Home Buying

In the not-so-distant past, aka before August 17th, 2024, real estate commissions worked a lot differently. Or at least the rules governing them did.

Back then, listing agents would put a property on the multiple listing service (MLS) that included an explicit, stated commission (offer of compensation) to the buyer’s agent.

This commission was actually paid for by the home seller, who also paid their listing agent, out of the sales proceeds.

The offer of compensation ensured both agents would be paid for their services and representation.

Real Estate Commissions Inflated?

While that setup was all good and well on the surface, some argued that it allowed agents to collude with one another and keep commissions inflated.

At the same time, there was an argument that agents didn’t exactly highlight the fact that commissions were negotiable either.

So both buyer and seller were often told the fee is 2.5%, or 3%, end of story.

The end result was a 5-6% commission paid by the seller to both agents on the transaction. A pretty penny to be sure.

Perhaps more problematic, buyers were often told they didn’t have to pay for representation and that the buyer’s agent services were “free.”

After all, they didn’t have to pay anything out of pocket. It was funded via the sales proceeds of the transaction.

Of course, the argument was that the home buyer actually did pay for it via a higher sales price needed to absorb some or all of that cost.

But wait, there’s more!

This arrangement also allowed a buyer’s agent to search for homes on the MLS by commission offered.

In short, they could steer their buyer client to just the homes that offered the highest compensation.

For example, only to properties that offered 3% commission to the buyer’s agent. If it was only 1.5% or 2%, they’d maybe skip those.

Clearly all of this wasn’t OK, and it’s what ultimately led to the big NAR lawsuit and settlement.

“Concessions Considered”

Fast forward to today and those compensation fields on the MLS have been removed entirely.

In their place might be a new field called something like “Concessions Considered,” complete with a yes/no option.

This tells buyer’s agents that the seller will consider offering concessions, which can be used to cover their compensation.

Knowing this, an agent will feel more comfortable representing a buyer, who may not (probably won’t!) have money to pay their agent out of pocket.

After all, buyers often barely have enough cash for down payment and other closing costs. Now they have to worry about paying their agent too.

However, it can’t reveal how much they’ll offer as that would again amount to steering concerns.

Instead, it’s just a signal that the seller is willing to negotiate and take the compensation burden off of the seller.

But that’s just the MLS rule. They can put the exact amount on their brokerage website, or on social media, or verbally communicate it. So it’s semi-pointless. More on that in a moment.

Buyer’s Agents Need to Set Their Comp in Advance

On the other side of things, buyer’s agents now have to set their compensation in advance and stick to it.

Again, the idea here is to have separate negotiations with their own client, which are not influenced by a seller or listing agent.

To take it a step further, the buyer’s agent should really have a set fee for their services that has nothing to do with what a seller/listing agent might offer.

Why? Because it’s their service! They shouldn’t earn more for a duty they perform simply because a seller says, “Here, we can get you more!”

Anyway, the settlement now requires buyers to enter into a written buyer agreement before they can tour a property.

At that time, the agreement must also “specifically disclose the amount or rate of compensation an agent or broker will receive or how this amount will be determined.”

“The amount must be objectively ascertainable and must not be open-ended. For instance, $X or X% is permissible, but a range of commission is not.”

For example, buyer and agent will sit down ahead of time and agree on say 2% of the sales price. Or $7,500. Etc.

That amount of compensation should not change, regardless of what a seller or listing agent offers on a given property once they begin touring and making offers.

The Original Fee Agreed Upon Drives the Compensation

Now let’s imagine buyer and agent are finally ready to make an offer. Remember, they had to sit down and discuss compensation before touring homes.

When that took place, the buyer and agent agreed to a 2% buyer agent fee. They don’t want to pay it out of pocket, so they scan listings where they think or know the seller will pay it.

They see in the MLS notes that concessions are considered on X listing and schedule a tour. They like the property but the listing agent doesn’t explicitly tell them what they’re offering.

Remember, this is apparently OK to do now outside the MLS, but this particular agent keeps their cards close.

So they prepare an offer and ask for the 2% fee and offer X price for the home. The listing agent comes back and says my seller will only offer 1.5%.

At this point, the buyer’s agent could theoretically accept it and try to get the missing 0.5% from their buyer directly. But I don’t believe the buyer is under an obligation to do so.

Alternatively, they could try to counter to get that extra 0.5%, or simply agree and move forward.

This could also work the other way where the buyer’s agent originally agreed to a fee of 2% but sees that the seller is offering a full 3% compensation.

In this scenario, the listing agents tells the buyer’s agent upfront exactly what they’re willing to offer in terms of compensation.

Depending on the state, the buyer’s agent can’t collect the additional 1% being offered. And if they do try to amend their agreement with their buyer, the buyer needs to sign off on it.

At that point, the buyer may ask why the agent is earning an additional 1% of the sales price. They could also say they want that 1% to cover their own closing costs instead.

This situation could evolve as time goes on, and might vary state by state. But it seems the spirit of the settlement calls for agents to stick to their originally agreed upon commission.

Not hope it increases if a seller or listing agent happens to offer more. That could amount to steering, especially if it’s openly advertised.

Another issue I foresee is buyer’s agents lowballing their compensation upfront, then hoping to earn more by scanning higher-compensation listings.

For example, they’ll agree to work with the buyer for a low 1% fee, then steer the buyer to properties they know offer 2.5% or 3%.

Again, that’s against the spirit of the changes, and I believe it’s not even allowed in the state of California.

If you’re a buyer, watch out for an amendment where the agent is all of sudden earning more. Tell them you want the excess instead to pay your closing costs!

How Real Estate Agents Can Still Be Paid

– Fixed fee by the home buyer
– Via listing agent (cooperative commission)
– Via seller concessions

You might be wondering how real estate agents can still be paid in light of these changes.

There are actually more ways to get paid because some buyers will now pay their buyer’s agent directly.

This was always technically an option I suppose, but never really happened. Going forward, it could happen a lot.

This is especially true if listing gents and their sellers offer nothing to the buyer’s agent, which I’m hearing happen quite a bit.

It might also become more common if the fee comes down, or is an hourly or flat rate that’s more reasonable to be paid out of pocket.

However, buyer’s agents can still be compensated via traditional means, such as by cooperative commission where a listing agent will share a portion of their compensation.

For example, if the seller says you get 4% total, either 2% to each agent, or some other split.

Lastly, there’s the possibility of seller concessions being used to cover the buyer agent’s commission.

This typically results in a higher sales price to cover the concessions. So if the agent’s fee is $10,000, the purchase price is adjusted higher by $10k and needs to appraise.

Note that you cannot currently finance real estate agent commissions in the loan amount.

Key Takeaways to Remember

• Real estate commissions are completely negotiable and are not set by law
• As a home buyer you need to negotiate your buyer agent fee upfront before touring homes
• As a seller you have options to offer zero to buyer’s agent or what was typical in your market (e.g. 2.5%), or something in between
• Commissions can no longer be listed on the MLS (but seller can say concessions considered)
• Compensation offer can be communicated via brokerage websites and all other channels like social media, text, email, phone call, etc.
• Listing agent may or may not share exact offer of compensation upfront
• There are a variety of ways for the commission to be paid to the buyer’s agent
• Watch out for amendments where buyer’s agent commission increases (careful what you sign)
• If your agent wants more commission than originally agreed upon ask for a closing cost credit in lieu so the money goes to you

Keep reading: How much do real estate agents make?

Source: thetruthaboutmortgage.com