Consider these 8 things about changes in buying and selling a home

Starting in July, the real estate industry is bracing for a sweeping shake-up thanks to a $418 million settlement offered by the National Association of Realtors to overhaul its long-entrenched commission structure for agents and pay compensation to the sellers and real estate brokerages who sued. The NAR got a further blow on April 5, when a federal court cleared the way for the Justice Department to reopen an antitrust probe into the group and its rules regarding home-sale commissions. While the settlement awaits final approval later in the year, a preliminary sign-off by a federal judge late last month means that the outcome is highly likely.

In addition, the NAR has already started planning to change some of its policies starting this summer. Although these will likely affect home buyers more than sellers, both sides will have to make some adjustments, including how they work with agents.

1. How will the changes with agent commissions affect home buyers?

While commissions have always been negotiable, sellers typically strike a deal with their agent, who then splits the compensation (often totaling 5 to 6 percent) with the buyer’s agent by agreement with the seller. Under the settlement, though, sellers can no longer advertise an offer to compensate the buyer’s agent on real estate databases known as multiple listing services. The lawsuit claimed that advertising commissions kept the fees artificially high because buyer’s agents might be more likely to bring their clients to properties where owners offered the most compensation.

Going ahead, buyers who hire their own agent must sign a document, known as the “Buyer Representation Agreement,” that explains how their agent will be paid. These agreements as such aren’t new — 18 states, as well as many real estate companies, already require them — but the range of negotiation around the commission may change, with greater transparency for buyers. And some sellers may choose not to offer to pay the buyer’s agent.

The shake-up could yield different commission rates for different levels of service, which would give buyers freedom to pay only for the services they want, says Todd Luong, a real estate agent with RE/MAX DFW Associates in Frisco, Texas.

For example, buyers can pay a flat fee to an agent to cover only basic services, like showing a home, submitting an offer or helping with negotiations. An hourly rate might also be possible.

2. If I’m buying a home, is an agent still worth it?

There’s a common perception that the seller “pays” the full commission that’s split between the agents. But in fact, “buyers have always paid a real estate agent commission fee when they purchase a home” because it comes out of what they pay the seller, Suzy Minken, a real estate agent with Compass real estate brokerage in Short Hills, N.J., points out.

The new changes could prompt more buyers to go without hiring an agent at all. That would mark a departure from current practice, with more than 90 percent of buyers and sellers working with an agent, according to the NAR.

If they do opt for an agent, buyers might vet several candidates first to compare services and costs, since they have flexibility to negotiate the agent’s commission. But they should also remember they probably won’t know in advance of making an offer whether the seller will pay the commission of the buyer’s agent — so that payment is likely to become part of purchase negotiations, Luong said.

“Sellers may first want to look at the offer price and all the offer terms before deciding how much of a buyer agent commission they’re willing to pay, if any,” Luong said. “The negotiations between buyers and sellers are only going to get more complicated” once the settlement goes into effect, he added.

3. Will certain home buyers be more affected under the new rules?

Probably. For example, firsttime home buyers or other buyers who are cash-strapped might struggle, since they are less likely to afford a lump-sum payment for the buyer-agent fee if the seller doesn’t cover it, Minken said.

Also potentially affected are buyers who use Veterans Affairs loans, who are barred from paying real estate commissions under the current loan program, Luong said.

“VA borrowers would be at a disadvantage in making an offer on a home where the seller didn’t pay the real estate agent compensation,” Minken said. “The already-sparse inventory could shrink even further if sellers ‘uncouple’ the real estate agent fees traditionally paid and not provide an offer of compensation for the buyer’s agent.”

Still, more generally, sellers can offer a credit to the buyer to close the deal, “and buyers can use that money however they want at the closing table, including paying for their agent’s commission,” Luong said.

4. What should home buyers do now?

If you’re planning to buy a home in the next few months, and you’re worried about your liquidity, you might want to close a deal before July because there’s less of a chance you’ll need to pay your agent’s commission with cash, Luong said.

There remains the broader debate over whether the changes from the settlement could affect home prices. Some researchers say buyers might benefit because home prices would fall — based on the argument that the traditional commission structure’s high fees are baked into higher listing prices because sellers want to cover their costs. The real estate industry has pushed back on this claim, citing data suggesting a weak correlation between commission percentage and listing price — and that prices depend on supply and demand, not commissions.

5. What do changes on agent commissions mean if I want to sell my home?

The biggest change for sellers is that their agents may no longer make compensation offers through the MLS. However, their agents can still negotiate commission offers with the buyer’s agent outside the MLS, provided they disclose the resulting deal to both the buyer and the buyer’s agent, said Bess Freedman, CEO of Brown Harris Stevens real estate brokerage, based in New York City.

6. If I’m selling my home, is an agent still worth it?

Realtors argue that commissions remain a valuable incentive for sellers, since it’s in their “best interest to show their property to as many prospective buyers as possible,” said Mark Pessin, chief learning officer at Realty ONE Group, who is based in Carlsbad, Calif.

But in a strong housing market, sellers have more chances “to negotiate lower commission rates, or place additional pressure on the buyers to cover more of these costs out of their own pocket,” Pessin added.

Conversely, if the market cools, sellers should be more willing to make concessions to cover the buyer’s closing costs, he said.

But even independent analysts anticipate that sellers are likely to continue to use agents after new policies are implemented, in contrast to the bigger shake-up on the buyers’ side.

7. What other changes should sellers expect?

Under the settlement terms, sellers could still face an additional set of contract negotiations that used to be addressed before the first showing of their property — since the two sides need to strike an agreement on commissions on a separate track outside the MLS, Pessin points out.

“This added hurdle created by this potential settlement may impact the final sales price positively or negatively,” he said.

Sellers may also want to refuse to pay a commission to a buyer’s agent. But that may not always be the best decision, particularly as industry practices and market conditions change: In such cases, buyers could make a lower offer if they must pay their agent’s commission separately — or they could choose not to make an offer at all.

Alternatively, sellers could offer to pay the buyer agent’s commission in part or in full at settlement; in the former case, the buyer would pay the rest directly to the buyer’s agent.

If sellers don’t want to pay the buyer’s agent, buyers will need to pay their agent’s fee depending on the terms in the buyer representation agreement, Minken said.

8. What should I do if I want to sell now?

It’s essential for home sellers to recognize this situation is evolving, Pessin said, adding: “Listing agents and buyer’s agents are awaiting the outcome and then will adapt their business practices accordingly.”

Despite the changes in store, Pessin urges sellers to account for the other factors that will shape their offer to buyers, such as market conditions, buyer demand, pricing strategies and interest rates.

Finally, sellers should remember there’s always room for bargaining, regardless of the NAR settlement, Freedman said.

“Have an open conversation about how you would like to structure the commission,” she said. “As always, commissions are negotiable, and a good agent will be transparent about this process.”

AJC STAFF