Subscribe to Cary W Porter blog

You’ve probably heard the news that there are changes coming in terms of how real estate commissions are paid. And while the seismic settlement announced by the National Association of Realtors earlier this month has not yet been approved it’s already sending shockwaves through the real estate industry.

This might sound exciting and like a potential game-changer for you as a home seller or buyer, with headlines proclaiming things like:

“Real estate commissions are being slashed!”
“Selling your house will now be less expensive!”
“No more paying 6% to real estate agents!”

But you’re also probably not sure exactly what it all means, how it will work, or how you’ll benefit from the changes.

Unfortunately, even if you ask the most informed agents on the planet, you probably aren’t going to get many answers. It isn’t because agents don’t want to answer your questions; it’s because they don’t even know exactly how the changes are going to work.

The settlement happened seemingly overnight. There was no advance warning or discussion with agents. They found out by reading a bunch of headlines you probably saw at the same time they did.

On top of that, most of the headlines are misleading, because nobody knows exactly how things are going to play out. Any claims that the media makes that commissions will be cut in half, or any specific number of dollars will be saved by consumers, remains to be seen. The changes might reduce commissions. On the other hand, they could increase them. As with many things the government or court system touches, there’s always the possibility that it could create more issues than it solves.

~The “Winning” offer wasn’t the highest offer. It was the 2^nd highest, but that agent agreed to only a 1% commission. On a $2.2 million home the difference was $33,000. Both the Buyer and Seller “Won”. The Buyer didn’t have to go the highest AND the Seller made the maximum return! ~

There are many new rule changes regarding “Offering” a Buyer’s Agent Compensation (We no longer use the term Commission). Those changes could range from minor tweaks to the commission system to a more radical restructuring of the residential real-estate industry, such as more people buying homes without using agents or buyers paying their agents by the hour.

Here are a few examples of how this program is already working.

Since January 1^st I have been listing homes with no “Set” buyer’s agent’s commission. It’s noted in the Marketing description and in the confidential agent notes on the MLS that the Buyer’s commission is “Negotiable”.

I have multiple examples of the listings still getting multiple offers and countless showings by other agents. In some cases, the best offer was one where the agent received a commission of what was 2023’s average of 2.5%.

On others we have had situations where the seller had no (0) buyer’s commission at all. This has saved some sellers as much as $50,000 in commissions on a $2 million+ home.

And still in some situations the program has worked EXACTLY how the DOJ hoped it would. The commission which is now fully negotiable benefited the Buyer and Seller equally. In the case below the highest offer to purchase the home also had an agent requiring a 2.5% commission. The 2^nd highest offer had an agent only asking for 1% commission. The difference on a nearly $2.2 million home was $33,000.

Buyer Broker compensation is now fully negotiable just like it was always meant to be!

So, in this case the “Winning” offer was not the highest price. So that buyer did NOT have to go higher than the other buyer to secure the property. AND, because the seller paid a lower commission, the seller also kept the maximum amount of return for selling their home.

Here’s What Matters to Buyers and Sellers in a Nutshell

Unless you’re in the business, you probably have no desire to read through all of the court documents or proposed settlement. You just want to know how the changes will possibly impact you. So, here’s an excerpt from a National Association of REALTORS® press release, highlighting the changes that will most likely affect you:

“In addition to the financial payment, NAR has agreed to put in place a new MLS rule prohibiting offers of broker compensation on the MLS. This would mean that offers of broker compensation could not be communicated via the MLS, but they could continue to be an option consumers can pursue off-MLS through negotiation and consultation with real estate professionals. Offers of compensation help make professional representation more accessible, decrease costs for home buyers to secure these services, increase fair housing opportunities, and increase the potential buyer pool for sellers. They are also consistent with the real estate laws in the many states that expressly authorize them.

Further, NAR has agreed to enact a new rule that would require MLS participants working with buyers to enter into written agreements with their buyers. NAR continues, as it has done for years, to encourage its members to use buyer brokerage agreements that help consumers understand exactly what services and value will be provided, and for how much. These changes will go into effect in mid-July 2024.”

