A small, but monumental change is going into effect on October 1, 2019: Real estate firms representing sellers will now be publishing the commission the seller is offering to pay a broker representing the buyer in the listing information and online.
The traditional means for brokers getting paid in a transaction is that the seller pays 6% of the sale price in commissions to the agents involved. That is 3% to the listing agent, and 3% to the buyer’s agent. Then along comes a “price-fixing” lawsuit alleging that real estate firms are price-fixing to set commissions at that 3% & 3% rate. What transpires is a move towards transparency for buyers.
You see, the listing agent and seller already know their commission agreement. But what isn’t known (or previously agreed upon) is how much to pay the buyer’s agent. So what happens is a 3% commission is built INTO the sale price of the home knowing that money is earmarked for the buyer’s agent. Thus, the price/cost/commission of the buyer’s agent is “fixed” at 3%.
However, by publishing what the seller is willing to offer the buyer’s broker, the buyer will have transparency into what they are paying their agent by way of the purchase price of their home. The buyer will now see the resulting markup in the purchase price of the home they want to buy to pay their agent with. There’s no doubt this empowers the buyer to take charge of how much they’re paying for the broker services they’re receiving, but how will this play out? I have some hypotheses:
- There’s going to be downward pressure on the commission paid to buyers’ agents. Can we all agree on that? But given this, if today’s median house price is what it is because it’s assuming a 3% buyer agent commission if the average commission paid to buyers’ agents fall, then there will be that much downward pressure on Puget Sound’s median house price. Said another way: If the average commission to buyers’ agents goes to 2% from 3%, then sellers will only need to markup their sale price by 2% versus 3%, thus putting downward pressure on the area’s median house price. Not a lot, but a little.
- This would not be wise, but let’s say a seller says “We’re not paying the buyer’s agent anything!” Well, now we’re in a situation where the buyer’s agent may not receive compensation if the buyer decides to pursue that particular listing. Thus, agents will have to protect themselves by way of Buyer Agent Agreements stating the commission they expect to receive if they continue to work with that buyer upfront. Long story short, buyer agent agreements will become the norm.
However, if the situation arises where a seller doesn’t want to pay the buyer’s agent, the buyer will now not only have to pay their down payment, their closing costs, their prepaid taxes, and homeowners insurance but also their agent’s commission. This can be quite a bit of additional money. Given that this scenario will eat into the buyer’s purchasing power, I would foresee that sellers don’t do this because they’d be limiting their buyer pool.
But let’s be honest, there will be a few sellers who do, and that will put further downward pressure on median house prices overall. This will happen since once that house sells at a theoretically 3% lower price, it becomes a comp for other houses in the neighborhood. Going one step further, if that other house in the neighborhood is offering to pay the buyer’s agent commission, the door is now open to low appraisals since there is an inherent 3% difference in the sale price for what could be the exact same home.
- This is going to greatly reduce the number of new agents entering the industry. The established agents will have the resume to command the commissions they need to run their business. New agents or part-time agents will not. Therefore it’s going to be really hard for new and part-time agents to make ends meet on the homefront since, in theory, the way they would attract the business to build their resume would be by reducing their commissions. Thus, future buyers will be left with a general pool of agents operating at a higher caliber of professionalism than the current overall pool of agents.
- And finally, brokerages whose business plan is quantity over quality (lots of new or part-time agents versus a few really good agents) are going to suffer, and potentially go out of business as their new and part-time agents get out of the real estate business.
Making the commission offered to buyers’ agents transparent is a small change, but it’s going to have a profound effect on the industry and our housing market. There will be downward pressure on buyer agent commissions and median house prices; as well as an increase in the overall quality of real estate agent. Established agents should see their businesses increase as competition from new and part-time agents decrease, and buyers, in general, will receive a higher level of service and professionalism from the agent they’re working with.
To read more about the rule change, see the press release from the NWMLS here: https://www.nwrealtor.com/wp-content/uploads/2019/07/NWMLS-SOC-Press-Release-July-2019.pdf