainance, HOA, taxes, etc.
On the other end, you can do very well for yourself. I wouldn’t be complaining if I bought property in Raleigh or Pheonix 15 years ago. You seem to have done very well for yourself and I have nothing but joy foe you and your family. As far as stability is concerned, RE is probably the way to go, but when it comes to a return on investment I prefer something not so difficult to liquidate that can offer historically stronger returns, without the stress and overhead of a property.
You could definitely call me bitter, but I’m seeing very similar parallels to 2008 right before the big drop. I failed to recognize the warning signs once, I would hate to be so ignorant to them again.
I purchased what will be my final property in 2022, which they will pull me feet first from, so the value does not concern me, but life is full of surprises, so I still track the market the best I can.
What’s interesting is that despite your negative outlook, you still decided to buy in 2022 after the run up in 2020-2021. Were you negative as well in 2022 and just didn’t care? Or did you become more negative after being positive after purchasing?
Local economic catalysts are super important for local home prices.
Not to be too critical but I “love” these comments that opine “home values to permanently shift downwards” when real estate values have “permanently” gone up. Has not real estate faced major jeadwinds before – like for instance 15% mortgage rates at the same time there was an energy crisis and gas prices skyrocketed? And guess what, real estate values still went up!! It is a limited asset so will never permanently go down. It may run into years or even decades of decrease or stagnation, although that is unlikely and few and far between, but there is no scenario short of nuking the whole land that will cause home values to decline pemanently.
I have been in the real estate industry for over twenty years starting out as a sales agent and eventually as a broker. I transitioned eventually into the title and escrow industry and have been an escrow officer for 13 years. I have seen commissions start to drop over the last year, but still hover around 5% split 2.5% each side, still paid by the seller. I have seen some commissions as low as 3% on a few recent transactions split between buyer and seller sides. I am worried for realtors right now and how the NAR settlement will affect their future under the changing landscape. I think these changes are going to be very messy over the next year as consumers and agents try to figure out how to make it work. I am worried that these changes are going to increase the already astronomical costs of buying a home with buyers now responsible for paying their agent. This is could cause less buyers in the market and push the dream of home ownership even further from reach for new buyers. The majority of buyers I see right now are either boomers transferring equity from the sale of their existing homes, or the very affluent purchasing. There are almost no new home buyers in my area due to the extremely high prices in the market, and this is troubling to see. I think we are in for a huge shift in the real estate industry that has been prime to be disrupted. How does it make any sense that consumers are paying a percentage of the sales price for a service that is relatively the same across price points. I see new competitors coming into the market that offer an a-la-carte type of pricing strategy as Sam described for both sides of the transaction. The existing structure where realtors work as independent contractors with little to no benefits, being paid straight commission creates an environment that is not conducive to honest consumer centric service. What would you do if your livelihood for the month depended on one sale happening or not to feed your family. I think we are in for a wild ride over the next year in the real estate industry to say the least!
I suspect there will be mortgage reform where a buyer can simply borrow money to pay the buyer’s agent and roll it into their mortgage balance.
I also see a situation where the seller gives the buyer a credit at closing, which then is used to pay the buyers agent or do whatever.
Agree totally. I am currently in the market for a home and shopping in the $1-1.3M range. The thought of paying an agent a commission on top of $200-$260k downpayment, closing costs, and all the other fees to close the transaction is very unappealing to me.
For a seller, this just comes out of the equity, but for a buyer it comes directly out of pocket. I see the death of the FT buyers agent and a shift to more of your typical “part-time” agents that close 3-4 transactions per year and do it as a side hustle. Not the kind of agent you want representing you if you’re looking for a deal.
For agents to make a living FT (and make the big bucks) they are going to have to be dual agents. And in the end, the buyer loses as the agent will always be favoring the seller in the deal.