Again, unless you’re in the business, that may not even be all that clear of an explanation. So, to put it in simpler terms:

Sellers and their agents won’t be allowed to offer a commission to buyers’ agents within their listing.
However, that doesn’t mean that a seller isn’t allowed to pay buyers’ agents a commission. It just can’t be published in the listing.
And buyers will now be required to sign a written agreement with an agent in order to work with them, which will likely require them to agree to a certain amount of compensation. That doesn’t necessarily mean the compensation has to be paid out of the buyers’ pocket; it could be an agreed-upon amount that will be negotiated into the purchase price paid for through the proceeds of the sale.

Basically, it allows sellers to choose to not offer or agree to pay a commission to buyers’ agents when they list their house for sale and allows buyers to choose to not work with a buyers’ agent when they buy, in hopes of saving money. But before you do that, there are some things you should keep in mind.

What is a “Fair” amount to pay for real estate compensation?

Here Are Some Things to Keep in Mind if You’re Selling a House…

It doesn’t mean that you can’t offer a commission to buyers’ agents.
Although you can’t publish how much you’re willing to offer or agree to on your listing, in most cases, it will still benefit sellers to offer and be willing to offer commissions to buyers’ agents, as many buyers will still want their own representation and will have buyer agency agreements in place.
There’s a good chance that buyer agent commissions will likely still be paid through the proceeds of the sale, as they have been for many years.
If you’re selling to a buyer who doesn’t have an agent representing them, they could expect you to drop your price accordingly since you’re not paying another agent. In other words, if your house was worth $1,000,000, and buyers perceive that a buyers’ agent commission would have been 2.5% then the buyer will want a $25,000 reduction on your price below what they already want to negotiate as the fair market value.
Of course, in the current market of bidding wars, a buyer NOT using another agent can help make their offer more competitive and attractive to sellers who will save money on commission fees.
It could cause more risk and lawsuits that may directly involve you and your property. Dual agency, which is when an agent represents both the buyer and the seller, is one of the leading causes of lawsuits in the industry. This new way of doing business could create a lot more situations where consumers don’t have their own independent representation, which could lead to either the buyer or seller feeling like their interests weren’t entirely represented.
You definitely want to make sure you have an experienced and capable listing agent to help navigate you through all the potential situations, both benefits and dangers.

Here Are Some Things to Keep in Mind if You’re Buying a House…

The way buyers’ agents have been paid is a result of originally trying to protect buyers decades ago. Years ago, buyers didn’t have an agent dedicated to representing their interests and were often unaware that the seller’s agent didn’t actually represent their interests as well. So, rules and laws were passed to change that, and listing agents were compelled to offer buyers agents a percentage of the commission if they represented a buyer on a house they were listing. This gave buyers more choice in who represented them, and the ability to compensate their agent without having to pay out of pocket. So, for many buyers, this isn’t that great of a change for you unless you cherish the idea of representing yourself and figuring out how to do everything that needs to get done.

You will now have to choose a buyer’s agent and sign an agreement with them. This has always been an option, and it could be argued that it should always have been required, but most buyers’ agents didn’t want to seem too pushy or aggressive, so they never asked for one. Now you’ll need to sign a contract to work with them.
First and foremost, the new buyer’s agency agreements requires brokers to disclose to the buyer, upfront, what their services will cost, the same way that, say, a consumer would expect an auto mechanic to explain what servicing their car would cost. The process is “identical” to a contractor asking a consumer to sign something acknowledging receipt of the repair estimate.

These agreements also shield you from potential conflicts of interest, mandate brokers to adhere to specific professional guidelines, and ensure transparency in their legal responsibilities and compensation. This all leads to a clearer understanding from the start as you select an agent to help in your upcoming home purchase.

The buyer’s agents will now negotiate their commissions as part of the purchase contract. Just as an inspections addendum or financing addendum is negotiated, so will the buyer’s agent’s commission.

A seller may accept your offer price on a home but push back on your buyer’s agents commission and negotiate that lower. Working with your agent you will have to decide if you will make up that difference as a buyer, or if your agent will be willing to accept the lower fee offered. The buyer’s agents commission simply becomes negotiable just like a home inspection contingency, the amount of earnest money put down, closing date, etc.

If you go it alone, go in knowing that finding the right house, understanding market values, negotiating the best deals, and handling everything involved throughout the process from contract to closing isn’t as easy as it may sound. There is more to buying a house than just finding it online, making an offer, and then going to a closing. You will have to do the work your agent would have done and know what needs to be done in the first place.

While it’s impossible to predict exactly how everything will play out, those are a few things to keep in mind whether you’re buying or selling.

