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Will You Have to Pay Thousands Extra to Buy a Home? Realtor Commissions Are Changing
Edward Smith updated website photo 2024
By Edward Smith
Published 8 months ago on
July 29, 2024

A settlement between the National Association of Realtors and the U.S. Department of Justice will take effect Aug. 17, changing how real estate agents get paid. (GV Wire Composite/David Rodriguez)

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The homebuying world is still trying to figure out how the market will work after Aug. 17.

That day, the settlement between the National Association of Realtors and the U.S. Department of Justice will come into effect, changing how homebuyers’ agents get paid.

That change has Realtors and brokerages scrambling to figure out what the world will look like.

“I went on record and said that it was a horrible day for consumers,” said J.P. Shamshoian, president of Realty Concepts. “People didn’t understand, all the CNN headlines made it sound like it was the best thing ever for buyers.”

Sellers will no longer be obligated to pay a buying agent’s commission after Aug. 17. Without that commission, thousands of dollars instead may come from homebuyer pockets — as well as other costs.

And, before any work can be done, a buyer and an agent will have to figure out how much compensation the agent gets and who pays it.

The Future Is Murky

One of the consumer advocacy groups most vocal about the housing market predicted that home prices will rise in the short term before falling as commissions become more competitive. Others aren’t so sure.

Stephen Brobeck, senior fellow with the Consumer Federation of America, said this is the kind of system shock needed to break power away from Realtor groups, which have had near-unilateral control over how homebuying and selling is done.

Most experts predict at least a year before the market figures out best practices.

“Essentially, this market is becoming deregulated now. But, the regulations were basically by the industry. It’s going to be a more disorderly marketplace. There’s going to have to be more active state regulation,” said Stephen Brobeck, senior fellow with the Consumer Federation of America.

No More Work for Free

Longstanding practice had been the Multiple Listing Service outlined the commission a buyer’s agent would receive on each home.

U.S. courts agreed with the Justice Department’s claim that this practice was anticompetitive, baking into home prices an additional 2% to 3% in typical costs to compensate an agent.

Shamshoian said the changes are worse for transparency for consumers. How much sellers and buyers had to pay was clearly delineated.

Other changes are also being implemented.

Before, a prospective homebuyer might find an agent, tour homes, and payment would be decided once a contract was finalized. But now, work between a buyer and an agent will have to be clearly outlined before any work can begin.

That could also mean if a buyer buys the home but changes agents, the buyer will still have to pay the first agent for his or her work.

“Nobody’s going to work for free,” said J.P. Shamshoian. “What these buyer representation agreements do is, they contractually commit a buyer’s agent to getting paid a certain amount to represent a buyer in a real estate transaction.”

Consumer Group Called CAR Forms “Anti-Consumer”

The Justice Department is taking an  active role in the broker agreements, especially those of the California Association of Realtors. The agency launched a formal inquiry into the first draft of the forms after Brobeck’s agency called them “anti-consumer.”

Brobeck said an ideal agreement should give buyers the ability to terminate a contract without any fees — the same ability brokers have. His group objected to commissions being determined as a percentage of sale, saying that some buyers may underestimate the dollar amount.

Brobeck also said all brokerage fees should be built into the commission rate.

“Home buyers and sellers are going to have to particularly careful, but most importantly, they select an honest and competent agent,” Brobeck said. “If the agent will not talk about compensation right at the beginning, you have to have questions about that agent.”

Will Home Prices Decline Without Commissions Outlined?

Brobeck said ideally, buyers and sellers would come together to decide how agents get compensated. In the past, that was much harder to achieve.

Even though Realtor forms say that commission rates are negotiable, very few negotiations on commissions take place, Brobeck said.

A study done by the group in the 1990s and more recently, asking realty groups about fees and standard commission rates showed a change in responses.

Shamshoian countered saying buyers’ agents earned the oft-quoted 3% rate in only 13% of transactions.

“More than 70% of compensation offerings in 2023 were 2.5%,” Shamshoian said.

The consumer federation said even though home prices will rise in the short term, with added commission fees needing to be figured out, home prices will come down as sellers no longer have to pick up both sides’ compensation.

Competition in the market will reduce commissions by 20% to 30%, according to Brobeck. He also predicted the rise of transactional brokers, or a neutral third-party who merely helps facilitate the sale of a property between a buyer and seller.

Corcoran did not think home prices would go down, saying sellers want to get as much money as possible.

“Sellers are greedy,” Corcoran said in an interview with Yahoo Finance. “It’s a one-time chance to get the most for your house and you’re not going to give that money away.”

Seller Will Probably Continue Paying Commissions: Shamshoian

With downpayments, closing costs, and other associated fees not covered by mortgages, buyers will be hard pressed picking up those costs, Shamshoian said.

A 2.5% commission on a $350,000 house means a $8,750 tab a buyer would have to pay.

“What’s most likely going to happen is that sellers will continue to pay buyers’ agents, because very few buyers will have enough money to pay their down payment and their agent,” Shamshoian said.

The degree to which banks will pick up those costs through a mortgage is still being determined, said John Vartanian, broker/owner of MAV Mortgage.

The type of mortgage dictates how much of a concession can be added into a loan. An FHA loan only allows 6%. Lenders are coming out with clarification as to what can be included in concessions, something that wasn’t needed before, Vartanian said.

Vartanian doesn’t see commissions being financed in the future.

Buyers can get a home with a down payment as low as 2.5% housing cost. A first-time homebuyer can get a home with 3% down. Paying 3% for a commission means a bank is essentially paying the entire cost of a house. The math might work out for a buyer paying a 10% down payment. But most first-time homebuyers are paying the minimum amount, Vartanian said.

“If you then allow them to roll that 3% commission back in, that is effectively 100% financing,” Vartanian said. “So you’re putting a homebuyer into a house with effectively no money down from the loan perspective.”

Market Will Dictate Commissions: Vartanian

With low supply, homes for sale are often getting multiple offers — a market primed for sellers. A house with four or five offers will likely have one where a buyer can pay their agent’s commission.

How fast an offer closes and how much of the closing costs are covered all go into a seller’s decision-making process. How a buying agent gets paid is likely to be also included, Vartanian said. When the market swings the other away, sellers may have to be more willing to pick up those costs.

“In a cooler market … then they might be more willing to do things like that,” Vartanian said.

Lenders, brokers, agents all live and breathe real estate, something the average homebuyer doesn’t do. Buyers and sellers may be so accustomed to the previous rules that they the sellers picking up the commission.

After the Great Recession, the lending agency went through a similar system shock when U.S. law changed and brokers had to charge commissions consistently, regardless of the buyer, Vartanian said. Lending agencies feared they wouldn’t be able to sustain themselves.

“We all thought the world was ending when that was going through, and here we are, it’s just business as usual,” Vartanian said. “It’s just the new norm that we all get used to.”

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Edward Smith,
Multimedia Journalist
Edward Smith began reporting for GV Wire in May 2023. His reporting career began at Fresno City College, graduating with an associate degree in journalism. After leaving school he spent the next six years with The Business Journal, doing research for the publication as well as covering the restaurant industry. Soon after, he took on real estate and agriculture beats, winning multiple awards at the local, state and national level. You can contact Edward at 559-440-8372 or at Edward.Smith@gvwire.com.

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