The Real Estate Commission War Is Over
Now, prepare to fight your own commission battle
On March 15, the National Association of Realtors announced that it had reached a $418 million settlement with litigants who had won a huge lawsuit that determined the traditional real estate commission structure to be illegal.
As of July, agents will not be allowed to dictate commissions through listings on the powerful and universally used multiple listing services. At the same time, home buyers who want agents to represent them will have to put that representation agreement in writing.
Sellers and buyers have been handed unprecedented power. Now, they have to figure out how to make the most of it.
In short: if you're selling, you don't have to pay the buyer's agent anything, and you can negotiate how much you pay the agent who lists your house on the MLS.
If you're buying, you'll have to decide how and how much to pay an agent to represent you — if you decide that working with an agent is worth anything at all.
Unprecedented Power
Sellers and buyers have been handed unprecedented power. Now, they have to figure out how to make the most of it.
It'll be a steep learning curve. Until now, there hasn't been much wiggle room at all — which was the entire point of a huge lawsuit that the real estate industry lost back in October.
Even if you've bought and sold houses in the past, you might not be up to speed on how commissions work — not surprising, given that the industry has hidden behind its convoluted system.
Historically, American home-selling transactions pivoted on a convoluted commission structure: the home seller paid 5% to 6% of the sale price to the agent that listed their house, who then split that commission with the agent who represented the buyer.
The MLS as Leverage
Technically, that commission has always been negotiable. In practice, not so much, for two reasons. First, dictates by real estate associations required listing agents to comply with the commission structure as a condition of putting any house in the powerful and universally used multiple listing databases. Meanwhile, agents agreed amongst themselves that they would resist lower commissions anyway.
I've dealt with this for over 40 years as a home buyer, seller and as the former real estate editor for the Milwaukee Journal Sentinel. My own experience, as recently as December, is that agents count on sellers to fall in line with the commission structure.
As my husband and I started exploring the process of selling our suburban house in Charlotte, North Carolina, I interviewed several agents. When I began negotiating the commission for listing our house and paying the agent for the eventual buyer, they laughed. All of them. Right there at my kitchen table.
Your Choice: Us or No One
Proving the point of the lawsuits, the agents told me point-blank that if we offered anything but the traditional 2.5% to buyers' agents, those agents would direct clients away from our house, using any conjured-up pretext — school district, traffic, noise, a crack in the sidewalk — to push buyers to pursue any house but ours.
I doubt they're still laughing. According to the NAR's announcement, in July, the two new rules go into effect for agents using the multiple listing services (that also feed listings to Zillow, Trulia and other online sites):
- Agents cannot dictate broker compensation through MLS listings;
- Agents representing buyers must have written agreements with those buyers.
Whether you're selling or buying, you'll have to find your negotiating voice. (Because this is such a confusing and hot topic, I created a Facebook page where buyers and sellers can share negotiating tactics.)
Here's Where to Start
If You're Selling:
- Make sure you understand all the costs of putting your house on the market and how the listing commission affects your net from the sale. If, like many baby boomers, you’ve been living in your house for a long time, you might have to pay long-term capital gains taxes on your house. And, you might have to seriously de-clutter to make sure the house presents and photographs well for those all-important online listings. Be sure you have a complete financial picture so you can understand how the listing commission further reduces the bottom line of your sale.
- If I were opening conversations now with agents about listing, instead of a few months ago, I’d state my commission expectations up front, so as to not waste time with agents who insist that the rule changes don’t apply to them.
- Ask a listing agent for a detailed breakout of the tasks they’ll complete so you can see exactly what you’re getting for the commission.
- If the listing agent insists that you offer a buyer’s commission for any buyer’s agent to take your house seriously, ask them to require every buyer’s agent to disclose the terms of their contract with their buyer, up front. If the buyer’s agent is being paid separately by their buyer, you should know that, so you can scale down or eliminate the buyer’s agent commission.
If You're Buying:
- Brace for an onslaught of contracts that you’ve never seen before.
- Ask early for the buyer’s agent agreement so you can understand exactly how the agent will be paid. Within the real estate industry, agents have been increasingly requiring buyers to sign buyers’ contracts, so any agent should have one at the ready.
- If the agent representing you, the buyer, insists their services are “free” because the seller will pay the commission in full, in the traditional mode, that means the agent will represent the seller’s best interests — not yours.
If you don't have to sell or buy for a while, take time to see how the industry resets. It will take a while for contracts and communication to realign with the new rules. Use the time to clarify what's important to you so you can negotiate from a position of strength, and use your new power to get what you most want.