The best thing to do if you’re curious or concerned about the coming changes is to reach out to your local agent and ask them for their perspective, insights, advice, and to keep you in the loop as the changes get finalized.

The Takeaway:

While it’s true that commissions may shift, the details remain uncertain, because nobody knows exactly how things are going to play out.

In some cases, especially in highly competitive markets like Seattle, both Sellers and Buyers may save money as in the example above. In a more balanced market, commissions may increase as sellers work to capitalize on offers. Likewise, in a declining market a sell may not be able to or be willing to pay a large commission due to decreasing home values.

In the example above, there were multiple offers. Three (3) offers with agents and three (3) offers with no agents. At a 2.5% commission on a $2 million home the offers without an agent saved the seller $50,000 AND made the buyers not using an agent offers more attractive and competitive. The winning offer wasn't the highest offer, but because there was no other agent it netted the seller MORE money, while SAVING the buyer because they didn't have to escalate higher to beat an offer price containing another agent's commission. So here again BOTH the Buyer and Seller "Won" or got the best deals.

The bottom line is “Commissions are now going to be fully negotiable just like they were always meant to be.” Just as sellers interview a listings agent and talk about services offered, marketing and what commission the listing agent will charge. Buyers will interview their agents and fully understand what services are offered and what the buyer’s agents’ fees are. It will be a fully transparent system.

And Transparency is a good thing for everyone.

If the proposed settlement is accepted by the courts, sellers won’t be able to advertise agent commissions, however they will still be allowed to offer them, just not within their listing. In many cases this will still benefit the seller by doing so in order to get the most exposure for their house and sell it for the most money possible.

Buyers will still have the option to work with a buyer’s agent, however they will have to sign a buyer’s agency agreement. Fortunately, that agreement will clearly state the fee charged by your agent and help to assure you of your own representation and to have an agent looking out for your interests while helping you through the process.

But, for the time being, as much as you might want or expect your local agent to be able to give you more specifics, please understand that they can’t. For starters, it’s a proposed settlement, not yet accepted by the courts, and if it’s approved, the changes won’t start until July.

Here are some more questions and answers you may want to explore below.

Real Estate Commission FAQ

Why was this rule change put into effect?

For more than 30 years, the compensation framework in the real estate industry was structured for the seller to pay the listing firm and for the listing firm to "share" its compensation with the buyer brokerage firm. This framework was a vestige from "sub-agency" where every broker represented the seller, and brokers did not work directly for the buyer. Sub-Agency was eliminated in the mid-1990s with the adoption of the Agency Reform Act (RCW 18.86) and the creation of buyer agency. Yet, the "commission sharing" structure remained.

Rules and the listing agreement will be revised to provide for a direct offer of compensation from the seller to the buyer brokerage firm. The concept of "commission sharing" by listing firms will be removed from the Rules and the listing agreement. Of course, the seller and listing firm can work together to determine the amount of compensation, if any, to offer the buyer brokerage firm. The listing agreement will be reformatted to clearly differentiate between the listing firm's compensation and the buyer brokerage firm's compensation.

The revisions further enhance transparency regarding broker compensation and create additional opportunities for consumers and brokers to discuss and negotiate compensation. The changes provide greater flexibility for consumers and brokers when selling and purchasing real estate and promote innovation and competition in the market.

Again, these revisions further enhance transparency regarding broker compensation, create additional opportunities for consumers and brokers to discuss and negotiate compensation, provide greater flexibility for consumers and brokers when listing and purchasing real estate, and promote innovation and competition among member brokers. These revisions are critical to the evolution of the real estate brokerage industry and will help brokers and agents to better serve their clients for years to come.

Do I have to offer a Buyer's Agent compensation?

No, Under the proposed settlement and in accordance with NWMLS regulations the requirement that a seller offer compensation to the buyer's broker has been eliminated.

Fact: Real estate brokers’ compensation rates are not regulated in any state and are ALWAYS 100% negotiable.

Surprisingly, many people think that real estate brokerage compensation rates are “set” in their area, and they must pay a specific percentage of the sales price to the agent to get their services. This is not the case. In fact, you can pay whatever you and the agent have agreed upon.

What is a “Fair” amount to pay for real estate compensation?

“Fair” is whatever you and the agent decide is fair, and just as you are not under any obligation to pay more than you want, the agent is not under any obligation to do business with you if they are not going to earn what they expect.

