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Lately, there’s been a flurry of confusing information regarding changes to real estate commission rules, with major news outlets like the New York Times and NBC New York adding to the mix. Headlines claim these changes will reduce home prices or that the "6% commission" is disappearing altogether. However, much of this coverage is misleading or oversimplified. Let's dive into what's really happening with the latest real estate commission rulings and clear up the misinformation.
Understanding Real Estate Commissions
First, it's important to understand how real estate commissions have traditionally worked. Contrary to popular belief, there has never been a fixed or standard commission rate. Each Realtor® and seller negotiate the commission an agent charges. Typically, this commission is split between the seller's agent and the buyer's agent. For example, if a seller agrees to a 6% commission, often 3% goes to the listing agent, and 3% goes to the buyer's agent.
The proposed rule changes by the National Association of Realtors (NAR) primarily affect how these commissions are presented in Multiple Listing Services (MLS).
The Changes in Commission Listings
The major change is that brokers who list a home for sale on any NAR-affiliated databases (local MLSs) can no longer include offers of compensation for a buyer’s agent on that site. This doesn’t mean sellers can’t offer commissions to buyer’s agents; it simply can’t be advertised in the MLS.
What Does This Mean for Sellers?
Under the proposed NAR settlement, a broker representing a seller would no longer be allowed to include a blanket offer of cooperative compensation to prospective buyer’s agents when advertising a property on NAR-affiliated MLSs. This change aims to remove any incentive for buyer’s agents to steer clients toward homes offering higher commissions, thus promoting fairer competition and transparency.
What Does This Mean for Buyers?
For buyers, the proposed changes could mean having to negotiate their agent’s compensation separately. Traditionally, buyer’s agents were compensated by the listing brokerage sharing a seller's commission offering, reducing the buyer’s out-of-pocket expenses. Now, buyers might need to factor in agent fees as part of their homebuying budget. This could be challenging, especially for those without substantial savings or financial flexibility, as they already face costs such as moving expenses, closing costs, down payments, and inspections.
The Practical Impact
Despite these changes, sellers and agents can still negotiate commissions outside of the MLS platforms. Listing agents can agree on buyer agent commissions directly with sellers.
Additionally, the NAR's settlement includes a requirement for agents to enter into written agreements with homebuyers. This is meant to ensure that buyers understand what their agent will charge them for their services from the start. In Utah, buyer broker agreements have been standard practice for years, specifying how a buyer will compensate their agent if a seller doesn’t offer a commission.
The Financial Implications
For Buyers
Having to cover agent fees out-of-pocket could strain homebuyers' budgets, potentially pushing some to navigate the complex transaction process on their own. This might result in buyers missing out on professional guidance, leading to uninformed decisions, or legal pitfalls.
For Sellers
Sellers might initially perceive savings by paying only their listing agent's commission. For example, if a seller agrees to a 3% commission for their agent instead of a combined 6% to cover both agents, they could save a significant amount of money. If a home sells for February's national median price of $379,100, the seller would save about $11,373 by paying only their agent’s commission.
However, these savings may be short-lived if the seller plans to buy another home. If the next seller isn’t offering a buyer’s agent commission, the original seller could end up paying more in agent fees, nullifying any initial savings. This scenario calls into question the broader consumer savings purported by these changes.
Clearing Up Misinformation
Let's address some of the misinformation spreading through the media:
The “6% Commission” Isn’t Going Away: There’s never been a standard 6% commission. The commission has always been negotiable between the seller and their agent. The change only affects how commission offers are displayed in MLS listings.
It Won’t Necessarily Reduce Home Prices: Some reports suggest that these changes will reduce the prices of homes sold. In reality, the market dynamics are complex, and while the new rules might affect individual transactions, broader market trends like supply and demand will continue to play a more significant role.
Commissions Are Still Negotiable: Sellers and agents can still negotiate commissions. The difference is that the terms won’t be advertised in the MLS, which might lead to more upfront negotiations but doesn't eliminate the possibility of offering or receiving a commission.
The Real Takeaway
While the proposed changes aim to increase transparency and reduce potential conflicts of interest, they also introduce new challenges for both buyers and sellers. Buyers need to be prepared for potential additional costs, while sellers need to understand that their savings might not be as substantial as they seem if they’re buying another property.
As with any significant change, it’s crucial to stay informed and work with knowledgeable real estate professionals who can navigate these new waters. Realtors® and brokers will need to adjust their practices to ensure compliance while continuing to provide valuable services to their clients.
In Utah, we have a head start with practices like buyer broker agreements, helping to mitigate some potential confusion. However, it’s essential for everyone involved in real estate transactions to communicate clearly and negotiate effectively to adapt to these changes smoothly.
The key takeaway? Stay informed, ask questions, and don’t rely solely on headlines. Understanding the full context of these changes will help you make the best decisions in your real estate transactions.
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