New changes in home buying and selling is in the works
Home buyers may soon be paying their real estate agent’s commission
If you are thinking of buying (or selling a house)... BIG changes are coming!
How does it affect you as the buyer or seller?
(*TLDR: home buyers may soon be paying their real estate agent’s commission)
The big ‘possible’ change is in the commission structure... or more specifically, the way it is paid out to the real estate agents.
I find most people don’t really understand how real estate agents get paid…so let me try and clear that up a bit for you. First of all… real estate commissions are negotiable. There is no ‘standard’ rate. There might be states or areas where there is a ‘prevailing’ or 'common' rate, but again, it’s all negotiable. For this example, I’ll use what it seems most people think the real estate commission rate is in New Jersey… 6%. Again, this is a rate that is currently negotiated between the home seller and the listing agent and listing broker. I say ‘currently’ because this may change soon, which I will get to later. So, this negotiated and agreed upon 6% is paid by the seller to the selling agents’ brokerage. During the commission negotiations, it was also negotiated how much of that (in this example) 6% would be paid out to the buying agents broker. Many times, it’s half, so again, in this example that would be 3%. But, sometimes the selling agent might keep 4% and only pay out 2% to the buyers’ brokerage, or any combination. Let’s assume it’s split evenly, 3%-3% in this example. Most real estate agents are 1099 workers (independent contractors… or more accurately business owners) We pay for our training, continuing education course, license renewals, association dues, MLS fees, marketing, promotion, sometimes office fees, sometimes technology fees etc. We also pay for our own health insurance, and of course need to put money aside for Uncle Sam. Real estate agents also split their commission with their broker. Again, this is a negotiable thing between the agent and the broker. It can be a 50/50 split, and there are some brokerages where there isn’t a split (but there are other fees that sort of make up for it). So… that 6% that most people think the agent gets, just got cut down to 3% (3% for the selling agent, and 3% for the buyers’ agent).. then cut down to possibly to 2% (let’s assume a 66% split with the broker, so, 1% to the broker, and 2% to the buyers’ (or sellers) agent) Out of that 2% the agent needs to pay for all of the items I mentioned above (taxes, marketing themselves, marketing the homes they sell (photography, pamphlets, post cards, postage etc), health insurance, etc. The buyers agent needs to cover the same, and also the gas (or electric) for driving around and meeting their clients at homes they want to see. We also check out homes without our clients as a preview, and to get to know the inventory. So we also have car payments, insurance etc. We also spend a lot of time researching the market, creating CMA’s (in order to help their buyer not overpay, and help their sellers know a good selling price), writing and submitting offers, scheduling inspections, putting out ‘fires’, negotiating deals and helping to make the transaction go as smooth as possible. (Unfortunately it doesn’t usually go a smooth as HGTV makes it seem!) A lot goes on behind the scenes that agents do when helping you buy or sell. Where am I going with this? Well, that 6%, just turned into maybe 1% for the agent. (1% to their broker, 1% for business expenses, and 1% for them) That’s what they have to live on. That’s their ‘paycheck’. That’s what they pay their mortgage or rent with. And of course their food, cost incurred by their kids and /or college education for their kids, gas and electric, cable, internet, phone and incidentals… and hopefully there is some money left over to put away for retirement and savings. Now, I’m not saying being a real estate agent can’t be a very lucrative career, it can be… but it is hard work. According to the National Association of Realtors, 87% of real estate agents quit within 5 years of getting their license.
So… that was a long explanation of how real estate commissions ‘currently’ work. I say currently, because it may change soon. There are a couple of lawsuits that are trying to change the way real estate commissions are paid. Home buyers may soon be paying their agent’s commission, while the home seller pays only their selling agents commission. (As opposed to the seller paying it and it getting split as I explained above) One could argue, that the home buyer is actually paying the commission, after all, they are the ones bringing the money to the table. The buyer gives the seller money, the buyer gets the house, and the seller takes that money from the buyer and pays the commission that is split out to the selling and buying agent (as explained above) and whatever other closing costs there are. That may change very soon.
If you have been seriosly looking to purchase a home recently, you may be noticing many buyer’s agents a wanting their clients to sign an ‘Exclusive Buyer Agent Agreement’. If you are serious about buying a house, don’t be afraid to sign this. This helps the agent feel more comfortable of putting 100% of their effort working for you. There is more ‘ghosting’ in house hunting than there is in dating! And many people just switch from agent to agent, even after an agent showed them 20 houses, wrote 5 offers or more… then who they thought was their ‘client’, popped up at an open house and put an offer in with the listing agent! The agent they were just working with for months, did all that work for ‘free’, as they were left out of the transaction and didn’t get paid. If an “Exclusive Buyer’s Agent Agreement’ was signed, the listing agent would have found that out if they properly vetted their ‘new client’. This could also be the original agents fault, for not explaining the expectations of both parties, and getting an agreement signed. As real estate agents make buyers signing a buyer’s agent agreement a standard practice, those things would (hopefully) happen less.
So what does this mean for you as a home buyer? It could mean that you would need to come up with more money at the closing table in order to compensate your agent who helped you through this transaction. It could add 2-3% (of course it’s negotiable) to the price of the home.
If you were thinking about buying a home… now might be the time to get serious before these new rules take effect.
As a seller, this means your closing costs would (should) be lower, so your net profit could be more. It’s too early to tell if home sales prices may drop because of the change, as some feel the commission may be 'built-in' to the selling price.
Anything can happen! It's good to be prepared!
If you have any questions, feel free to reach out to me.