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The battle over how realtor commissions are paid is far from settled
We’re only weeks into the new regulations, but some sellers and first-time home buyers are seeing a reduction in agent compensation.
A little more than a month after new rules set in around how residential real estate agents earn their compensation, consumer advocates and legal experts caution: The dust hasn’t settled yet.
The biggest change from the $418 million National Association of Realtors settlement earlier this year entails no longer assuming a home seller will cover the cost of both the listing and buyer’s agents through compensation that was typically between 5 percent and 6 percent of a home’s sale price. In the past, the seller’s agent would usually split the commission with the buyer’s representative.
Now, buyers who utilize a real estate agent will be required to sign an agreement upfront stipulating how much the agent will be paid. Agents also are no longer allowed to note on the Multiple Listing Service, or MLS, whether a seller will continue the old practice of paying the buyer’s agent commission.
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The new policies still are only a few weeks old, and there already are signs buyers can end up paying less than what they normally would in terms of agent commissions. But there are concerns first-time or price-sensitive buyers might not benefit as much from an emerging system that still isn’t fully baked.
Final approval for the NAR commission lawsuit settlement isn’t expected until November.
“There is some ambiguity in the rules, or at least how they’re being interpreted in different ways,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America. “Some brokers are trying to essentially reproduce the old system in which blanket offers of compensation from sellers were permitted, while others have taken the position that this violates the spirit of the settlement and [are] encouraging agents and brokers to adopt new practices.”
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Brobeck anticipates the market to remain “very unsettled” until there is final court approval of the settlement or the US Department of Justice weighs in again. The CFA issued a consumer alert last month stressing the importance of buyers doing their research before selecting a broker or real estate agent. It also is advising consumers to evaluate buyer and seller agent agreements to make sure there aren’t unfair provisions.
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Brian “Brad” Mahoney, a real estate attorney and founder of Mahoney Law Group, noted that buyer agent compensation terms are a prominent addition on new Massachusetts offer forms. Further, Mahoney said, the agent compensation in recent weeks has trended lower.
“Whereas in the past, the compensation of the buyer side might have been 2.5 percent, it’s pretty standard now at 2 percent,” Mahoney said. “It’s a small sample size of only three weeks’ worth of transactions, but it’s very consistent.”
That means the combined buyer-seller agent compensation appears to be settling in the 4 percent-to-4.5-percent range of a total home sale rather than the 5 percent Mahoney said was typical in Greater Boston. But don’t just assume you will get a lower commission rate on your next transaction. While the CFA encourages buyers to set their agent compensation at 2 percent or less, this isn’t a firm rule.
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“We’re not suggesting that you should reject all agents that are inflexible and will charge more because we think that the really good, best, most experienced, most professional agents will probably be able to continue to charge the same amount that they’ve been charging,” Brobeck said. “It’s the folks who just earned their license who are being forced by the marketplace to reduce their compensation a bit.”
Michael McDonagh, general counsel for Lamacchia Realty, said it’s important that agents know what skill sets they bring to the table. “What we’ve told our agents is: ‘Know your value. Know what you’re worth. You bring a lot of experience and expertise to a very complicated and emotional process of buying and selling a home, so keep that as your guidepost, and charge accordingly,’” McDonagh said. “We’re not in a position where we’re saying, because of the settlement, we now have to automatically reduce our fees across the board.”
But the new system also can be a headwind to first-time home buyers or price-sensitive buyers. It means there’s the potential for a seller not to cover the agent compensation, so it becomes another cost buyers have to shoulder.
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Those buyers might decide to forgo representation entirely, which comes with its own potential set of headaches.
“They try to go through the whole process without a person looking out for them, being an advocate, helping them negotiate, helping them ask the right questions,” McDonagh said. “From a consumer protection standpoint, I think that’s unfortunate, because under the old system, maybe it wasn’t perfect, but at least in the old system, the buyer could always have an agent on their side and not really have to be overly concerned about how that person’s going to get paid.”
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