Buyer agents will have a Buyer Brokerage Services Agreement with their clients. This agreement will guarantee them a certain commission. That commission can be negotiated as part of the offer and paid from the seller’s proceeds, the buyer can pay their agent directly, or a combination of both.

Who pays the Buyer’s Agent compensation?

It can be the seller or the buyer because it is negotiable who pays the Buyer Agent commission. Commissions are negotiated through an addendum to the Purchase and Sale Agreement. Just like the negotiations in an Inspection Addendum or Financing Addendum.

Under the new rules it is clear the Buyer Agent commission is part of the negotiated purchase price, and it is clear who is paying them, who they represent, and what amount of purchase price that represents.

It is all about better transparency in the process. Agents will still be compensated. Everyone will be clear on who represents who and it conforms with the law that states “ALL” real estate commissions are negotiable.

And honestly many Buyers and Sellers didn’t understand how that worked.

Now the Buyer Agent commission can be directly negotiated. In competitive situations with multiple offers, it may end up where the agent’s required commission is as big a factor as final sales price. For example, on a $2 million home an agent asking for a 2.5% commission would represent a $50,000 fee, whereas an agent asking for a 1% commission would be a $20,000 fee. That $30,000 difference in buyer’s agent commission can be the difference in the lower commission offer getting the home.

Buyer Agents will now have what is called a Buyer Brokerage Services Agreement with their clients. This agreement guarantees them a certain commission.

The Buyer Agent may submit the offer along with an addendum asking you to pay them 2.5% of the purchase price. ($25,000 on a $1M home) That addendum must be agreed to and signed off on by the Buyers as part of their offer. (So, the buyers will understand this “Ask” may affect the competitiveness of the offer they are submitting.) If you counter back on that commission amount the buyer may be required to pay the difference directly to their agent, OR the agent will have the opportunity to adjust their commission down to the offered amount.

Is compensation negotiable?

YES!

Fact: Real estate brokers’ compensation rates are not regulated in any state and are ALWAYS 100% negotiable.

Compensation is negotiated through an addendum to the Purchase and Sale Agreement. Just like the negotiations in an Inspection Addendum or Financing Addendum.

Sellers may choose commission as a percentage or a flat dollar amount.

The buyer agent may submit the offer along with an addendum asking you to pay them 2.5% of the purchase price. ($25,000 on a $1M home) That addendum must be agreed to and signed off on by the Buyers as part of their offer. (So, the buyers will understand this “Ask” may affect the competitiveness of the offer they are submitting.)

You could accept this request, deny it, or counter back at a different number.

You could even offer LESS

If your home is listed at $1M and the buyer’s offer comes in under $1M and their agent asks for a 3% commission…. You could choose to accept the lower offer or counter back AND you could also LOWER the compensation you are offering down to $5,000 or some other number.

What is a “Fair” amount to pay for real estate commission?

What will most likely happen is Buyer’s agents will have what is called a Buyer Brokerage Services Agreement with their clients. This agreement will guarantee them a certain compensation.

How will it work if Buyer commissions are no longer displayed on the MLS?

Compensation is now negotiated through an addendum to the Purchase and Sale Agreement. Just like the negotiations in an Inspection Addendum or Financing Addendum. Most of the time the buyer's agent commission will be paid out of the seller’s net proceeds through escrow just like it has been done for the last 30+ years. In some cases, if the seller is not willing to cover the full amount, and if the buyer’s agent will not adjust their commission to what the seller offers, then the buyer may have to make up this difference directly.

What happens when a Buyer Agent has a Buyer Brokerage Services Agreement?

“This revision allows greater flexibility for sellers when listing a property, while affording buyers and buyer’s brokers a vehicle for negotiating the compensation for the buyer’s broker’s services.

Sellers and their agents won’t be allowed to offer a commission to buyers’ agents within their listing.

However, that doesn’t mean that a seller isn’t allowed to pay buyers’ agents a commission. It just can’t be published in the listing.

And buyers will now be required to sign a written agreement with an agent in order to work with them, which will likely require them to agree to a certain amount of compensation. That doesn’t necessarily mean the compensation has to be paid out of the buyers’ pocket; it could be an agreed-upon amount that will be negotiated into the purchase price paid for through the proceeds of the sale.

