In the not-so-distant past, before August 17, 2024, real estate commissions operated very differently. Or at least the rules governing them were different.
At that time, listing agents would list the property on the Multiple Listing Service (MLS) which included an explicit and advertised commission (compensation offer) to the buyer’s agent.
This commission was actually paid by the seller of the home, who also paid it to the listing agent, out of the sales proceeds.
The compensation offer ensured that both agents would receive compensation for their services and representation.
Are real estate commissions exaggerated?
While this setup was fine and dandy on the surface, some have claimed that it allowed agents to collude with each other and keep their commissions inflated.
At the same time, there was an argument that the agents did not highlight the fact that Commissions were negotiable. also.
So, the buyer and seller are often told that 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 deal. That’s a lot of money, no doubt.
Perhaps most problematic, buyers were often told that they did not have to pay for representation and that the buyer’s agent’s services were “free.”
After all, they didn’t have to pay anything out of their own pockets, but it was funded by the sales proceeds generated from the deal.
Of course, the argument was that the home buyer had already paid for it through a higher sale price necessary to absorb some or all of that cost.
But wait, there’s more!
This arrangement also allows the buyer’s agent to search for homes on the MLS for a commission.
In short, they can direct their buyer client to only the homes that offer the highest compensation.
For example, only for properties that offer a 3% buyer’s agent commission. If the commission is only 1.5% or 2%, they may ignore these commissions.
Obviously, all of this was not going well, and that’s what ultimately led to the massive lawsuit filed and settled by the National Association of Realtors.
“considered concessions”
Fast forward to today where these compensation fields have been removed on MLS entirely.
In their place might be New field It’s called something like “considered concessions,” with a yes/no option.
This tells the buyer’s agents that the seller will consider making concessions, which can be used to cover their compensation.
Knowing this, the agent will feel more comfortable representing the buyer, who may not have (and probably will not have!) the money to pay his agent out of pocket.
After all, buyers often don’t have enough money to cover the down payment and other closing costs. Now they have to worry about paying their agent, too.
However, they cannot disclose the amount they will provide as that would raise guidance concerns again.
Instead, it is simply a signal that the seller is willing to negotiate and ease the burden of compensation on the seller.
But that’s just a rule of the MLS. They can put the exact amount on their brokerage website, on social media, or by word of mouth. So it’s pretty much meaningless. I’ll get into that in more detail in a moment.
Buyer’s agents must set their prices in advance.
On the other hand, buyers’ agents now have to set their compensation in advance and stick to it.
Again, the idea here is to have separate negotiations with their clients, which are not influenced by the seller or listing agent.
Moving forward, the buyer’s agent should have a set fee for their services that is unrelated to what the seller/listing agent may offer.
Why? Because it’s their service! They shouldn’t be paid more for doing a job just because the salesperson said, “Well, we can give you more!”
However, the settlement now requires buyers to enter into a written buyer’s agreement before they can tour the property.
At that time, it was agreed Must also “Specifically disclosing the amount or rate of compensation that an agent or broker will receive or how that amount is determined.”
“The amount must be objectively determinable and must not be open-ended. For example, an amount of X or X% is allowed, but a commission range is not allowed.”
For example, the buyer and agent will meet in advance and agree on 2% of the sale price, or $7,500, etc.
This amount of compensation should not change, regardless of what the seller or listing agent offers on a particular property once the tour begins and offers are in.
The original agreed fee determines the compensation.
Now let’s imagine that the buyer and agent are finally ready to make an offer. Remember, they had to sit down and discuss compensation before touring the homes.
When this happens, the buyer and agent agree to a 2% buyer’s agent fee. They don’t want to pay it out of their own pocket, so they scan listings where they think or know the seller will pay it.
They saw in the MLS notes that concessions were being considered for Listing X and scheduled a tour. They liked the property but the listing agent hadn’t explicitly told them what he was offering.
Remember, it seems like doing this is now acceptable outside of MLS, but this agent in particular is keeping his cards close.
So, they set up an offer and ask for a 2% fee and offer X price for the house. The listing agent comes back and says the seller will only offer 1.5%.
At this point, the buyer’s agent could theoretically accept this and try to collect the missing 0.5% directly from the buyer. But I don’t think the buyer is obligated to do this.
Alternatively, they can try to respond to get the extra 0.5%, or simply agree and move on.
This can also work the other way around where the buyer’s agent originally agreed to a 2% fee but sees the seller offering a full 3% offset.
In this scenario, the listing agents tell the buyer’s agent up front exactly what they are willing to offer in terms of compensation.
Depending on the state, the buyer’s agent cannot charge the additional 1% offered. If they try to modify their agreement with the buyer, the buyer must sign it.
At this point, the buyer may ask why the agent is getting an additional 1% of the sale price. He may also say that he wants the 1% to cover the costs of closing the deal himself.
This situation may evolve over time, and may vary from state to state. But the spirit of compromise seems to call for agents to stick to the originally agreed-upon mission.
We should not expect a price increase if the seller or advertising agent offers more. This may be a directive, especially if it is publicly announced.
Another problem I foresee is that buyers’ agents will lower their compensation up front, then hope to earn more by scanning listings with higher compensation.
For example, they will agree to work with a buyer for a low fee of 1%, then direct the buyer to properties they know offer 2.5% or 3%.
Again, this goes against the spirit of the changes, and I believe it is not even allowed in the state of California.
If you’re a buyer, beware of the adjustment that suddenly makes the agent more money. Tell him you want the extra money instead to pay closing costs!
How Real Estate Agents Can Still Get Paid
– Fixed fees paid by the home buyer.
– Through the listing agent (Cooperation Committee)
– By seller concessions
You may be wondering how real estate agents can still be paid in light of these changes.
In fact, there are more ways to get paid because some buyers will now pay the buyer’s agent directly.
I think this was always an artistic choice, but it never happened. In the future, this may happen more often.
This is especially true if the advertisers and their sellers don’t offer anything to the buyer’s agent, which I’ve heard happens quite often.
It may also become more common if the fees are lower, or are an hourly or flat rate, which makes it more reasonable to pay out of pocket.
However, buyers’ agents can still be compensated through traditional means, such as a co-op commission where the listing agent shares a portion of their compensation.
For example, if the seller says you get 4% total, either 2% per agent, or some other split.
Finally, there is the possibility of using seller concessions to cover the buyer’s agent commission.
This usually results in a higher selling price to cover the concessions. So, if the agent’s fee is $10,000, the purchase price is adjusted by $10,000 and must be appraised.
Please note that you cannot currently finance real estate agent commissions with the loan amount.
Key points to remember
- Real estate commissions are fully negotiable and are not fixed by law.
- As a home buyer, you need to negotiate the buyer’s agent fee up front before touring homes.
- As a seller, you have options to offer zero to the buyer’s agent, what is customary in your market (e.g. 2.5%), or something in between.
- Commissions can no longer be listed on the MLS (but the seller can say that concessions have been taken into account)
- The compensation offer can be sent through brokerage websites and all other channels such as social media, text messages, email, phone calls, etc.
- The listing agent may or may not share the exact compensation offer in advance.
- There are a variety of ways to pay a buyer’s agent a commission.
- Beware of modifications that increase the buyer’s agent’s commission (be careful what you sign)
- If your agent wants a larger commission than originally agreed upon, ask for a closing cost deduction instead so the money passes to you.
Continue reading: How much do real estate agents earn?
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