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Out with the old and in with the new: New rules for real estate commissions

Aug 21, 2024

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Background: A class action lawsuit was filed against the National Association of Realtors (NAR) and four real estate brokerage firms. Essentially, they were sued for conspiring to keep realtor commissions high. The case settled. Even though a settlement doesn’t necessarily mean the NAR and brokerage firms were actually guilty of conspiring, the writing was on the wall so to speak.

 

Part of the settlement required the NAR to literally change the industry standards on how commissions get paid to realtors and who is required to pay the commissions.

 

Here’s what used to happen:


Payment of commissions was controlled by the Multiple Listing Services (MLS). If you were the seller of a property, you would sign a commission agreement with your agent. Your agent would then list your property for sale on the MLS. That MLS listing would tell anyone and everyone that your property was for sale and that if an agent procured (found) a buyer for your property, that the commission you were obligated to pay your agent would be split with the agent for the buyer. This essentially offered peace of mind. Seller side and buyer side agents knew that they would receive commissions.

 

The problem with this kind of scenario is that the commission agreement signed by a seller almost always provided for a 6% commission (3% to the seller's agent and 3% to the buyer's agent). So, if you were a buyer looking for a home, you had zero negotiating power over the cost of commissions. Zero control of cost of commissions meant higher overall home prices.

 

Here’s what happens now:

 

Sellers’ agents can’t use the MLS to offer buyers’ agents a split of the commission (they can make their own agreements separately). On top of that, if a buyer chooses to hire a real estate agent, they have to sign a contract with their agent that details the commission to be paid. “Commission to be paid” means the commission the buyer will pay their agent.


On the seller side, that 6% is not going to be split with the buyer agent. Are you willing to pay your agent a 6% commission? Probably not.


On the buyer side (and this is probably where the biggest opportunity lies), if you’re looking to buy a home and want to use a real estate agent, you will have to pay your agent’s commission out of your own pocket.


Of course, this begs the question: Do you want to use an agent to buy a home? Do you need to? What is a real estate agent doing for you anyway? In today’s world, you don’t need MLS access to see homes listed for sale. All you need to do to find a new home is hop on the internet and you can find every single property for sale in your area through sites like Zillow, Trulia, and Redfin.


As a buyer, you need to ask yourself whether you find value in hiring an agent to help you find a home; whether your agent will be doing something for you that you can’t do yourself. You’ll need to consider two main phases of your property search. The first is finding a suitable property. Since you can get on the internet and find every single property for sale by simply plugging in a search area by city, street, or zip code, you may find it completely unnecessary to have a real estate agent do it for you. It then goes without saying that once you find some suitable properties, you can simply go see the property for yourself.


The second phase, after you’ve found the property you want to buy, is handling the purchase and sale transaction. This is typically where most buyers may get a bit uncomfortable. Unless you have knowledge of how to navigate a real estate transaction, you may miss out on negotiation opportunities and you could even jeopardize a proper and legal closing if you fail to take all the necessary steps.


Let’s say that you are not comfortable with handling this phase of the deal on your own. Are you willing to pay a real estate agent a commission of up to 3% of the home’s price to do this for you;  a percentage that is going to cost you tens of thousands of dollars or more? Or would you rather pay a real estate attorney a flat fee to handle this phase for you? Remember that this phase of a real estate transaction is typically handled by a real estate attorney to begin with.


Here's the takeaway: The real estate industry is changing from the ground up and if you are considering selling your home, but especially if you’re considering buying a home, you can (and should) get on the internet and search for a property you’re interested in buying. You don’t need someone to do this for you and you certainly are not obligated anymore to pay someone immense sums of money for it. And if you need help with effectively negotiating the deal, making sure all contractual documents get drafted properly, and closing your deal on time, you can hire a knowledgeable real estate attorney for a flat fee to assist…

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