From Optional to Mandatory

Buyer Brokerage Services Agreements have been around for quite a while. And now they are legally required by Washington State. These agreements offer crucial safeguards for everyone involved and are similar to how long-standing seller listing agreements have always worked.

Safeguarding Your Interests

These agreements shield you from potential conflicts of interest, mandate agents to adhere to specific professional guidelines, and ensure transparency about the Buyer Agent’s legal responsibilities and compensation. This all leads to a clearer understanding from the start as we team up on your upcoming home purchase.

Can the Buyer Agent “Ask” for higher commission?

The Buyer Agent may ask for any commission amount that their client agrees to. (2.5% of the purchase price on a $Million Home that would be $25,000) That addendum must be agreed to and signed off on by the Buyers as part of their offer. (So, the buyers will understand this “Ask” may affect the competitiveness of the offer they are submitting.)

This revision allows greater flexibility for sellers when listing a property, while affording buyers and buyer’s brokers a vehicle for negotiating the compensation for the buyer’s broker’s services.

The Seller still has no obligation to agree to pay the higher commission, and as the Buyer Agent works solely for the buyers benefit it may fall to the buyer themselves to make up the difference in the offered commission and the commission amount guaranteed in the Buyer Brokerage Services Agreement.

You could even offer LESS

Just because a buyer agent asks for a certain amount of commission, that does not mean you have to agree to it. The commission paid to the buyer agent by the seller from the net proceeds of the sale is completely negotiable. So, if a buyer agent asks for 3%, you could counter back at 1% or anywhere in between. That amount can be negotiated until everyone is satisfied. The buyer agent can even agree to lower the commission requirement in their Buyer Brokerage Services Agreement and to accept what is negotiated.

If the Buyer Agent asks for a commission but the offer is lower than the asking price, can I offer a lower commission?

YES! You can offer less.

Many Buyer Agents offer “rebates” to their clients. How does this rule change affect that?

Additional options have been added to Buyer Brokerage Services Agreements to enable the buyer brokerage firm to reduce its compensation and have the seller credit the amount of the reduction to the buyer's obligations at closing. Note that such credit is subject to approval by the buyer's lender. Another new option on the form is a simple reduction in the buyer broker compensation paid to the firm. This option could be used in situations where a buyer and buyer's broker agreed to a lesser amount of compensation in a buyer representation agreement or a reduction to make the buyer's offer more competitive. There is also an "Other" box that the parties may use to agree on different compensation terms.

This new legislation also effectively separates the processes of buyer and seller agent commissions, and that is going to have significant changes as well.

While some awkward situations are sure to come up as agents adjust, the difficult conversations prompted by the new legislation will help their buyers through a much more transparent transaction. Another plus: Under the revised law, brokers will not have to wrestle with clients who do not want to sign agreements, for example, because another agent at another brokerage did not ask them to.

Can a Buyer Agent reduce their commission to make the offer more favorable?

Another new option is a simple reduction in the buyer broker compensation paid to the firm. This option could be used in situations where a buyer and buyer's broker agreed to a lesser amount of compensation in a buyer representation agreement or a reduction to make the buyer's offer more competitive. There is also an "other" box that the parties may use to agree on different compensation terms.

For example: In competitive situations with multiple offers it may end up where the agent’s required commission is as big a factor as final sales price. For example, on a $2 million home and agent asking for a 2.5% commission would represent a $50,000 fee, whereas an agent asking for a 1% commission would be a $20,000 fee. That $30,000 difference in Buyer Agent commission can be the difference in buyer (two) with the agent asking for 1% getting the home over buyer (one) with the agent requiring 2.5%.

What if a Buyer comes unrepresented and wants to purchase my home?

If the buyer is unrepresented the listing agent will be required to handle both sides of escrow, confer with the buyer’s lender, collect data, and clear all sides for closing. There will be a separate section on the listing agreement where the listing broker indicates.

1. Compensation for marketing the home and negotiating the offer.

2. Additional fee if the buyer is unrepresented.

In the past the default would have been for the Listing agent to claim both the Listing and Buyers compensation.

Under the new forms this is now broken out and can be clearly negotiated in advance what would happen if the buyer came unrepresented into the transaction.

Posted by Cary W Porter on April 4th, 2024

How Changes in Real Estate Commissions Will Actually Impact You as a Buyer or Seller

Real Estate Commission FAQ

Tags

Leave A Comment